Petroleum Review - Editorial - September 2005
Now the market rules
The death of Opec has been predicted so many times that to do so again would be folly. The wry observation that the oil cartel is like a teabag – it only works when it is in hot water – is probably nearer the mark. However, with no real spare capacity and member Indonesia now an oil importer, Opec is, for the moment, without market power.
In 1970 the Texas Railroad Commission (TRC) set production allowables at 100% for the first time and the era of controlling oil prices by controlling Texan production drew to a close. [In 1970 Texas was what Saudi Arabia was in the 1990s – it had enough spare capacity to depress prices when released on to the market. The TRC set allowable production levels for all Texan fields each month, to manage prices at an ‘acceptable’ level.] In fact, from 1971 onwards, US lower 48 production moved into slow, steady, inexorable decline.
This month’s (August) Oil Market Report from the International Energy Agency (IEA) records – on p15 – that: ‘Total supply from the Opec-10 (ie excluding Iraq) averaged 27.7mn b/d versus a 28mn b/d quota target effective from 1 July. It may be a trivial point or a staw in the wind. Opec, to this columnist’s recollection, has never before underperformed a target quota – it usually struggles with ‘quota cheating’ to get production down to the target.
Further straws in the wind are that the retiring Energy Minister in Iran has indicated that capacity loss from producing fields are now running at 300,000 to 400,000 b/d, or around 6% to 10%, each year. Taken literally, this means Iran will lose 1.75mn b/d of capacity by the end of the decade. The challenge of developing the replacement capacity in the period will be an enormous one.
In the July, August and September 2004 issues of the Oil Market Report (accessible free at www.iea.org) the IEA attempted to gauge future Opec capacity. While its conclusions were relatively optimistic, the key and unknown variable is the level of capacity erosion in existing fields. If Iran is any guide, these may already be quite high.
For the moment – and that moment may be quite long – there is effectively no spare capacity in the world. (Is effectively unsaleable heavy sour crude out of Saudi Arabia really spare capacity?) This means that the market now rules. No country or company in any conceivable form can now moderate prices, although removal of capacity would obviously spike prices. In such a situation rumour, speculation and market manoeuvering promise a bumpy ride. Goldman Sachs, in its latest assessment in a just issued report, predicts that WTI prices will remain above $60/b for the remainder of the decade. This follows its prediction earlier in the year that oil markets had entered a period in which super spikes could hike oil prices to $105/b.
Predicting future oil prices is a game for the brave and the foolhardy. The real question is at what point does the economic drag of high oil prices cause economic growth to slow, or even stop?
So far, the world has been quite extraordinarily lucky. A series of generally mild winters has allowed North America to get by with a restricted gas supply that could easily have caused crisis. Oil supply has, so far, remained virtually uninterrupted. This year, until the Thunder Horse semi-submersible accident, virtually all new projects had flowed on time – with Kizomba B even early. The effective loss of a Bombay High platform following a fire reminds us that, in a large and complex system, accidents and capacity loss do occur. The US refining industry has just been through this. After a long period of high capacity operation, a series of accidents and unit problems led to shutdowns and capacity restrictions. This, in turn, spooked the markets and drove WTI prices to $67/b. As units came back onstream, prices eased back to $63/b. Clearly, market perceptions now rule and price instability is the order of the day.
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The latest update of LNG projects (see p22) clearly shows the industry’s massive commitment to monetising remote gas reserves. It also clearly shows the way that reductions in LNG production costs have opened up the market, providing the world with a competitively priced fuel in substantial volumes.
In contrast, our latest round-up of North Sea prospects and projects (p12) shows the struggle to slow production decline in the face of few large undeveloped reserves but many small accumulations to be developed while the major infrastructure is still in place.
We are very pleased to include with this issue of Petroleum Review, the first edition of our Future Fuels Supplement. Rapid progress is now being made in commercialising biodiesel and bioethanol as alternative fuels or fuel extenders. The supplement clearly shows just how much progress has already been made.
Chris Skrebowski
The opinions expressed here are entirely those of Chris Skrebowski, Editor of Petroleum Review, and do not necessarily reflect the view of the EI.
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