Petroleum Review Editorial August 2006
Lower prices may be delayed – for political reasons
At the time of writing oil prices have just moved to $78/b as traders reacted to the deteriorating security situation in the Middle East. Prices this high have only ever occurred twice before. The more recent occasion was for around three months at the end of 1979/early 1980, in reaction to the massive reduction in Iranian production following the revolution that brought the Ayatollah Khomeini to power. The only other time prices were this high was in the Pennsylvania oil boom of the mid-1860s.
Paradoxically, prices were, according to many commentators, just on the point of easing back in the face of slowing demand and a stockbuild to levels that would cover 54 days of forward demand, with the highest absolute stock level seen in the last five years.
What is remarkable is that the market appears to have absorbed the shut-in of over 500,000 b/d of capacity in the Niger delta as a result of the ethnic unrest in Nigeria, according to the latest figures from the International Energy Agency (IEA) in its July Oil Market Report. Nigerian exports apparently improved slightly on the month, gaining 95,000 b/d, but only because attacks by militants have constrained refinery runs in the Warri and Kaduna refineries.
Meanwhile, the conflict between Israel and both Lebanon and Gaza threatens to produce the most dangerous of Middle East crises seen in the last 20 years. The danger primarily comes from the potential involvement of Syria and Iran, given their backing (both covert and overt) of the Hizbollah movement based in Lebanon. It therefore seems unlikely that the crisis will be resolved quickly.
Cautious optimism
The G8 meeting in St Petersburg, however, brought together most of the world’s most powerful leaders, which may be a cause for some optimism. The meeting was the culmination of the Russian’s period leading the G8.
Although the G8 has a series of objectives, the most important – and the one effectively defined by the Russians – is energy security. Whether by accident or intent, the Russians have concentrated minds about security of gas supply following the cut-off of Russian gas to Ukraine in early January. Although the cut-off was, in fact, quite brief, because the Ukrainians were in a position to effectively pass on the cutbacks to all of Gazprom’s customers it had a major political impact across Europe. What this proved all too effectively is that much of Europe does not have enough gas storage capacity to deal with supply shortfalls. It also showed how dependent much of Europe has become on Russian gas supplies.
Since that date, Russia has alternated threats to sell gas to China with promises to ensure reliable supplies to Europe, while demanding to be able to buy into gas supply companies across Europe but fiercely resisting any dilution of Gazprom’s export monopoly, never mind third-party access to its pipelines. The shape of Russia/Gazprom’s ambitions are now becoming clear and unambiguous – it wishes to integrate its supply chain forward in order to sell directly to European end-users, using its gas resources as both the stick and the carrot.
Confronted with this essentially aggressive posture, many European countries are now considering ways to make themselves less dependent on Russian supplies – while recognising that Russian gas will necessarily remain a key part of their energy mix.
Not such a strong position
Russia’s position is, however, not as strong as it first appears. All the major Russian gas fields are either in decline (Yamburg, Urengoi, Medvezhye, Orenburg) or at plateau (Zarpolyarnoye), while the new producers such as Shtokman in the Barents Sea and Bovanenko and the other Yamal peninsular giants await development.
It is hoped that the award of the contract to develop the Shtokman field will be announced shortly. Similarly, the recent bilateral deals between Russia and Germany to build the Baltic pipeline and develop the Yuzhno-Russkoye gas field in Siberia, with E.On taking a 25% shareholding in the field, could offer a way forward. The ‘deal’ being for western investment in Russian gas fields in exchange for guaranteed supplies. A deal that, if offered, is potentially very attractive.
However, Shtokman and Bovanenko are unlikely to be onstream before 2012, and possibly even 2015, which leaves a gas supply gap to be filled if incremental volumes above existing contracts are to be fulfilled. Lukoil, in a recent presentation, clearly illustrated the challenge while seeing it as a major opportunity for companies such as itself and other Russian independents such as Novatek. The company indicated that, by 2011, even if Russia delivers all the Central Asian gas supplies to Europe, a shortfall against likely European requirements will be opening up.
Now, possible pipelines to China are already leading Central Asian states such as Turkmenistan and Kazakhstan to demand higher prices for their gas from Gazprom. Alternative routes to Europe avoiding Russia, such as the Nabucco pipeline, are being actively promoted. Nabucco would link Turkey to Austria, thereby linking Azerbaijani gas to Central Europe – but although the Azerbaijan to Turkey pipeline will be in operation by the end of this year, the link to Austria is unlikely to be in operation before 2011.
Gas supply challenge
This presents Europe with a considerable gas supply challenge (see p39). Nearby supplies from the North Sea are effectively confined to Norway as UKCS supplies are already in steep decline. The option to import LNG supplies is becoming constrained by a lack of availability. Our annual tabulation of global LNG projects is on p42 and clearly shows what a boom the sector is enjoying. The downside of this is that there is active competition from around the world for available LNG supplies and, according to one prominent consultancy, some 90% of all LNG availability to 2010 is already sold.
Another option is to develop coal gasification in its modern clean coal version, either to power modified combined cycle gas turbines (CCGT) for power generation or directly for under boiler or heating use. The article on p27 gives an update on recent progress in this area.
The final option is to modify fuel use patterns, reducing the dependence on gas. The UK’s latest Energy Review effectively does this with its commitment to 20% of power generation coming from renewables, and its commitment to improve energy efficiency using targets and mandates broadly in line with some of the suggestions made by Claude Mandil in his speech to the Energy Institute’s Summer Lunch last month (see Petroleum Review, July 2006). The part of the Energy Review that has attracted most commentary, however, is the UK government’s preparedness to facilitate new nuclear generation capacity providing it is funded by the private sector. The great driver for these changes is the fact that, in their absence, the UK could have had a 70% or 80% dependency on gas-fired electricity generation by 2020–2030.
Chris Skrebowski
The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.
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