Petroleum Review Editorial October 2006
What a difference a day makes
In mid-August all the signs were that prospects for the oil industry were looking up. However, by 18/19 September there were suddenly a number of black clouds on the horizon.
Oil market pricing has always been heavily affected, even driven, by the US market – the largest single market for oil and oil products. By mid-August all the props for high prices – which had peaked at $78/b in July – were being removed or re-evaluated.
Crude oil product stocks were building, the US driving season was ending, no hurricanes had damaged oil facilities and US economic growth appeared to be slowing. Sentiment was also changing about the biggest price prop of all – fears about the security of Middle East oil supplies in the face of the stand-off with Iran over nuclear enrichment.
Although, technically, nothing had changed, favourable noises from UN representatives and a less hawkish tone out of Washington combined to produce a sharp change in sentiment and a steady drop in oil prices down to a low point of around $620/b in mid-September.
Meanwhile, the favourable results of the Jack apprasial well in the Gulf of Mexico were happily over-interpreted to mean that US oil reserves had doubled and Gulf of Mexico production would soar.
Shattered dreams
This, and other happy dreams, were broken on 19 September, when BP revealed that its flagship Gulf of Mexico development – Thunder Horse – would not start-up before mid-2008 following the failure of the production manifold when pressure tested. As if that wasn’t bad enough, rumours were circulating of a pending reserves downgrade at Thunder Horse.
Quite apart from the delay to Thunder Horse, this failure could impact other Gulf of Mexico deepwater developments where the technology is being pushed to the limits. It may also herald greater involvement by US regulators following earlier refining and pipeline corrosion failures.
An even greater challenge for the industry emerged in Russia, where the administration now appears determined to force a renegotiation of the three original production sharing agreements (PSAs). The three projects are the ExxonMobil-operated Sakhalin I development, the Shell-operated Sakhalin II project and the Total-operated Kharayaga field. On 18/19 September, Russia first revoked the environmental approvals for Sakhalin II and then announced that it was suspending discussions with Shell over the asset swap in which Gazprom would gain a 25% shareholding in Sakhalin II in exchange for a Shell interest in a major Siberian gas field. Now, whether this is just a somewhat brutal form of negotiation or whether, as some suspect, Russia is now committed to renegotiating the PSAs, remains to be seen. Until resolved, it will add considerable uncertainties.
An enigma
Trying to discern Russian intentions is always difficult. Churchill described Russia as ‘a riddle, wrapped in mystery, inside and enigma’. However, recent experience shows that Russian policy changes normally start with a ‘kite’ being flown, then followed by an academician’s analysis of the merits of the proposal, and then application of the new policy.
Earlier in the year, Petroleum Review ran articles by Russian academics on relationships with Algeria and the possibility of a gas Opec (See Petroleum Review, May 2006, p22) and the flotation of Rosneft (see Petroleum Review, June 2006, p28).
In this issue, on p38, we have an article on the merits of the Shanghai Cooperation Organization. It is hard to be certain if we should take the reassurances in this article at face value.
Opec update
According to the Opec website, members’ collective production (including NGLs) should increase by 1.2mn b/d in 2006. However, according to the International Energy Agency’s (IEA) latest Oil Market Report: ‘Opec supply has now spent the past 20 months oscillating within a very narrow, 29.5mn b/d to 30.5mn b/d range.’
This, in fact, minimises the problem. Petroleum Review has calculated the changes in Opec production in the first eight months of 2006, compared with the first eight months of 2006.
In terms of total output (crude plus NGLs and other liquids), production in 2006 is running just 390,000 b/d above year-earlier levels (34.41mn versus 34.02mn b/d), although crude production is actually 30,000 b/d lower (29.85mn versus 29.88mn b/d). [Note: In 2005, Orinoco production was included in ‘Opec NGLs and other liquids’ but in 2006 it was added in to Venezuelan crude production.]
Most of the changes are quite small. The largest gain is the 180,000 b/d increase for the United Arab Emirates. This is broadly consistent with the new capacity coming onstream. Venezuela’s apparent gain of 440,000 b/d is, in reality, a decline of 160,000 b/d once the 600,000 b/d of Orinoco capacity is taken in to account. President Chavez’ aggressive posturing and campaigning for higher prices may well conceal the reality that Venezuela needs higher prices to offset quite rapid production falls. Kuwait’s increase of 100,000 b/d looks impressive, but is much less than the notional capacity gains recorded on the Opec website. The decline of 210,000 b/d year-on-year for Nigeria is somewhat smaller than might have been expected given the shut-in of up to 780,000 b/d of capacity by pipeline sabotage, reflecting the number of fields brought onstream in the last 18 months.
Perhaps the most surprising of all, is that Saudi production is running below year-earlier levels despite the start-up earlier in the year of the 300,000 b/d Haradh 3 development.
Opec production figures should be treated with some care as they are all inferred and indirect measurements. The conclusion, however, is plain – Opec needs to bring on all its remaining 2006 developments if it is to have any chance of meeting its 2006 output target.
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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