Petroleum Review Editorial February 2007
Is efficiency in use starting to pressure oil prices?
Rarely has the world oil and gas market been as difficult to analyse as it is at the moment. The first full-year 2006 production and oil demand data are now becoming available – but far from providing clarity, the statistics seem to create confusion. The International Energy Agency (IEA) reports an increase in global production of 760,000 b/d, while the latest US Energy Information Administration (EIA) sees a gain of only 1,000 b/d. The IEA sees Opec production expanding in 2006; the EIA and the Oil and Gas Journal record it as declining. All three sources show non-Opec production expanding in 2006, but the range is from well under 300,000 b/d to over 600,000 b/d (see p45).
As production data are arguably the most reliable and verifiable of industry statistics, the increasing demand for better and more reliable information is not just desirable, it is an urgent necessity if plans and prices are not to be swung about by lack of reliable data.
At the moment, oil markets appear unable to decide if oil prices – currently in the early $50s – are low because at the 2006 summer peak they hit $78/b or fairly high because they have only been higher than $50/b (in real terms) in early 2006, in 2005 and between 1979 and 1985. Before that you have to go back to 1872 for a real price higher than $50/b.
Mild weather is repeatedly claimed to be the key price depressant, but it has been calculated that only 6% of North American demand is really weather sensitive. Speculative holdings and hedge fund activity is another favourite explanation. In mid-summer there were large ‘long’ positions, but these disappeared by September, built a little in October/November and then disappeared again. The current position is a small ‘short’ one and hardly a significant price driver.
In terms of stock levels – the other factor usually cited to explain the recent price decline – the excess levels are now eroding quite quickly. North American stocks are now almost back down to 2005 levels. European levels are moving back into the five-year range, while Asia-Pacific stocks are still above 2005 levels, but actually below 2004 levels. In short, with days of forward cover unchanged for the first three-quarters of 2006 and now declining, stock levels are not a key price driver unless the market is so relaxed about future prospects that a further stock decline is acceptable. Even refinery throughputs are back to the middle of the five-year range. Even Russia’s latest price negotiation by supply cut-off failed to rattle the markets, although it probably had rather more impact at the political level.
In searching for an explanation of the market’s current level, the most likely influence is on the demand side. There has been much debate about whether global economies may be slowing under the pressure of high oil prices. Rather less attention has been paid to high oil prices inducing more efficient fuel usage.
Preliminary US demand data suggest a 1.1% fall in demand in 2006. The most fuel-inefficient sector of the US economy – road vehicles – is currently undergoing a major upheaval. Adding to the impact of falling SUV sales is anecdotal evidence that users are favouring fuel efficient vehicles and rapidly abandoning the gas-guzzlers that Detroit found so profitable to produce. Now, if the demand slowdown is the result of efficiency in use rather than economic slowdown, the longer-term outlook for the global economy and the oil market is rather more positive.
As our megaprojects feature (p40) and the depletion article (p24) show, the world needs to find and then develop more oil and gas resources. The feature on p13 looks at the potential for additional gas supplies from the Russian arctic. Kazakhstan has great production potential, but is now at the very epicentre of a new ‘Great Game’ (p16). On p32 we look at the opening up of Greenland to oil exploration and the high hopes that many have for its offshore basins.
Russia’s latest unilateral gas price hikes appear to have been forced through in Belarus, Georgia and Azerbaijan. In the case of the last two, alternative supplies from Iran and the Caspian may provide some amelioration.
In the case of oil markets, the product is so widely traded that any offer for sale can quickly be evaluated as cheap, expensive or in line with the market. For gas, a similar calculation is much more difficult and sometimes impossible. This, however, is starting to change as more LNG is produced and traded, and as more cargoes are sold spot. So far, the market is small, illiquid and imperfect. It has, however, started to link up the traditional regional gas markets. In the Atlantic basin the ability to send LNG cargoes to either the US or Europe depending on price has started to price-link the two markets. This, as explained in the LNG article on p36, is likely to develop quite rapidly.
A question worth asking is whether there should be a deliberate effort to develop a global gas price by developing an LNG market in the way there is a Brent cargo market. The advantage would be that linked and consistent gas prices would promote incentives to develop a more transparent valuation for gas offered to the market. It would also provide a range of new trading opportunities and the ability to buy and sell forward in an open and transparent market.
Heavy oil and tar sands have been widely promoted as key incremental oil supplies. We are very pleased to have a definitive article from Halliburton on the production and utilisation of this key resource.
Completing our features in this issue we have an article on managing project risk at an early stage to gain competitive advantage. While it is certainly true that major oil companies have become very efficient at identifying and minimising risk, some critics are objecting that in a fundamentally high-risk industry companies may be becoming too risk averse to reproduce some of their earlier successes.
In preparing this latest version of the megaprojects database, every effort has been made to make the analysis as accurate as possible. We would be pleased, however, to hear of any errors and omissions so as to further improve the analysis. Murphy Oil’s recently sanctioned Thunder Hawk development in the Gulf of Mexico was inadvertently omitted. It has a 60,000 b/d peak flow and is due onstream in 2009.
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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