Petroleum Review Editorial October 2009
Time to remember the fundamentals?
After months of depressing economic news and data the last few weeks have produced little but good news. There is increasing confidence that recovery from ‘the worst recession since the 1930s’ is now underway, with increasing numbers of ‘green shoots’ being spotted almost daily.
The oil industry has been producing its own share of good news. On the exploration front there has been BP’s ultra-deep Tiber discovery in the Gulf of Mexico, and Petrobras’ subsalt Abare Oeste discovery in the now legendary BM-S-9 block in the Santos basin, where the Carioca, Guara and Iguacu fields have been discovered over the last two years. Tullow Oil has announced that its Ngassa discovery may be the largest find to date in the Albert basin in Uganda. Meanwhile, offshore Sierra Leone, Anadarko appears to be on the point of announcing an oil field discovery – Venus – following the successful completion of the Venus B well. Needless to say, the stock market has loved this proof positive that the industry can still find oil in large quantities and oil company shares have been marked notably higher.
Similarly good news is being made in terms of new oil field projects coming onstream. Since June, the Saudis have brought onstream the AFK fields, the Khurais field, the Nuayyim field and the Shaybah field expansion. In Iraq, the Nassiriyah field has come onstream, while the Tak Tak and Tawke fields have started up in Iraqi Kurdistan. In Angola, the Gimboa and Tombua Landana fields have come onstream. This means that in just the last three months OPEC has brought onstream fields with a peak capacity of nearly 2mn b/d. Some 18 months ago this would have been unreservedly good news – now it is somewhat more ambiguous as OPEC already has 5–6mn b/d of spare capacity.
For the non-OPEC suppliers, new capacity is unambiguously good news given the real struggle most oil companies have been having in order to expand their production capacity. In the period since June, non-OPEC suppliers have brought onstream fields with a peak capacity of towards 1.4mn b/d. These include Azurite (Congo, Murphy Oil), Frade (Brazil, Chevron), Jidong Nanpu (China, Petrochina), Mangala (India, Cairn Energy), Parque de Conchas (Brazil, Shell), Tengiz expansion (Kazakhstan, Chevron), Thunder Hawk (Gulf of Mexico, Murphy Oil), Tyrihans North and South (Norway, StatoilHydro) and Vankor (Eastern Siberia, Rosneft).
It is also notable that companies seem to be bringing fields onstream with fewer delays. Almost certainly the global recession has freed up engineering and fabrication capacity as well as deterring key staff from job hopping – all features that make on time completion easier.
This means that virtually all the capacity planned to come onstream in 2009 probably will do so. As 2009 is the peak year for new capacity increments this could add around 6mn* b/d of gross new capacity, or over 2mn* b/d of net new capacity, to the system by the end of the year.
It remains to be seen if OPEC is prepared to increase its spare capacity by 2mn b/d in order to defend the current price level and thereby allow the non-OPEC producers to fully utilise their new production capacity. Alternatively, is OPEC willing to allow prices to fall, thereby stimulating economic activity, hoping that this will expand oil demand sufficiently rapidly that its overall earnings are maintained?
Currently, both the oil and the financial markets appear reluctant to recognise the industry fundamentals – the continuing weakness of demand, lacklustre refinery utilisation rates and depressed refining margins, high stocks on land and at sea of both crude and products, and the way that spare production capacity is more likely to build than decline. In addition, we are now starting to get the flattering distortion that one year ago oil demand was falling fast. Supply and demand are now rising slowly. Comparison with year ago figures are flattering; comparison with two years ago are sobering.
One has to be brave or foolish to suggest markets are wrong and it is wise to remember one of the financial market’s better quotes – ‘Markets can remain irrational for longer than you can stay solvent’. However, even with these caveats oil demand needs to revive quickly and rapidly if current price levels are to be maintained, never mind increase as so many seem to expect. Many must be praying for a severe winter.
One of the other great hopes for the recession was that it would blunt or reverse the trend to aggressive resource nationalism. So far this hope remains unrealised. Libya now appears to be demanding that Libyan nationals head up all foreign operations in the country. Coming on top of some of the highest oil taxation in the world, these actions provide little incentive to invest.
Meanwhile. Brazil has apparently decided (it has yet to be ratified by Congress) to reserve operatorship of all future sub-salt reserve developments to Petrobras and to replace future concessions with production sharing agreements in which Petrobras will have operatorship and at least a 30% share. Foreign companies would win shares on the basis of how much oil they offer the government.
The Australian government appears to have set a most interesting precedent in sanctioning the Gorgon LNG project by accepting the long-term liability for any sequestered and stored carbon dioxide subsequently leaking. If the UK, Norwegian or Danish governments did the same it would open the way for enhanced oil recovery and sequestration of carbon dioxide in depleted North Sea oil fields.
Chris Skrebowski
The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.
*Figures from Peak Oil Consulting
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