Petroleum Review - Editorial - January 2005
Nine to watch in 2005
At the considerable risk of being a hostage to fortune, there appears to be around nine key areas that will shape the international oil and gas industry in the coming year.
*The first, and most obvious, is geopolitics. The key concern in 2005 is whether stability will increase or decrease. Successful investment and production operations are only possible when there is a predictable high degree of political stability and law enforcement.
In this context, there are three immediate questions - Will the post-election Iraq settle down enough for investment to occur? Will the current stand-off in the Ukraine be settled peaceably, with Russian gas supplies to Europe remaining undiminished and unharmed? And possibly most important of all - Will the threat from fundamentalist Islamic militants decrease and will the current Saudi regime retain full control of the Kingdom and its oil supplies?
*The next area of interest will be the way the Russian oil and gas industry develops. In 2005 we will see the emergence of the new state-controlled Gazprom-Rosneft behemoth. How will it operate, and what will this mean for foreign investors (actual and potential) in Russian oil and gas? And for production?
Russian oil companies, particularly Lukoil, are seeking to expand overseas. Lukoil is already in Egypt, Colombia, Venezuela, Saudi Arabia and the Caspian. Next year could see it back in Iraq - a possibility that has just been enhanced by Russia's forgiveness of most of the Saddam-era debt to Russia.
*However, it is not just Russian companies that are seeking to expand their oil producing interests around the world. Both China and India have become acutely aware of their rising oil dependence as their economies expand and are seeking to acquire production assets. Their enthusiasm to lock in future supplies has led to some very aggressive bidding and it is all too possible that 2005 will see a scramble for production assets around the world.
*One of the drivers of this asset scramble has been the very rapid demand growth of the last two years. This leads to the question: 'Has oil demand growth moved to a higher trajectory (2.3% in 2003, 3.3% in 2004) or will continuing high prices cool demand back to the 1.6%-1.8% that had been the norm? We now regard the boom years of the 1960s, when post-war reconstruction and the move away from coal produced oil demand growth of 7%/y, as an anomaly to long-run energy demand growth of just under 2%. The question is whether rapid industrialisation and emerging consumerism in China, India and the Asia-Pacific is producing a new anomaly of faster oil demand growth? And, if so, for how long?
*We can probably expect some easing of the supply/demand balance and somewhat easier prices in 2005 as new production comes onstream.
*Following a year of high and rising oil prices, increased investment in new exploration and production is to be expected. How large these are and how successful they are will be one of the key developments to be watched over the next 12 months.
*On the production technology side, 2005 will be a key year in the struggle to maintain production flows from those areas either in decline or close to it. High oil prices, if maintained, will justify considerable investments in this area. Companies have shown their ability to augment reserves by field extensions and additions, as well as by improved recovery. What they now have to demonstrate is that these 'late life' reserves can be produced at flow rates that are both economic and in volumes sufficient to build overall production to meet market requirements.
*Another key area is going to be North American gas. Latest reports indicate that the current record drilling activity in Canada and the US has managed to stabilise production after declines earlier in the year had reached 4% in both countries. The question will be whether this can continue, how quickly the LNG imports can build up, and how much of the market is going to be destroyed before the new price-weakening supplies arrive?
*On the refining side, 2005 will see a further tightening of fuel qualities around the world. With incremental crude supply largely high-sulphur, there seems to be the possibility of a sulphur squeeze unless there is considerable investment in desulphurisation capacity.
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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