Petroleum Review - Editorial - March 2005
Was 2004 demand so exceptional?
This year's IP Week was once again a resounding success, with around 2,500 industry executives attending all or some of the events. The two big set piece speeches of the week addressed the complex issue of delivering affordable energy in the volumes required without imperilling the environment we all inhabit.
Lee Raymond, CEO of ExxonMobil - in what was probably his last public appearance in Europe before his retirement - addressed the 1,000-plus guests at the annual dinner, spelling out the size and complexity of the supply challenge facing the industry. It seems most unfortunate that Greenpeace sought publicity by knocking over bottles of wine (surely a waste of resources!), rather than engaging in constructive dialogue on the complex problem of fuelling the world without damaging it. The day before, at this year's annual luncheon, Sir John Collins had addressed the progress and the challenges in meeting Kyoto targets for carbon dioxide (CO2) reduction).
It is always difficult to try to encapsulate the tone of a whole week of conferences. The nearest attempt would be 'nervous confidence' - confidence that a whole range of challenges could, in fact, be met, but nervousness that success could easily be derailed. A much repeated caveat was that Chinese demand slows down in 2005.
The reason that so many are so nervous about Chinese demand is the sheer speed with which it has been growing. According to the IEA's latest Oil Market Report (February 2005), Chinese demand grew by 120 kb/d in 2001, 300 kb/d in 2002, 550 kb/d in 2003 and 860 kb/d in 2004. Demand growth in 2005 is currently estimated at 400 kb/d. The unspoken question in the industry is: 'Is 400 kb/d realistic or wish fulfilment?' - particularly as 4Q2004 saw upward revisions to Chinese demand.
Overall demand in 2004 has also been revised up to 2.68mn b/d. This was the second highest annual increase ever recorded - 1976's record 3.35mn b/d consumption growth and 4.38mn b/d production growth was largely met by Opec turning on 3.5mn b/d of capacity it had turned off a year earlier.
According to the IEA, total Opec production (including NGLs) reached 33.01mn b/d, or 2.34mn b/d, above 2003 production. By December 2004 Opec was producing a record 34mn b/d. At this point the general consensus was that the only spare capacity in the world was around 1mn b/d of Middle East high sulphur crude that was virtually unsaleable because sulphur handling capacity is the bottleneck in global refining; the only other notional space capacity in Iraq, Nigeria and the Gulf of Mexico created by sabotage, political action and hurricane damage respectively.
With quite limited spare capacity, any incremental demand in 2005 will largely have to be met by new capacity coming onstream. In fact, significant volumes of new capacity are due onstream this year, with four out of the 22 major new projects due for start-up in 2005 already onstream. However, although the gross capacity additions in 2005 are quite large, the IEA's view is that net capacity additions will be just under 1mn b/d for non-Opec and up to 1mn b/d for Opec, of which 440 kb/d will be from NGLs.
Clearly, 2005's supply/demand balance is precarious. Opec cutting supply by 770 kb/d in January has kept prices firm, even before the cold weather price boost. Demand estimates are already creeping up, with the IEA now predicting 1.52mn b/d against January's 1.44mn b/d. The major supply side risks are that Russian production growth will be less than the currently predicted 5% and that new projects will be delayed or underperform. The major demand side risks are that Asian and North American demand growth in 2005 will be more than half their 2004 level (the current IEA prediction).
Further downward revisions to SEC definition proven reserves by oil companies continue to spook investors and undermine confidence. Deloitte's Peter Newman and Victor A Burk have written a pamphlet - Presenting the full picture. Oil & gas: reserves measurement and reporting in the 21st century - presented during IP Week, which argues that confidence will only be restored once companies print both proven and proven + probable reserves, as well as forward estimates of production flows. Copies of the pamphlet are available from Deloitte - visit www.deloitte.co.uk
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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