Despite increasing dialogue between oil producers and consumers, intended to reduce both supply and demand uncertainty, crude prices continue to be skittish while industry investment is falling short of expected requirements. Additionally, speakers at the 8th International Oil Summit in Paris on 5 April warned that the uncertainty could make OPEC members rethink their production capacity expansion plans. David Knott reports.
While both producers and consumers acknowledge the link between demand security and supply security, Nalcosa President Nordine Ait-Laoussine said there had been little evidence that the flourishing producer-consumer dialogue had reduced oil market volatility: Consumer governments are undertaking widely publicised programs for reducing oil dependence, while demanding that producers increase their capacity. Yet producers cannot take oil demand security for granted. While he viewed partnerships between international oil companies (IOCs) and national oil companies (NOCs) as the most promising route to improve supply/demand security, again there is little evidence of progress. IOCs have said they are willing to consider new business models, but they are constrained by the short-term targets of shareholders. At the same time, NOCs increasingly prefer to work with other NOCs, particularly in the case of those from Asia. This go-it-alone attitude among NOCs may be fuelled by high oil prices.
IOCs Pushing Technology For Complex Projects
Jeroen van der Veer, Shell Chief Executive, told the conference that while the oil industry faced no lack of reserves, the choices open to investors were difficult. Risks are increasing, as is cost inflation, and IOCs have to consider what will happen over the 25-30 years lifetime of a typical large-scale project. He added that governments approaches to energy policy and the environment were critical. Short-term thinking could see both IOCs and consumers losing out, while longer-term changes in standards and specifications would allow companies to plan for a win-win situation. The government role, he said, is to set a policy framework with a longer term than the normal political horizon.
Mr van der Veer said: We have to consider what will happen to taxation, and we have to allow for new government regimes. Shells position is that surplus profits can no longer be expected from easy oil. We look for difficult projects where we can employ our technology The role for IOCs is not easy oil, but to use technology and management skills to work together with NOCs.
While oil demand growth was waning, Total CEO Christophe de Margerie predicted that demand would increase by 19% from 2005 to 2020. He said that 5mn b/d of new production capacity would need to be brought on-stream each year, of which 4mn b/d would just compensate for capacity declines. For this reason, he said, we need to improve our relationship with NOCs. We have to achieve 100mn b/d global oil production in 2020, I believe, but this will be very difficult if we continue to behave as we do today. There is not a problem with reserves, but things are not happening as they should.
New oil production would largely come from huge hi-tech projects, said Mr de Margerie, which would be demanding in terms of expertise and cooperation between NOCs, IOCs and contractors. The bad news is rapidly rising costs, he added. We cannot continue with 30% a year rises in costs. The price of development is reaching a level where some countries may decide not to go ahead if they dont need the oil for themselves, and can save the reserves for the longer term. I can imagine a situation in which prices continue rising, yet there is a limit to the amount of energy available. NOCs should bring their investment efforts more in line with IOCs, or be more open to letting them invest.
OPECs Investment Doubts
Muhammad Hamil, Head of OPECs Energy Studies Department, said the organizations overriding challenge was sustainable development. OPEC projections showed oil demand rising to 103.5mn b/d in 2020 and to 117.6mn b/d in 2030: But there are major uncertainties about the amount of oil that OPEC will have to supply. Our estimates show a range of 9-10mn b/d in the amount of oil required from OPEC by 2030. Oil supply side risks have increased recently, said Mr Hamil, with the EU, for example, adopting a policy to encourage the use of alternative fuels and the US looking to increase the use of biofuels to more than 2mn b/d by 2020. The question, he said, is whether producer countries need to revisit their investment plans in the light of such moves away from oil. OPEC cannot be expected to invest as a back-up policy for consumers, in case their alternative energy investments fail to materialize.
Muhammad al-Hamili, OPEC President and UAE Energy Minister, said that despite the current geopolitical uncertainty, demand growth remained the largest doubt for producers. While demand growth continues, he said, there is an increasing trend among consumers away from using fossil fuels. OPEC members will inevitably review their capacity expansion plans in the light of this. Over the period to 2010, we estimate there is a range of uncertainty of $50bn in their capital requirement. Producer countries are naturally reluctant to commit to further investment without reliable supply/demand information.
IEA Concerned By Chinese Demand, Global Oilfield Declines
Fatih Birol, IEAs Chief Economist and Head of the Economic Analysis Division, identified three key uncertainties in the oil supply/demand outlook. The biggest on the demand side is the pace and nature of Chinese economic growth, he said. I believe there may be many surprises to come, and that we may have to revise our models. Chinese oil demand is about 7mn b/d today, and would rise to 11mn b/d over the next 10 years if the countrys economic growth slowed to 7% a year, or to 14mn b/d if economic growth continued at 9%
a year as China expects. This 3mn b/d difference, he continued, is equal to the expected OECD oil demand growth for the next 10 years.
Dr Birol also saw oilfield decline rates as a source of uncertainty: The industry needs to know what capacity is needed for the next few years, not just new capacity but also the replacement of declining capacity. Out of every $4 spent on capacity development, $3 would go to replacing declines. The annual oil decline rate is 8% worldwide. The evolution of prices was another uncertainty. Recent oil price increases had not led, as feared, to demand destruction for a number of reasons. Oil represents a decreasing percentage of GDP in OECD countries; demand growth is rising mainly for transportation, where alternatives to oil are limited; and subsidies in many developing countries help reduce sensitivity to cost. We must not expect high prices to curb demand too much, he said.
IEA Executive Director Claude Mandil said that both producers and consumers agreed on the need for more oil market stability and less volatility: The question is how to achieve it. Some blame market fundamentals for high prices, some blame speculation and geopolitical uncertainty. I believe it is not one or the other, but both. As long as there was a lot of geopolitical and weather-related uncertainty, the market would need the flexibility to cope: That means more stocks and spare capacity Investing in capacity does not mean investing in spare capacity. At times some capacity will be spare, but which other industry does not have 5% of spare capacity?
