• Category Archives Energy
  • Effects of Falling Crude Oil Prices Begin to Bite

    Global crude oil prices, driven largely by weak demand and oversupply, have plummeted since the beginning of the year, reaching five-year lows just a few days ago. The marginal increase in supply has come primarily from unconventional producers in the United States (shale) and Canada (oil sands).Figure 1. Crude Oil Prices - WTI, Brent (Spot, FOB)

    The decline was exacerbated by the resolution at a meeting last month (driven in the main by Gulf States) of the Organization of the Petroleum Exporting Countries, OPEC, not to reduce supply. While OPEC has maintained supply within a narrow band around 30 million barrels per day for a few years, unconventional oil producers largely account for the 6 million barrel-per-day increase in global supply that contributed to the current glut; and in a stroke aimed at punishing the (higher-cost) unconventional producers, the government of the United Arab Emirates, recently revealed that OPEC would not reduce production even if prices declined to US$40 per barrel.

    In this sheikh-versus-shale staredown of sorts, the fallout has been reverberating. Continue reading  Post ID 268



  • Crude Oil Prices: Let The Turf Wars Begin

    Petroleum resources, at present, constitute the dominant energy form used to propel the wheels of the global economy. When prices of crude oil or natural gas begin to tumble, economies are therefore affected, whether negatively or positively. For example, while some oil-producing countries reel from current price levels, consumer-countries such as the United States have seen low gasoline prices ― and just in time for the thanksgiving driving holidays ― as well as a spike in demand for SUVs.

    Crude oil prices have fallen by as much as 40% since the beginning of the year due mainly to oversupply and decreasing demand. Crude oil benchmarks Brent and West Texas Intermediate closed at US$69.92/bbl and US$67.38/bbl respectively on Wednesday. Expectations that the meeting last week, of the Organization of the Petroleum Exporting Countries, OPEC, would resolve to cut the group’s oil production proved futile; and with good reason. First, OPEC had maintained official crude oil production rates in a narrow band about 30 million barrels per day (mbpd) for the past few years and has seen its market share fall to about 40%. Secondly, the preponderance of supply glut has come from a massive ramp-up of non-OPEC production (Figure 1), mainly from the United States (shale) and Canada (oil sands). Cutting production would have meant, in addition to revenue losses, ceding further market share to these higher-cost producers.

    Change In Oil Production - OPEC, U.S. & Canada 2006-2013

    With none of the producer-groups willing to cut production in order to shore up prices, the stage is set then for a costly game of brinkmanship between OPEC and non-OPEC producers; and traditional as well as fiscal fundamentals will most probably define the outcome. Continue reading  Post ID 263



  • Global Crude Oil Prices: More On The Uncertainty

    Global crude oil prices have plummeted significantly over the past four months, due mainly to increased supply and a lull in global economic activity. With producers unwilling to rein in supply and stem the falling prices, comparative fiscal disadvantages in their production models will determine the inevitable winnowing process.

    Crude oil prices have fallen significantly over the past four months. The international benchmark Brent declined by 22% and the West Texas Intermediate (WTI), by 21% since the beginning June (Figure 1). The decline took its toll on 3Q results for many oil companies including Total, BP, Eni, Cenovus, Suncor, Rosneft as well as the Chinese majors among others.

    Crude Oil Prices - Brent, WTI

    While a global supply glut and the current lull in global economic activity have been the main drivers for the decline, Abdalla El-Badri, the secretary-general of Organization of the Petroleum Exporting Countries, OPEC, said in a recent oil conference that at a global oil price of US$85 per barrel (about current value), 50% of tight oil production would be in peril. This has dampened expectations of any supply reduction by the group, which meets in the next few days. And just as well: OPEC supplies only about a third of global crude oil consumption and has maintained supply at about 30 million barrels per day since 2008, while the greater proportion of the marginal increase in global supply has been from tight oil, particularly in the United States and Canada.

    As oil prices fall, both intuition and competition theory hold that the higher-cost and inefficient producers will be removed from the market. Falling oil prices will impact tight oil producers, mostly in the United States, Canada and Australia; but it will also impact many conventional producers in the Middle East and North Africa, MENA, region, as well as the producers in the Atlantic petroleum provinces of West Africa. While the former need higher oil prices to ensure profitable production, the latter need certain oil price levels to maintain fiscal sustainability thresholds. With each of these groupings eager to ensure sustainable production, a tenuous price face-off is developing between them, adding to market uncertainty but also exposing their vulnerabilities. Continue reading  Post ID 251



  • The Inevitable Decline Of Big Oil

    Alternative Image - TRF

    The major International Oil Companies, IOCs, ― Royal Dutch Shell, BP, ExxonMobil, Chevron, Total, ENI and Statoil ― have seen a marked decline in fortune over the past few years. During the late 1960s for example, the group held more than four-fifths of global crude oil reserves; currently, their share is less than one-sixth. In addition, the group has over the past decade and half, grappled with growth challenges, to wit, profitability and reserves addition. The recent dip in crude oil prices to multi-year troughs has only added to such challenges.

    Two principal issues, in the main have driven the change in fortunes:

    1. Resource Nationalism

    Major IOCs operating in oil-rich countries have over the past few years been required by host governments to cede greater proportions of assets and, or production proceeds. In 1979 for example, Nigeria under the leadership of General Olusegun Obasanjo, nationalized the British oil company BP; the action was consistent with the country’s policy of economic nationalism and afro-centric liberation. In Venezuela, assets belonging to ExxonMobil and ConocoPhillips were expropriated in 2007 for their failure to restructure in accordance with the provisions of President Hugo Chávez’s “21st Century Socialism”; Chevron and BP among others relinquished majority shares in their Venezuelan projects. Though there was some financial compensation for the requisitioning, the impact on these IOCs was substantial.

    With the expropriation of the group’s assets came the establishment of wholly-owned National Oil Companies, NOCs, in which acreages and other petroleum assets were vested. These assets, in addition to seemingly limitless state-funding without the restrictive shareholder accountability, set up these NOCs as formidable competitors. Some of the NOCs such as Brazil’s Petrobras and Columbia’s Ecopetrol have since listed in stock exchanges, having restructured and boasting high operational efficiencies as well as cutting-edge technological proficiencies. 

    2.  Spiraling  Costs

    Access by IOCs to production acreages in these oil-rich countries, has largely been through Production Sharing Contracts, PSCs, and Joint Venture Agreements, JVAs, and at very high costs. Production Sharing Contracts in general, require the IOCs to bear exploration ― even where there are no discoveries ― and production costs and then share production proceeds with host countries if and when discoveries are made. However, such proceeds often come under very steep, royalty and other tax regimes sometimes as high as 80% to 90%; and since they are on a sliding scale, usually indexed to oil prices, rising global crude oil prices offer no relief to the IOCs.

    Selected Comparative Indices_ IOCs vs NOCs

    Joint Venture Agreements have become rare. A recent licensing round for Iraq’s massive onshore oil acreages was for service contracts; one of the winning bids, a partnership between Royal Dutch Shell and Petronas was for a mere US$1.39 per barrel of marginal production increase, to the great delight of the host government. Continue reading  Post ID 236



  • Global Crude Oil Prices: Why Uncertainty Will Endure

    Global crude oil prices have fallen significantly over the past few months. Brent crude for November delivery for example settled at US$94.67 per barrel, a 16% drop for the quarter and its lowest for 27 months. West Texas Intermediate also last month fell below US$90 per barrel ending 12% lower for the third quarter.
    Such declines however, bear only mixed fortunes. While manufacturers and other consumers may welcome the relief, crude oil producers especially those engaged in unconventional resources (such as shale) and complex terrains (such as the deep offshore or the Arctic) may not be so welcoming; and that is because the falling crude oil prices may test the upper range of breakeven prices for some of these producing fields.

    At present, there are three principal drivers for global crude oil prices:

    Demand
    The 2008 global economic crises saw a decline in the world’s total petroleum consumption; among member-countries of the Organization for Economic Cooperation and Development (OECD) however, that decline began well in advance, in 2005 (Figure 1).

    Total Petroleum Consumption _OECD, Non-OECD 2005-2013

    A sustained rise in oil prices led to the introduction of higher efficiency and conservation measures such as Renewable Fuel Standards and Fuel Efficiency Standards which further reduced consumption.

    Global rebound from that recession has been modest and that has led to sluggish growth in demand for petroleum, which is still the dominant energy form for powering the world’s economic wheel. In the United States, rebound has been slow and factory activity reports for September indicate an uneven expansion. For the European Union, growth has been fragile and the prospects for 2015 are modest. France and Germany are the two European economic powerhouses but in September, factory activity shrank for the first time in 15 months in Germany while France saw a contraction for the fifth month running. In the United Kingdom, manufacturing activity fell to a 17-month low in September.

    Rising emerging market demand for petroleum was expected to countervail the decline in developed economies, however GDP growth in this economic group has slowed; according to the International Monetary Fund, IMF, GDP growth in emerging markets slowed from 7% during 2003-2008 to 6% during 2010-2013 and is expected to further fall to 5% during 2014-2018. Even the Asian economic giants have seen a measure of slower economic growth. China, on concerns about slowing economic growth, recently cut mortgage rates for the first time since the 2008 crises, in an effort to bolster a flagging housing market. India and South Korea have also witnessed contractions in manufacturing activity.

    Production
    The steep rate of crude oil production increase in the United States ― in addition to increases from Organization of the Petroleum Exporting Countries ― has contributed significantly to the current excess global supply. Such is the contribution from producers outside the Middle East that the current ISIS crises in Iraq has had little if any effect on global crude oil prices. According to the Energy Information Administration, total oil supply by the United States exceeded those of Saudi Arabia and Russia to record the highest value for a country in 2013 (Figure 2).

    Total Oil Supply_U.S., Russia Saudi Arabia 2005-2013

    According to Platts, the estimated surplus of global oil supply over consumption for 2014 is currently about 800,000 barrels per day. That surplus is set to increase as OPEC members prepare for a price-reduction battle in order to protect their market share. The net effect of the supply glut has been downward pressures on prices.

    Dollar Rates
    Exchange rates for the United States dollar with regard to major global currencies have also impacted crude oil prices. The U.S. currency strengthened to a two-year high against the Euro and a four-year high against several major currencies. Since crude oil is bench-marked in United States dollars, the effect of that strengthening has been to make the commodity more expensive, exerting downward pressures on demand and hence prices.

    All said, given the current levels of oil oversupply and the phlegmatic rates of global economic activity, oil prices will most probably remain comparatively low in the short to medium term. Some analysts expect a further decline of about US$10 per barrel from current price levels. This will test the profitability of cost-intensive producers. Breakeven prices for tight oil producers in the United States for example are estimated to be between US$65 per barrel and US$85 per barrel. For the Canadian oil sands, the values are US$75 per barrel for steam-assisted gravity drainage projects and US$100 per barrel for mine upgrading capacity projects. The implication is that some ongoing projects may be forced to shut down while some proposed ones may be shelved.
    While these conditions may constitute the necessary spur for a future price rebound, the expected tenure of the current price regime remains uncertain.



  • Shale Resources: Prospects For Global Oil and Gas Supply

    TRF Thumbnail 2The United States in the last few years witnessed a massive increase in crude oil and natural gas production from shale formations. That increase, according to the Energy Information Administration, EIA, has put the country on course to leapfrog Saudi Arabia and Russia to become the world’s largest producer of crude oil while reducing the domestic price of natural gas by about two-thirds. The shale boom, as the breakthrough has been termed, was made possible in the main by two processes, namely hydraulic fracturing (or fracking) and directional drilling.

    Given the formidable challenges facing oil and gas production from many shale formations, questions have inevitably arisen about the sustainability or longevity of the whole shale boom phenomenon. While skeptics hold that the sheer number of wells necessary just to maintain production is impracticable, proponents estimate that the boom will endure for between three and nine decades. A proper evaluation of the prospects is therefore informative.

    Production
    One characteristic of production from shale formations is the rather steep initial production decline rates (Figure 1) which in some cases are in excess of 50% (typically 60% to 70%) after just one year of production.

    Typical Natural Gas Production Curves For Selected Shale Formations

    Conventional resources in the main, show decline rates of about 55% after two years and thereafter taper off gradually. The implication then is that for shale formations, many newer wells would have to be drilled just to maintain production. According to the International Energy Agency for example, North Dakota’s Bakken shale formation will require 2,500 new wells drilled a year in order to sustain production of crude oil at 1 million barrels per day; a measure many conventional fields can accomplish with as little as nine-tenths less .
    Another production concern in shale formations is low recovery rate. Shale resources show a lot of lateral variability. For example, a 100-meter thick oil-laden formation may in just over a kilometer away thin out to zero, impacting the general yield rate.

    Revenues
    Of greatest concern to shale producers however, is the cost factor. According to reports by Oil and Gas Journal, there have been assets write-downs of nearly US$35 billion among the 15 largest shale resource producers since the beginning of the shale boom; the report also cites 6 years of “progressively worsening financial performance” among 35 U.S.-focused independent companies involved in shale gas and tight oil plays. The high-positive correlation between shale production costs and product prices leaves little wiggle room for profitability. Some analysts estimate that this year, drillers for shale oil and gas resources will spend US$1.50 for every US$1.00 they earn from sales of their output. Clearly, cash flow, positive inflection point is still some time away. Continue reading  Post ID 186



  • The Middle East* And Global Petroleum Supply

    The lack of any significant effect on global crude oil prices by the current Middle East conflicts is perhaps indicative of the region’s declining importance in the global oil and gas industry. The Middle East has for decades dominated the supply of crude oil and natural gas and any unrest ― such as the Arab Springs ― in the region has tended to cause spikes in energy prices.
    The current spat in the region involves Israel and Hamas on one hand and ISIS on the other. Since the current crises began and through 11 August, the two major metrics for global crude oil prices, namely Brent and West Texas Intermediate (WTI) have declined (Figure 1).

    Spot Crude Oil Prices (FOB)_ Brent, WTI 01 July 2014 - 11 August 2014

    In contrast, the Russia-Ukraine crisis has had an opposite effect. The recent report that Russia ―― the third-largest producer of crude oil and with the largest natural gas reserves ―― has sent battle tanks across its border into Ukraine caused crude oil prices to rise. For example, front-month October Brent prices on Friday climbed US$1.46 to settle at US$103.53 per barrel.

    This market response may derive from the region’s fundamentals. For example, the proportion of global crude oil reserves held by the Middle East has been declining significantly over the last decade while that for natural gas has remained essentially unchanged over the same period (Figure 2).

    Middle East_ Proved Oil and Gas reserves As Proportion of World's Total  1980 - 2013

    In addition, the growth in crude oil reserves by the rest of the world has outpaced that of the Middle East. Between the years 2000 and 2013, the rest of the world grew crude oil reserves at an average rate of 3.5% while for the Middle East the average growth rate was only 1.3% (Figure 3).

    For natural gas, while the Middle East’s proportion of global supply has been increasing, the growth rate for its reserves since the year 2000 has declined faster than that for the rest of the world.

    Growth In Crude Oil Reserves_ Middle East vs Rest of the World 2000 - 2013

    The Middle East region presents one of the last remaining “easy-to-get” petroleum provinces; however, major oil and gas companies while still active in the region, have channeled investment in the more politically stable ― even if more geologically complex and capital intensive ― acreages.
    Investors often loathe uncertainty, but prefer the calculated risk in technological or geological challenges over the inscrutable vagaries of less-developed economies. ExxonMobil, Royal Dutch Shell, BP and Statoil are among the majors prospecting for oil and gas in the Arctic. Some other companies in the United States are divesting overseas assets to focus on domestic prospects.

    With the prospective addition to the global inventory, of resources from tar sands, shale (especially in China), as well as the Arctic among others, the strategic importance of the Middle East to the global petroleum industry may be further (even if gradually) eroded.

     

    *The Middle East region referred to in this post consists of Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Palestinian Territories, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.



  • Major Oil Companies: Restructuring For Profitability

    Nrelate and Default Icon - TRFCrude oil and natural gas exploitation has been progressing into more challenging regimes. These frontiers such as the Subsalt as well as the Arctic among others are more geologically complex requiring enhanced technological applications to exploit; that inevitably means higher costs with implications on the operating companies’ profitability and shareholder returns. The Energy Information Administration in a recent report indicated that among 127 major oil and gas companies, cash proceeds for the year ended 31 March 2014 totaled US$568 billion while cash usage was US$677 billion, or US$109 billion higher.

    Three metrics elucidate this:

    1. Upstream Unit Capital Productivity

    In the seven years to 2012, unit capital productivity among the world’s top 74 oil and gas companies declined in a near-exponential manner from 21.59 barrels of oil equivalent per dollar (boe/$) to 9.56 boe/$ (Figure 1), according to a Pricewaterhouse Coopers report. The report was based on the world’s top 100 oil and gas companies as compiled by Evaluate Energy. Unit capital productivity measures the quantity of oil and gas produced for each dollar of capital employed by the companies. In other words, the quantity of oil produced by the companies per dollar employed has almost halved in the period under consideration. The decline is in spite of massive production increases mainly from unconventionals and is same even among the top performing (upper quartile) companies. Figure 1. Unit Capital Productivity_2006 - 2012 Continue reading  Post ID 143



  • A Brief On The Current Energy Sector Sanctions Against Russia

    Nrelate and Default Icon - TRFThe United States and European Union a few days ago announced a third stage of co-ordinated sanctions against Russia, in response to that country’s annexation of Crimea and its reported complicity with separatist rebels in the shooting down of Malaysia’s flight MH 17 over Ukraine. The current sanctions target Russia’s energy, defence and financial sectors.

    According to the Energy Information Administration, Russia is the second-largest producer of dry natural gas and third-largest producer of liquid fuels in the world. However, exploitation of the country’s petroleum resources is largely dependent on the West’s technological expertise and financial muscle; any withdrawal or reduction with regard to these will certainly impact her production.
    The provisions of the current sanctions limiting financial and specific technological investment in the Russian oil and gas sector must therefore be of some concern. For example, production in the country’s older oilfields is only being maintained by horizontal drilling and hydraulic fracturing processes among others provided by western energy companies. In addition, estimated capital expenditure for 2014 by (mainly western) upstream companies was US$51.7 billion according to Barclays Capital Inc. ExxonMobil (U.S.) and Statoil (Norway) have joint ventures with Russia’s state-controlled oil company Rosneft, for the exploitation of Arctic and other geologically complex prospects while BP (UK) holds a 19.75% stake in Rosneft. Igor Sechin, Chief Executive Officer of Rosneft recently revealed that the company has devised ways to circumvent or minimize the effect of such sanctions.

    Oilfield service companies such as Schlumberger, Baker Hughes and Halliburton generate 4% to 6% of their global sales from Russia according to RBC Capital Markets; and while losses at such levels ― should they occur ― would not threaten these companies, they would certainly pinch. Vladimir Putin, Russia’s president may have been counting such a pinch when he defied the West’s calls and pressed on with support for rebel separatist forces in eastern Ukraine; and he may have gotten a reprieve as Russia’s gas works were spared of sanctions, perhaps because they supply about a third of the European Union’s gas consumption.

    While these sanctions may have little or no immediate effect on Russia’s oil production, they will however, if they endure, quicken production decline in older oilfields and lead to extensive delays in the development of new ones. Russia is blessed with a lot of brilliant scientists and engineers who are quite capable of developing their own technology to replace the West’s; but the capital outlay as well as the time frame needed for its development, testing and deployment would suggest a Russian crude oil production decline in the medium-term to long-term.

     



  • Global Crude Oil Prices: Three Critical Issues To Watch

    Crude oil, albeit in decreasing proportions, will for some time to come remain a dominant form of energy used to power the gamut of domestic and industrial processes around the world. There are however, concerns that supply disruptions may impact the current ― even if sluggish ― economic rebound particularly in Europe, as well as the projected economic growth in emerging markets.

    Geo-political tensions such as those of the Middle East-North Africa (MENA) region can and do impact crude oil supply and therefore prices. There are currently two flashpoints that hold the potential for larger supply disruptions. The first is the Israel-Hamas military conflict which can develop into a full-fledged proxy war in a region that is critical to global crude oil supply; the second is the spat between the West and Russia over the shooting-down of Malaysia’s Boeing 777 passenger jet over Ukraine. It is noteworthy that about a third of Europe’s gas energy requirement is met by Russia and a significant proportion of that through Ukraine.

    While such flashpoints are often tenuous, there are in the short to medium term, three potential drivers for global crude oil prices that need to be kept in view:

    1. Production from Unconventionals
    The massive increase in crude oil production from unconventional sources has come mainly from the United States and Canada. In the United States, about 90% of crude oil production growth comes from tight oil in six shale plays, according to the Energy Information Administration, EIA; and of the six, only two (Eagle Ford and Bakken) account for about 67% of that growth. While operators of these plays welcome such output, the rather high productivity decline rates for the plays has meant that an estimated 6,000 wells must be drilled annually at a staggering cost of about US$35 billion just to maintain production. Many analysts believe this is unsustainable. Tight oil production is projected to rise rapidly (leading crude oil production growth) to 2.6 million barrels per day in 2019 and then decline through 2040 (Figure 1).

    Continue reading  Post ID 106