Majors
Not the prices in themselves are most important, but rather their fluctuation over a lengthy period of time which, in turn, affects productivity and replacement of depleting oil deposits under extraction, this statement by the President of one of the largest European oil&gas companies addressed Caspian Energy’s inquiry regarding oil price prognosis. The today’s volatility looks more like a turbulence which is checking all market participants for strength without an exception.
Oil companies fell rather well, with their accumulated technological assets and financial flexibility developed over a period of more than ten years of a «high season» for soaring oil prices on the international market. Despite financial losses - a legacy of the crisis carrying on for another year - no significant structural changes will follow in this field, unlike mergers and acquisitions of the 1998 - early 1999, when Amoco, Unocai, Elf, Texaco, Mobil and many other companies left the market. Since expectations are not too high in regards to dwindling investments and even a 40% drop on major revenues this year resulting in decreased extraction, new technologies rise to the challenge of lowering the net cost of deep-water drilling, thus reducing expenditures year by year. Regardless of oil prices, companies distinctly prefer deep-water deposit investment, covering SPG production within the area stretching from the Arctic belt (Shell) up to the shelf waters of Australia, Papua-New Guinea and Mozambique (Exxon, BG). Sub-oceanic extraction systems and sub-aquatic gas processing and compression (Statoil), designed to increase layer yielding and bring down CAPEX, will allow shelf project engineers to adjust accordingly to low energy prices set on the world markets. A wide spectrum of projects, from floating plants on SPG production to application of GTL technologies to brand new thistle oil-based polyethylene bio-production complexes in the EU, all carry a substantial investment potential for Majors and other oil&gas companies.
In the meantime, profits of Exxon fell by 6% in 2014. However, the company plans to take advantage of the situation and acquire deepwater gas blocks in Australia.
Chevron’s stocks reduction totaled 33% last year compared to a 21% depreciation of shares of Exxon and Shell. This summer the companies announced that low oil prices make them revise their expenditures downwards on average by 30%. Thus, ConocoPhillips, Pioneer and Linn Energy reduced expenditures by 20%, 21% and 53% respectively.
Earlier, in his interview with the Caspian Energy Executive Director of Exxon Rex Tillerson stated that global prices for oil collapsed because of the slowdown of demand growth in China and other countries, but at the same time, oil supply from the USA “comes as a cargo train”. According to him, a company can grow but spend less owing to lower prices for drilling rigs and other services as well as at the expense of much cheaper steel.
“Because of low oil prices, the income of oil companies has reached the rates observed for the last time in mid of 1980s.
But it can overcome the lower floor this year”, Nil Beverage, Senior Analyst of Bernstein Research, says. According to him, peak of profitability of oil companies was observed in 2006-2007 when it was close to 30%. But since then it has fallen down and can fall below 5% this year. At the same time, a profitability of oil companies always recovers in spite of the price environment, and though the terms of this revival remain uncertain, there are grounds to assume that 2015 will be the year of lower point. “The increase of prices and deflation of expenditures should lead to increase of return on capital as early as 2016”, Beverage says.
MARKET
The market today is under pressure caused by uncertainty of a number of geopolitical issues, the shift of the sanction axis from Iran toward Russia on the one hand and the lack of an answer to many questions on the other hand. How will the sanction policy continue? What will happen to so called “Arab spring” situation? What policy will the next 45th administration of the USA follow after 2016?
These questions turned out too many for global commodity and stock markets which will keep contracting or growing caused also by uncertainties in the geopolitics. It is ironic that if the geopolitical conflict occurred in Georgia in summer 2008 and the preceding explosion of the strategic Azerbaijani oil pipeline Baku-Tbilisi-Ceyhan marked, though a short-term price decline in 2008-2009, a period of high oil prices till July 2014, nowadays we are observing the reverse situation. The geopolitics wins back positions pending the uncertainties of the end of 2016. If the price level, starting right from the commencement of the system global financial crisis in USA, has been maintained before – growth of liquidity at the expense of the FRS’s monetary policy on quantitative easing, debt increase of the biggest world economy, industrial revolution in China as well as reduction of OPEC production, then today these factors have been leveled.
QE2 led to the growth of the stock market as early as the second half of 2010, which in its turn led to the growth of consumption and strengthening of the US economy late in 2010.
Completion of the QE program in the USA and latest events in global currency wars, it is certainly a part of the oil price decline history. But there is still a long way to go till the establishment of the balance and the beginning of the new cyclical market. It is also observed in OPEC’s policy which moved aside waiting and hopeful of maintaining its market positions no matter what oil price it will require.
OPEC has partially ceded its regulative functions to the US oil reserves which keep impacting on oil prices. The low oil prices is favorable for the US consumer market, but not for a long timeframe, since it slows investment flow which can affect GDP growth prospects expected at the rate of 2.4% in 2016 – the year of elections.
EXPECTATIONS OF INVESTORS
Pushed by forecasts about inconsiderable GDP growth of the American and European economies, Asia – China, India, 6 ASEAN countries, which in its turn implies prospects of the following cycle of high prices for energy resources, oil companies are waiting for the appearance of the favorable price corridor in the oil market in order to start investing in oil-gas provinces of the Arctic and Iran, Mexico and Oceania.
China continues increasing oil import because own production of the country grows slower than demand. According to the estimates of the American Energy Information Administration (EIA), demand for oil in China will reach about 11 mln barrels per day (about 550 mln tonnes per year) this year. In 2016 it will grow up to 11.34 mln barrels.
China’s own production totals 4.61 mln barrels per day or 230.5 mln tonnes per year (estimates of EIA for 2015). Production in China grows considerably slower than demand: production totaled 3.99 mln barrels per day in 2008 (about 199.5 mln tonnes per year).
In this way, oil production rate in China increased by 15.5% over the past 7 years while the demand increased by over 38%.
Gas demand in India will increase almost by one third in 2018-2019 – by 29%, State Minister of Oil and Gas Dharmendra Pradhan said.
According to the written reply of the minister to the request of the upper chamber of the Indian parliament, the working group for oil and gas is forecasting increase of demand from 405 mln standard cubic feet per day (in 2014-2015) up to 523 mln standard cubic feet per day in 2018-2019.
India currently imports up to 75% of its energy needs. The country aspires to diversify supplies of energy resources. In particular, India shows interest in LNG of Iran.
Investors’ expectations are also strengthened by the ongoing growth of global oil demand. According to the August report of OPEC, this year it will increase by 1.38 mln barrels. It is 90,000 barrels higher than the figure of the previous forecast of OPEC. Apart from this, OPEC has not changed the previous forecast of the global oil demand increase by 1.34 mln barrels in 2016, while global oil consumption will reach record 94.04 mln barrels per day. In spite of the growth of demand, OPEC thinks that surplus of oil supply in the global market totaled 2.87 mln barrels per day in the second quarter.
IEC, which in its August report says that this year’s oil demand increase will total 1.6 mln barrels per day while 200,000 barrels per day growth figure was reported earlier, is more optimistic. Next year this growth may reach 1.4 mln barrels a day.
According to the agency, the decline of oil price below $50 per barrel from a three-digit level, observed a year ago, triggered a much quicker response of demand rather than supply. Many players of the oil industry have adopted a new slogan in this context”, IEA says.
MAJOR PLAYERS
The United States preponed the date of entry of its oil into the world markets after lifting a 40 year oil export ban late in 2015. Long-term efforts of the American companies have been justified. If the ban is lifted, by 2025 the USA will have exported 2.4 mln barrels per day, the report of IEA says. These volumes will make the country the fourth among oil exporters.
According to Ryan Lance, Chairman of the Board of Directors of ConocoPhillips, lifting of oil export ban will lead to the decline of petrol prices and strengthen stability of energy supplies.
“USA can become a net LNG exporter in 2016. Together with Canada it will have become net exporters of oil by 2020. At the same time, oil export will stimulate additional production of 3 mln barrels per day”, he says. Therefore, R.Lance called to seriously consider a new energy policy.
Barack Obama’s administration has earlier permitted limited supply of crude oil to Mexico. Formally, it is not an export: US, in exchange, receives heavy oil from Mexico.
Crude oil export ban, which has been in force since mid of 1970s, has been slowly eroded for over a year.
The first step was the decision made by the US Trade Department in June 2014 to admit minimally processed superlight oil (gas condensate) as an oil product and the ban does not refer to it. As a response to rapid decline of oil prices, in December the government announced about the increase of the quantity of companies which have a right to export condensate without special permission. A tanker loaded with 400,000 barrels of light oil headed from the USA to South Korea on July 30 of this year.
The necessity to bypass the ban arose because of the rapid growth of oil production after the shale revolution in the USA. In 2013, the USA, for the first time after 1988, produced more oil than it imported. This year the country has become the first world producer, leaving Russia and Saudi Arabia behind. According to forecasts of EIA, production can reach 9.4 mln barrels per day in 2015 (maximum rate since 1972).
Increasing export and maintaining import, the USA turns out both the biggest producer and importer, purchasing 7 mln barrels per day (half of import falls on supplies from Canada). However, its leader, Saudi Arabia, had to yield part of the American market, reaching about 1 mln barrels, and redirect this volume to China and India where it faced the competition with Iran and Russia. OPEC increased oil production rate in July 2015 and has set a new production record since 2012.
Saudi Arabia reduced production by 202.7 thou barrels per day – down to 10.36 mln barrels per day, a minimum production rate for the country since August 2014.
Saudi Arabia raised oil production volume by 230.9 thou barrels per day (up to 10.564 mln barrels per day) in June 2015. In general, OPEC raised its share in global production from 33% up to 33.4% in June of 2015.
At the same time, Saudi Arabia has issued state obligations for the first time since 2007. Final volumes of the auction are not announced. However, earlier Saudi Arabia was going to attract about $5.3 bln. The reason for the country’s entry into the debt market is the decline of oil price. This year the budget deficiency of Saudi Arabia can total about $110 bln because of that. Saudi Arabia could avoid economic challenges by maintaining high oil prices. However, such decision would be unbeneficial for the country in the long-term future.
According to Rosstat, Russia produced 10.036 mln barrels per day in June.
In May this figure totaled 10.331 mln barrels per day vs 10.187 mln barrels per day in Saudi Arabia.
According to Rosstat, oil export from Russia increased by 9.8% in the first half of 2015 compared to the same period of 2014 – up to 120.5 mln tonnes.
OUTCOME
Considering the constantly growing forecasts of global oil demand, even during the period of decline of Brent oil price below $43 per barrel late in August, and later below $40 per barrel after December 14, we still witness the oversupply in the market caused by low prices and stagnation of OPEC production, even though real OPEC export figures usually outrun all official indicators. It means that emerging positive macroeconomic price maintenance factors have not firmed up yet and do not cardinally influence on global prices. The geopolitical factor helps them in this process as well. Physical lifting of sanctions from Iran is expected early in 2016 while the technological sanctions imposed on the Russian oil industry will not allow to boost production in the foreseeable future. Geopolitics of Near East and North Africa still leaves much to be desired.
No serious price increase is going to occur if the market, just like in period of August decline, will keep laying major regulating role on quantitative indicators of the reserve oil fund of the USA and cooperation of the American and Chinese economies. Even the positive statistics of growth of the Eurozone markets will have no serious impact on the price since the western market is no longer in need of upper level of oil price to maintain a necessary investment rate.
Effectiveness and technologies will strengthen, economy of upstream projects will shrink, low oil prices will support the growth of the global economy (IMF’s Executive Director Christine Lagard stated). Any toughening of the monetary policy of the US FRS will lower liquidity at markets and slowdown the oil price increase, which is beneficial for the European economists as well. It results in an endless circle for customers in the market, which can be changed, for instance, by an environmental factor restraining, for the time being, a global shale production or the following, preferably, industrial revolution, somewhere in China, India, BRICS countries in general. And of course, if new cheap energy resource shows up in the market, which will lead to the following collapse of the oil market.
