By Paula Dittrick
Senior staff writer
HOUSTON, Feb. 18 -- The global oil industry is correct to fear a price drop from current levels and is wise to expect continued volatility during 2003 and beyond, according to Ann-Louise Hittle, Cambridge Energy Research Associates senior director, upstream oil.
During a panel session last week featuring CERA researchers outlining their global energy outlook by region, Hittle said four uncertainties are driving current oil prices: US energy market fundamentals and the economy, worldwide cold winter weather, the labor strike in Venezuela, and fears of war in Iraq.
She presented three 2003 oil price scenarios depending upon whether military action is taken against Iraq.
If there is no war, Hittle predicted an average of $25/bbl for benchmark US West Texas Intermediate on the New York Mercantile Exchange and $24/bbl for North Sea Brent on the International Petroleum Exchange.
"If the US does stage an effective and relatively short, successful war, then prices would average about $29/bbl for the year for WTI and $28/bbl for Brent," she said, adding that this forecast assumes a return of Iraq exports and a gradual return to production capacity. But if the potential war were to turn into a prolonged struggle with numerous casualties, damage to neighboring countries, or very extensive damage to Iraq, she predicted prices would hover around current levels of $35/bbl for WTI.
"We put the downward price risk for the year at about $22/bbl (WTI), if for example, the US economy slips back into a recession, and oil demand growth slows. That would be in the second half of the year," Hittle said.
Downward pressure also would be asserted if "the world were awash in oil in the second half of 2003; however, we don't expect that. We do think the Organization of Petroleum Exporting Countries will cut back on production to keep that from occurring. The market is quite tight."
Beyond 2003
An oil price collapse into the "low teens between now and 2010" would be possible if OPEC fails to hold onto its spare capacity or if Iraq's production returns faster than expected, she said.
Julian West, CERA senior director, oil and environment, said he hopes the oil industry "might see some changes for the better" in coming years despite its chronic problems of an aging workforce, consolidating companies, and shrinking returns.
"If the oil companies do get back into Iraq, they will have access to more potential than anywhere else they are allowed to go," West said, adding he believes assistance from service companies will be vital in Iraq.
For instance when compared to Siberia, Iraq's reserves are easier to develop and produce technically speaking, he said.
"So, it's quite possible to conceive we could see 7 million b/d from Iraq by 2010. This is not a forecast, and it's certainly not the most likely outcome, but it's what we could have if we can get it right with investors," West said.
Worldwide natural gas
The next 18 months will be crucial in shaping the future of European power liberalization, said Scott Foster, CERA senior director, European power.
In turn, power liberalization efforts will influence what happens with natural gas demand and price, said Michael Stoppard, CERA director, European gas.
The future of natural gas prices appears robust for the rest of the year even though "the reality in the marketplace feels at odds with the political vision," said Stoppard, adding progress is being made toward more open, competitive markets.
He sees "the sprouting of unbundled pipelines" in Italy, Spain, Belgium, and the UK, adding that he expects that trend to continue.
"The new prize is the UK gas market," Stoppard said, adding he expects the UK to become a net importer of natural gas. Contracts already have been arranged with Norway and with the Netherlands, he said. LNG also will be imported into the UK. The drivers behind LNG projects are reduced costs and improved project execution.
This means that "LNG is ready to move beyond the Mediterranean and improve its market share in cold European markets," Stoppard said. "In late 2002, Russia. . .signaled its own interest in entering UK markets with its proposal to build a pipeline across the Baltic Sea and make its way toward the UK. This symbolizes the threat to LNG in Europe of pipeline gas as pipeline gas wakes up to the new challenge."
New competitive dynamics in 2003 include the first signs of a "price communication or ripple between two markets previously quite unconnected—the current differential between US vs. European gas prices. . . . LNG arbitrage across the Atlantic will indeed be of growing importance in 2003," he said.
Michael Zenker, CERA senior director, North American natural gas, said North American gas imports—which include those into Canada, the US, and Mexico—are going to turn the natural gas industry into a global commodity in which LNG is going to play a critical source.
CERA sees a potential for a North American gas demand of 9 bcfd, or 60 million tons, by 2010.
"But, there are enormous structural challenges to making this LNG potential a reality—capital requirements, contract structure issues, and policy issues," Zenker said. "And, securing natural gas overseas adds a unique geopolitical dimension that is currently not a component at all in the North American natural gas market."
Uncertainly of supply dominates the near-term market as well, he said.
"Quite simply, the North American natural gas market has passed a tipping point. One that we characterize as a point in time in which it became clear that demand was going to outstrip the ability to grow supply," Zenker said.
North American gas supply has become less responsive to price than in recent history, he said.
"The demand that we see is going to be greater than the supply outlook that we have outlined for the next few years. . . . We see the gas market very tight at least for the next 24 months—tighter than at any other time in contemporary history," Zenker said.
Contact Paula Dittrick at [email protected]
