Bob Tippee
Editor
LONDON, Feb. 14 -- Challenges facing the oil and natural gas industry have more to do with delivery and product quality than with size of the petroleum resource, company executives told the Energy Institute's International Petroleum Week in London.
John Manzoni, group managing director and chief executive, refining and marketing of BP PLC, started the conference with a resource assessment more optimistic than those of some other analysts, saying the global supply problem for at least the next couple of decades is not the size of the resource but rather the ability of the market and industry to access the resource and provide the oil needed.
Jean Jacques Mosconi, senior vice-president, strategy and development of Total SA's Downstream Division, elaborated from the downstream perspective with a "paradox" refiners face in satisfying demand for ever-cleaner fuels.
Other speakers addressed resource issues, demand—especially in China—and the question whether market strength of 2004 was the start of a long-term trend or an aberration.
Future supply
Manzoni portrayed resource limits, as a problem for the industry, as less pressing than providing energy that's affordable, clean, and secure.
He called 2004 "unusual" and said capacity growth probably will increase to provide the global 3 million b/d cushion the market needs. When that happens, he said, prices will settle at a "support level" in the vicinity of $30/bbl.
"Affordable energy is what the economy needs; clean energy is what the environmental needs," Manzoni said, noting recent and prospective cuts in reductions of sulfur dioxide and nitrogen oxides and the promise of cuts in emissions of greenhouse gases.
And he said energy security comes more from the market—and the mutual needs of energy buyers and sellers—than from ownership of energy sources.
Because the major consuming countries can't produce enough energy to meet their needs, he said, "Self-sufficiency is not an option." He added, "The emphasis needs to be on strengthening the market."
Thomas Ahlbrandt, chief of the US Geological Survey World Energy Project, which published an important oil and gas resource assessment in 2000, supported Manzoni's optimism about the resource and emphasized reserves growth— "the observed increase in reserves for a particular field over time."
Reserves growth, he said, comes from conservatism of initial estimates and advances in exploration, drilling, and production technology. The phenomenon, he added, doesn't occur only in the Middle East, as some analysts assume. In fact, the US has accounted for 85% of all reserve additions in the last 15 years.
Globally, Ahlbrandt said, reserves growth in recent years has been "three times more significant" than new-field discoveries to reserves estimates. He also highlighted the Arctic, where USGS sees 21 potential producing provinces, as "the next frontier."
Peter Newman, global managing partner, oil and gas, of Deloitte, who expressed doubt about projections of 120 million b/d global oil market during a review of consensus market forecasts for the period to 2025-30. He said he thinks supply constraints, some related to the resource, could make "much higher prices possible," which would keep demand from growing as forecast.
He also said energy-use efficiency will improve in high-consumption developing countries as those economies advance. The consensus forecasts, Newman said, don't account for efficiency gains of that type.
Refiners' paradox
The paradox described by Total's Mosconi arises because refiners must use increasing amounts of energy and hydrogen to make fuels that produce lower emissions of pollution such as NOX and SOX. Both activities increase production of carbon dioxide, a greenhouse gas that many governments are trying to control.
Mosconi noted that in Europe concern about climate change is strengthening diesel's dominance of the vehicle-fuel market. Historically, in some European countries tax preferences made diesel more attractive than gasoline. Now, diesel's advantages over gasoline in the generation of greenhouse gases is boosting the product.
In France and Spain, Mosconi said, two thirds of new cars have diesel engines.
Demand for vehicle fuel is one force behind surging growth for oil in China, pointed out Gao Shixian, director of the Center for Energy Economics and Development Strategy of the Energy Research Institute of China's Naitonal Development and Reform Commission.
The other force is demand for residential energy. Industrialization and urbanization are strengthening demand in both sectors, he said.
Gao projected that Chinese demand for oil will rise from 230 million tonnes in 2000 to 350-380 million tonnes in 2010 and 420-500 million tonnes in 2020. Oil imports by 2020 are expected to reach 240-300 million tonnes.
He forecast Chinese demand for gas at 100-125 billion cu m in 2010 and 180-250 billion cu m in 2020. Gas imports, he said, will be 50-100 bcm in 2020.
Structural change?
The question of whether price strength is structural or part of a cycle received attention from speakers from the Organization of Petroleum Exporting Countries and Deutsche Bank.
Adnan Shihab-Eldin, director of OPEC's Research Division, said he's not ready to declare that the market has undergone a structural change. General demand increases, he said, might be cyclical.
He said Chinese demand strength is an important new market factor but said he doesn't expect China's consumption growth to match that of 2004 over the next 5-10 years.
He forecast global oil demand in 2025 at 111 million b/d but pointed out that the projection assumes world economic growth of 3.5%/year. With more-moderate economic growth, oil demand in 2025 would be 95-98 million b/d.
Adam Sieminski, Deutsche Bank global oil strategist, said, "2004 was a spike" caused by the "spurt" in Chinese demand, reduced exports of crude oil by Iraq, and loss to the market of 500,000 b/d from the Gulf of Mexico during October due to Hurricane Ivan.
With inventories low and OPEC members raising production to fill the market's needs, global spare capacity shrunk, adding to market jitters. When inventories and spare capacity rebuild, Sieminski said, "Oil prices will come down." Another "settling factor," he said, is that demand growth is easing.
When inventories again provide 51 days of forward demand cover, compared with 53 days now, Sieminski said, crude prices will settle at $30-35/bbl, supported by longer-term factors such as continuation of demand growth, even if rates of increase don't match those of 2004; supply growth outside OPEC that doesn't keep up with demand; costs of upstream operations that are rising faster than oil prices; the dollar's weakness; and limits on access to oil reserves by private oil companies.
Contact Bob Tippee at [email protected].