Judy Clark
Senior Associate Editor
HOUSTON, May 2 -- The oil and gas industry is entering a "new era" with different realities to face and a new set of diverse challenges and opportunities, said a panel of representatives from the Organization of Petroleum Exporting Countries and other industry speakers at the Offshore Technology Conference in Houston May 1.
Among these realities, they said, are government-subsidized, emerging alternative energy competition, increased emphasis on global climate change, soaring exploration and production costs, supply-demand uncertainties, and the need for maintaining price and market stability.
The "new market" equals "uncertainty," said Sadek Broussena, former Algerian Minister of Energy and current advisor at Société Générale. These uncertainties—also fueled by higher prices, more-stringent environmental regulations, and geopolitics—are not good for the market, he said, and they make it difficult to know how much to invest to meet uncertain demand in the wake of conservation efforts and alternative energy fuels production.
However, Broussena said, OPEC has an interest in keeping the market stable, and it is adapting to the new era. It seeks to reduce the uncertainty by playing the role of swing producer to increase or decrease production as needed to stabilize the market, but first it must secure a large spare capacity. OPEC is producing 2-2.5 million b/d in spare capacity, primarily from Saudi Arabia.
Demand shift
Delivery of energy is another relevant issue, said Edgard Habib, chief economist at Chevron Corp. The new energy landscape is characterized by a demand shift, with the last 5 years seeing greater take-up in Asia. During that time China's demand growth, which Habib compared to the Industrial Revolution, averaged 11%, India's 6%, the US's 20%, and global growth 5%, he said, adding that world demand would grow at about 9% for the next few years.
In addition, an increase in nationalism worldwide has resulted in a change in the geography of energy, and the volume of trade in the world has increased, Habib said. "We are living in a very robust globalization," he said, with great flows of trade, information, and money. "This environment is very good for the energy industry because of the balance of trade."
All of these elements affect government policy, which is changing, he said. "Governments can altar the fuel mix. We'll have to wait and see what happens with the climate change issue." Although the US was the first nation to mandate and implement reduced sulfur content in gasoline and diesel, it would never accept the Kyoto Protocol, he said, "because it would shave 2% off US gross domestic product, which would not be tolerated" while China is growing at such a rapid pace and using so much coal.
About 50% of greenhouse gas emissions will be from electric power generation at coal-fired plants, said Cornelia Meyer, chairman and vice-president, UK, The British Swiss Chamber of Commerce.
Oil price controversy
OPEC has emphasized that investment in infrastructure depends on one of the uncertainties: demand security.
"One of the biggest threats to security of demand is high oil price," said Meyer. "If it is too high, investors will go to renewables and nuclear." Consistently high prices also stimulate conservation, lowering demand further. She said energy efficiency can create a 10% reduction in demand by 2030.
Keeping prices high enables investment in fossil fuel developments such as tar sands and shale that otherwise would be ignored as uneconomic, countered Broussena. He said OPEC cannot make or control prices because other market forces affect price, but it wants to "influence" prices. "OPEC's one objective is to stabilize the market, and prices are very important to that end," he added.
Hasan Qabazard, director of OPEC's research division, said the group's price band for the years 1989-98 will not be back because the price was too low. This caused a surge in demand and resulting in a proliferation of sports utility vehicles until 2003 when spare capacity decreased and the price of oil and commodities rose. "It killed investment, basically. We are not defending any price," Qabazard said, but Broussen added, "If prices will stay at this level [$50-60/bbl], OPEC will be very happy."
Habib added: "Sixty-five dollar[/bbl] oil has not affected the world economy in the least."
Supply-demand balance
Balance is the key, said keynote speaker Faud Al-Zayer, both in creating security of supply and demand and in developing cooperative working relationships between national oil companies and international oil companies.
Al-Zayer, who heads OPEC's data services department, said the organization is committed to ensuring that there will be adequate resources in the future and is investing heavily in new capacity. A large amount of idle capacity will be utilized to provide a stable market.
Meyer said OPEC is investing $20.2 trillion over the next 25 years to create more capacity.
Nimat Abu Al-Soof, OPEC upstream oil industry analyst, said spare capacity provides market balance, which has improved since 2004, but became tight with the 2005 hurricanes Katrina and Rita.
"OPEC capacity growth is underpinned by over 130 E&P projects in execution or planning stages, 50% of which are with international oil companies," said Al-Soof. "Total cumulative capital expenditure is likely to exceed $130 billion. These projects are in addition to all energy infrastructure projects, such as pipelines, export terminals and downstream expansion.
"Upstream capacity expansion projects planned involve investments of $200-370 billion by 2020," he said. "OPEC spare capacity could build to 6-9 million b/d before 2010," while overall required OPEC crude likely will drop or remain flat until 2009.
Habib said the boom in investment also will enable technology to unlock future upstream and downstream production.
"The impression that we are running out of oil" is erroneous, Al-Zayer said, adding that OPEC has almost doubled its conventional resources since 1960. "We expect that to continue."
Contact Judy R. Clark at [email protected].
