The Organization of Petroleum Exporting Countries will try to keep prices at its current low level this year “to sustain the economy,” said OPEC Sec. Gen. Abdalla Salem El-Badri at the 10th International Oil Summit in Paris in early April.
Organized by Institut Francais du Petrole and Consultant and Publisher Petrostrategies, the summit was held on the same day that G20 leaders were meeting in London to discuss the global economic situation, now deeply impacting the world’s oil markets.
Calling the current $40-50/bbl price “a pragmatic price,” El-Badri said, “OPEC member countries are already shouldering a good deal of the responsibility for turning the global economy around. At our March meeting, we maintained oil output at existing levels despite the current low price environment and the market’s persisting oil stock overhang. OPEC’s objective…is to bring about long-lasting market stability.”
OPEC member countries are already shouldering a good deal of the responsibility for turning the global economy around. At our March meeting, we maintained oil output at existing levels despite the current low price environment and the market’s persisting oil stock overhang.—OPEC Sec. Gen. Abdalla Salem El-Badri
Bringing his point home, El-Badri added, “The fall in oil prices since last summer has offered some short-term relief to consumers. According to some institutions, today’s oil price is providing a stimulus of [at least] $1 trillion to the struggling global economy. If we consider the last half of 2008 and 2009 together, the figure may reach $2 trillion, and OPEC’s share accounts for some $800 billion of this. And at least some of this stimulus is already being felt by the whole world.”
Nonetheless, El-Badri warned members not to lose sight of medium and long-term perspectives. “When we consider what the future holds for the oil industry, it is important to remember that the short, medium, and long-terms are all interlinked. Concerning ourselves only with the immediate situation will lead to a potential impasse in just a few years.”
Summing up the price balancing dilemma, El-Badri said, “High prices destroy demand; low prices prevent investment.” He cautioned that the current oil price breaks the momentum of investment in the oil industry. This momentum, he said, “is as vital for continued research and development and encouraging new human capital, as it is for capacity expansion to meet future demand.”
UAE Energy Minister Mohammed Bin Dhaen Alhamli voiced a further concern: “Production cuts, combined with the current low price, have massively reduced the export incomes vital to the economic advancement of developing countries,” which he said includes OPEC members.
He also fears that low prices are harming the development of renewable energies, in which the UAE has “ambitious” plans. “The promotion of renewable energy goes hand-in-hand with our role as a leading producer of oil and gas,” he stressed.
Learning from the past
The encouraging news from the summit was the broad consensus—among both national and international oil companies, major service and construction companies, and international energy organizations—that the mistakes made during past crises should not be repeated this time: short-term uncertainties must be managed while pursuing the development of long-term potential.
This reference to the past was made at the start of proceedings in the introductory statement of Nordine Ait-Laoussine, president of Geneva-based Nalcosa. He said that “when the idea of holding this summit was first discussed 10 years ago, world economic prospects were bleak in the aftermath of the Russian, Asian, and Brazilian financial crises.
“Oil prices were stagnating around $10/bbl in spite of a series of production cuts involving almost all exporting countries,” noted Ait-Laoussine, adding, “The last 10 years were a period of unprecedented change during which we have witnessed a profound restructuring of the oil industry on a scale never seen before.”
Last year’s profits are helping us maintain business in a low-priced environment.—Total SA Chief Executive Officer Christophe de Margerie
“Clearly,” he insisted, “the current exceptional market conditions and their potential risk to the global economy and the oil industry underscore the importance of closer dialogue and cooperation at all levels, which is one of the fundamental objectives pursued from the beginning by the organizers of this summit.”
Qatar’s Deputy Prime Minister and Energy Minister Abdallah Al Attiyah put it more specifically: “Investment decisions which we make today will have an impact on how energy markets evolve over the next decades.”
Maintaining investments
The two keynote speakers, Total’s Chief Executive Officer Christophe de Margerie and Royal Dutch Shell’s Chief Executive Jeroen van de Veer set an upbeat tone as they indicated they would maintain their investments in 2009.
“Last year’s profits,” said De Margerie, “are helping us maintain business in a low-priced environment.” At the same time, he echoed the general feeling of summit participants that “the long-term view is easy; more difficult is the short-term view.” He said, “The long-term view is good, the short-term not so good.” While Total’s strategy and its long-term vision have not changed, it is adjusting to short-term constraints by keeping a strict hold on costs.
Van de Veer expects short-term oil overcapacity until the economy picks up, “and then energy demand will come back,” he said, predicting that “long-term energy demand will double between now and 2060 because of population growth.” Classic oil and gas will not supply all the energy demand, he said, so coal and renewables will also be needed. But renewables will have to be geared to lower costs with no subsidies, he added.
Most of Shell’s investments, however, will remain in oil and gas, Van de Veer said, adding that the group has abandoned none of its long-term projects and is preparing to bid for Arctic oil and gas resources when the time comes.
International oil companies, national oil companies, and service companies are complementary, he concluded: “NOCs own the land, IOCs design and build the house, service companies’ role is [installing] the scaffolding and plumbing. Moral: you need one another,” said Van de Veer.
While Repsol YPF SA Chief Operating Officer Mighel Martinez wondered how long it would take the economy to adjust supply to demand, he said the current situation allows his group to renegotiate some contracts and to continue with its investment commitments, despite a capex reduction to €29 billion from €33 billion.
Saudi Arabia building
Joining forces with the IOCs, Saudi Arabia also is “taking a longer-term view of oil market trends and is staying the course when it comes to its program and investments,” said Ibrahim A. Al-Muhanna, advisor to Saudi Arabia’s Ministry of Petroleum and Mineral Resources.
Saying oil demand will rise as soon as the economic crisis abates, perhaps later this year, he said if global production capacity is unable to meet demand at that time because of underinvestment, “Saudi Arabia is capable and willing” to meet any demand growth.
“With the completion midyear of the Khurais oil increment, the biggest increment in the history of the oil industry, Saudi Arabia will have a 12 million b/d sustainable production capacity” and will continue to play its role of “reliable supplier of oil in both good and bad times.”
Declaring that 64 million b/d of gross oil capacity must be installed in 2007-30—five times Saudi Arabia’s current capacity—to meet future demand growth and offset field declines, Executive Director of the International Energy Agency Nabuo Tanaka said more than $1 trillion/year in investments would be needed for the purpose. “The challenge is to do it, especially in the current economic climate,” he said.
“Reserves can still be developed at $50/bbl,” he said, adding that the economic crisis is “an opportunity to place a Clean Energy New Deal at the heart of the economic stimulus packages everywhere.”
NOC-IOC cooperation
Taking a bird’s eye view of current oil markets, Nader Sultan, former chief executive of Kuwait Petroleum Co., pointed to the “unusual” feature of the current oil crisis, which is occurring in combination with a financial and economic crisis. But “our industry is an industry of decades,” he said, “and one can run a company on a $40-50[/bbl] price.”
Sultan sees better cooperation building between NOCs and IOCs who, he said, will share risks and reduce costs, “as financing is back in a new dimension.” He pointed out, however, that OPEC has postponed 35 projects while IOCs generally are maintaining investments. “NOCs cannot do this because they contribute to the national budgets and [they] don’t have the money,” he explained.
The summit heard comforting news from service firms Halliburton, Technip, Saipem, and CGG Veritas. They seemed to be learning from past mistakes when the service and construction industry had massive labor cuts and cut rig construction but then had to build it all up again.
Short-term oil overcapacity will prevail until the world economy picks up, and then energy demand will come back. Long-term energy demand will double between now and 2060 because of population growth.—Royal Dutch Shell PLC Chief Executive Officer Jeroen van de Veer
For Tim Probert, executive vice-president for strategy and corporate development at Halliburton, the behavior of the current cycle differs from prior downturns as it is an economic, financial, and oil crisis. “We are still finding the bottom for demand destruction,” he said. But he saw the longer term as “very positive.”
Meanwhile, the company is reducing input costs, including inefficiencies in execution; managing effectively employed capital; focusing on quality execution; and adjusting its technology portfolio and general positioning, while aligning all four elements to its customer base. Probert acknowledged that there had been some staffing reductions, especially in the US.
Supply destruction generates risk on human capital as the price of oil and gas declines, agreed Thierry Pilenko, president and chief executive of Technip. He said capex will go down with prices. The workforce has grown strongly in the service industry, he said, but there is an aging pyramid. “Headcount reduction has started, and we are expecting it to decrease further as projects are postponed.”
To mitigate the human resources impact, Pilenko said, Technip tries to “select the best, maintain R&D investment, rethink core processes and improve efficiency, and invest in competency development and employ lessons it has learned.” He added, “In relations with oil and gas operators, we must stay engaged on the future projects (particularly the large and complex ones); drive standardization as well as simplification; and eliminate redundancies. We also need to keep recruiting university graduates to avoid future generation gaps and to maintain credibility.”
To reduce costs, which have gone down by 5-6%, Pilenko said he starts with the group’s own costs and looks for new types of suppliers. Inefficient subcontractors push up costs, he said.
Saipem Chief Executive Officer Pietro-Franco Tali said that, in the short-term, exploration and production investments suffer; in the medium-term, the economy recovers; oil prices rebound; and shareholders, irritated by production and reserve replacement declines, demand action. Oil companies then rush to make up for lost time except that new frontier projects will be tougher than before.
And he cautioned, “Contractors cannot organize themselves in survival mode.” Saipem, he said, has made the choice of improving and nurturing competencies, working with clients, and investing in the future. It will continue to invest in new assets: Saipem is developing a new field vessel to work difficult future projects such as Shtokman and the Arctic region.
CGG Veritas has seen a substantial reduction in exploration and seismic budgets, but key projects are confirmed, although often spread out over time. However Pres. and Chief Operating Officer Thierry Le Roux insists that maintaining production levels tomorrow depends on exploration spending today.
The first half of 2009 has a backlog cover, but the second half is uncertain, said Le Roux. He said lower costs for such things as fuel should help, especially in marine contracts. His strategy is to manage short-term uncertainties while developing long-term potential by bolstering technological advances and preserving human capital.
But, he cautioned, a strong balance sheet and a strong order book is mandatory to carry out such an ambitious strategy.