February 4, 2010
The panel looked into trends in crude oil supply and demand.
The panelists reached a broad conclusion that oil trends will be much more restrained than commonly believed. Christoph Ruehl, BP’s chief economist, pointed out that since the crisis, OECD countries have seen a 4 mln bpd decline in crude oil consumption, which he sees as a structural development that is unlikely to be reversed in the near term. Indeed, the entire global incremental increase in demand over the past six years has come from countries that subsidize oil products – an expensive policy that will have to end at some point. Edward Morse said that due to the impact of high prices on demand, 2009 may be the first year in over a decade in which more oil was found than consumed.
Meanwhile, supply is being restrained by artificial barriers in producing countries that have little to do with geology and more to do with the political and tax situation. The Iraqi government may impose a quota on itself and rein in its 12.5 mln bpd potential as it is the one taking the pricing risk under contracts with Western majors (and would thus capture the entire benefit from a higher oil price); production in Iran, Iraq, Venezuela and Nigeria has fallen short of the consensus forecast of 10 years ago as those countries policies have dampened production. Mr Ruehl pointed out that what has given OPEC its pricing power, despite the latter producing well below half of all global oil, is that non-OPEC producers failed to respond to seven consecutive years of rising oil prices earlier this decade due to internal problems.
Within Russia itself, the crisis has dampened expectations of possible shortages in the long run. TNK-BP saw its retail sales fall 8-10% in 2009, the company’s CFO Jonathan Muir said (although demand somewhat rebounded in January 2010). Alexei Makarov of the Russian Academy of Sciences’ energy studies think-tank said that the country’s recently unveiled 2030 Energy Strategy allows for a scenario where growth is half the pace as under old assumptions, with timelines for field development moved back years and a renewed emphasis on efficiency. However, true energy efficiency is being held back by subsidized gas prices, which have a dampening effect on all other energy prices as well, he said.
IEA chief economist Fatih Birol pointed out that China ? the one country seen by the world as the engine of global oil demand – is putting increasing stress on energy efficiency. Indeed, it sees that as part of its security policy. Mr Morse said that despite growth in imports, China’s real oil consumption is impossible to pin down, as there is no visibility on how much oil it may be stockpiling.
The speakers touched upon the peak oil theory. The problem with peak oil is that it assumes constantly rising demand, which lately has not been the case, according to Birol. Once you adjust for slower demand, Doomsday is shifted back significantly. Michael Lynch compared peak oil enthusiasts to Platonists, who are content at looking at the numbers but cannot interpret them. Extrapolating cyclical trends simply does not work: in 1991, peak oil theorists saw a drop in Soviet production and predicted that by today, Russian output would be down to 4 mln bpd ? less than half the level where it is now. Getting oil out of the ground and avoiding peak oil is not in itself a problem, he suggests. “It’s really always a problem of trying to avoid peak taxes.”
Rosneft’s Peter O’Brien agreed with Lynch. With oil at $70/bbl, Rosneft is paying about $50/bbl in direct taxes on all levels, plus $5/bbl in transportation costs, which have tripled over the past decade and go to Russian pipeline monopoly Transneft; hence the company thinks of this as a tax as well. Lifting costs are down to just $2.5/bbl. “So you can bring as much technology as you want, that will do little good” for unit profitability and extraction rates”, O’Brien said. Rosneft has already decided to lower the planned plateau at several fields because the current tax regime makes high output unprofitable.