In this week’s readers’ Q&A session, Peter Voser, the chief executive of Shell, answers your questions.
Next in the hotseat is Chris Huhne, the UK energy secretary, who will be answering your questions on electricity market reform next Thursday, December 23rd. Send in your questions for consideration by the end of today – Friday, December 17th – to firstname.lastname@example.org.
But for now, over to Peter:
Oil price shock
When do you think the next oil price shock is likely? How do you see the scenario being played out?
Steven Kopits, managing director, Douglas-Westwood
Steven, thank you for your interesting question. The recession has clearly increased economic volatility. So the big question is will this higher volatility be enduring or fleeting? Prior to the recession, a combination of good policy, good practices and good luck enabled most advanced economies to enjoy about 20 years of historically low volatility – a “Great Moderation”. Since the mid-1980s central bank independence and policies of inflation targeting have enabled monetary policy to stabilise output and inflation more effectively. At the same time, better inventory management – thanks to IT – helped to manage demand volatility with less overshooting. Through the mid-2000s there were strong gains in productivity with advances in information and computing technology, helping economies to grow without inflation. The relatively fewer and smaller oil price shocks in this period also helped reduce volatility, along with the fall in oil expenditure relative to GDP.
Some analysts say the “Great Moderation” trends are permanent and will re-emerge with the eventual recovery from the global recession. I think, however, that the recession interrupted the commodity price boom but it may return as the fundamental drivers and uncertainties reassert themselves. Emerging nations like China and India are going through their most materially intensive period of development and this puts pressure on markets.
We can also expect more discontinuities to be generated from policies aimed at mitigating climate change and other environmental stresses. The longer the delay in climate policy action, the more likely that eventual policy actions create shocks. If it’s any help please do take a look at our energy scenarios.
In its 2010 Joint Operating Environment, the US Joint Forces Command warns that “By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day.” According to yours and Shell’s analysis, is this a possible outcome?
Lionel, thank you for your question. I think many factors will determine the short and long term supply and demand situation. The global recession reduced oil demand, but that was balanced by the resilience of the developing economies, especially China. I’m convinced we’re climbing out of the recession, even though recovery is still patchy in some parts of the world. I’m still concerned about the USA and some parts of Europe. But for the Middle East and further eastwards, I foresee strong growth.
I’m convinced we’re climbing out of the recession, even though recovery is still patchy in some parts of the world
Normal annual global oil production growth, which is around 1.2m barrels of oil equivalent per day, is expected to 2015 with a return to normal economic conditions. In the medium and longer term, demand for energy will continue to grow. The IEA expects non-OPEC supply growth to cover almost all of the demand growth next year. It will then continue to grow more modestly, but still to cover about half the global demand growth on average in the years to 2015. So the call on OPEC crude is expected to increase over this period. But with the expected increase in OPEC output, especially from Iraq, the global supply demand balance still shows a comfortable spare capacity situation to 2015, and an imminent shortage is therefore not supported by the latest IEA analyses.
What is Shell’s view of the future of the UK’s sector of North Sea? Does Shell see any remaining material exploration/development potential here? If not, would Shell remain active in the UK as a major upstream player or gradually leave the basin?
Zaur Muslumov, Senior Consultant, Palantir Economic Solutions
Zaur, that’s a good question. We see the UK, the North Sea and Europe as core business areas in our upstream portfolio. They contribute about one third of our oil and gas production. Shell is a leading operator in the UK sector of the North Sea and we intend to maintain that position. We have interests offshore in more than 50 fields, and operate more than 30 platform installations, 30 subsea installations and one FPSO [floating production storage and offloading] vessel.
That all being said the UK continental shelf is a mature, high-cost province and requires an attractive oil price and supportive tax regime in order to continue to flourish. We have invested significantly in the UK, and we will continue to manage our portfolio to focus on where we can add most value. In line with this we have announced that we have sold some interests but we have, for instance, also announced a deal to increase our interest in the Clair field from 18 per cent to 28 per cent.
We have also had some success in extending field lives: we brought on stream four new North Sea fields in 2008. As you might imagine organic growth has been a challenge with new field discoveries significantly smaller than discoveries 15 to 20 years ago.
Now that Rockhopper has found oil in Sea Lion in the North Falklands Basin, so you regret Shell’s decision to pull out of that acreage in 1998?
David, we drilled in the area some time ago, and were not successful. In general, we focus on basins with proven oil & gas potential, and we also invest in a few areas where there is more uncertainty whether there are commercial hydrocarbons or not. This is part of the exploration industry, and we explore, commercialise or move on. We have found around 12bn boe with the drill bit for 2001-2009 in areas like Australia, the United States and the Caspian. I think overall our exploration strategy has been reasonably successful, and we are spending about $3 billion per year on exploration, which is one of the largest programmes in our industry today.
In terms of the Gulf of Mexico this year our exploration activity has been impacted of course by the BP Macondo oil spill, and we are still awaiting permits to drill from the US authorities. This was a very tragic event. The question is what we can learn from what went wrong both in the accident and with the subsequent environmental impact. We’re studying this as closely as we can. Undeniably, the Macondo incident has greatly harmed the oil industry’s reputation. Our ability to drill in deep water has been questioned, and that’s a serious matter. Nonetheless I believe that the energy sector has proved in the past that it can learn from incidents. This will help us to regain our credibility.
How much of a concern is security to your operations, particularly in places such as Iraq?
John Drake, senior risk consultant, AKE Limited
John, ensuring our staff and contractors can operate safely and securely is our top priority. You will understand, more than most, given your job title, that details remain confidential. In Iraq we have operations and HSE staff resident in country and there are regular management visits. In Nigeria sadly the threat to people working in oil and gas operations in the delta remains high. In recent years, gangs have kidnapped SPDC employees and contractors.
There are many factors at the root of the instability in the Niger Delta – including unfulfilled aspirations for political recognition and influence, poverty and historical neglect, and criminality. We believe that the situation needs to be addressed through dialogue, alongside infrastructure development and providing employment. Our priority is to keep our staff safe while we continue to work with the communities, the federal, state and local governments, and other agencies in an effort to help restore peace in the Niger Delta. We continue to look for ways to improve the way we manage our relationships with communities to contribute to social development in the region.