Oil

In any discussion of the oil market it is all too easy to ignore the real world consequences of the price fall that has occurred over the last three years. We might appreciate a small cut in the price of petrol or gasoline at the pump, even though its effect is dampened by high levels of taxation. But we do not give much thought to the impact of price changes on the supplying countries. That is short-sighted because the structural shift that has taken place is profoundly destabilising and potentially very dangerous.

A new note from the Energy Information Administration in the US published last month sets out the impact of the fall in prices in recent years. It is worth summarising the data, which are expressed in real 2016 dollars. Read more

Austrian police guard Opec headquarters in Vienna during last month's meeting

Austrian police guard Opec headquarters in Vienna during last month's meeting  © Getty Images

The oil price is back where it was some months ago — with Brent crude struggling to stay above $50 a barrel. This is despite an extension of the Opec quota deal and the support of Russia. The fall in prices after the announcement of the nine-month extension on May 25 shows a lack of confidence in the cartel’s ability to reassert total control of the market. The open question is, what happens next?

First, let us dismiss one well-rehearsed conspiracy theory. The outcome is not a deliberate move by the Saudis to convince other Opec members to agree to a tighter quota regime driven by the fear that prices will slip still further. Read more

Iran's President Hassan Rouhani

Iran's President Hassan Rouhani  © Getty Images

The spring of 2017 is certainly the season for elections, with contests in France, Britain and South Korea and the election for the chancellorship in Germany to follow in the autumn. For the international energy companies and the global energy market none is more important than the presidential election in Iran that takes place on May 19.

There are 12 candidates but the main contest will be between the current President Hassan Rouhani and his main challenger Ebrahim Raisi. To label them as moderate and hard line is a convenient western shorthand. The nuances of policies and allegiances makes the comparison more complex. Mr Rouhani is not a secular liberal and Mr Raisi, at least on the basis of his past role as attorney general, is perhaps not as rigid as some imagine. Both are survivors in the complex and often vicious game of knives which has existed in Iran since the 1979 revolution. Read more

Saudi oil minister Khalid al Falih

Saudi oil minister Khalid al Falih  © Getty Images

The new Opec quota has been in force for six weeks, which is sufficient time to judge what is happening on the basis of facts rather than speculation. The key questions are, first, whether the restraints on production agreed last November are working or not and, second, whether the regime that came into force at the beginning of January can be sustained until June, as planned.

The oil price has been remarkably stable at around $54/$56 a barrel for Brent crude. That is about 15 per cent higher than before the November agreement but still barely half that seen three years ago. So will prices rise further or does the current level represent a ceiling? Let’s start with the facts. Read more

Opponents of the Keystone XL pipeline protest in Washington against Donald Trump's executive orders

Opponents of the Keystone XL pipeline protest in Washington against Donald Trump's executive orders  © Getty Images

The US energy sector, or to be precise that part of the sector working on hydrocarbons, is celebrating the arrival of Donald Trump as president. Mr Trump and the Republican congress have started a bonfire of regulations and the president has promised to do what it takes to increase supply from a sector he says is worth $50tn.

The number may be a little flaky (after all, US gross domestic product last year was only $18tn) but the direction of travel is not. After eight years of tightening regulation and restrictions, those who want to develop new sources of coal, gas and oil now have Washington’s full support. The new commitment to fossil fuel development has been welcomed by the industry and by countries such as Saudi Arabia. The question is whether they will all be cheering so loudly when they start to see the full consequences of the new policy. Read more

China is restructuring its domestic coal industry

China is restructuring its domestic coal industry  © Getty Images

What are the implications of China’s announcement last week that it will be spending $360m over the next four years to build up its renewable energy sector? There are many reasons behind the move, from Beijing’s growing concern about the impact of climate change to the political imperative of reducing low level pollution in the smog-ridden cities. The scale of the investment, however, suggests that two closely related policy objectives are driving energy strategy: an effort to create a modernised economy that can provide employment for the Chinese workforce and a determination to limit dependence on imported supplies.

Two weeks ago, in looking ahead to the potential stories of 2017, I suggested that Beijing might set a target of energy independence by 2025. This provoked a range of responses. Some people told me that such a policy was unnecessary since the country can afford to pay whatever is necessary. Others did not believe anything close to self-sufficiency was attainable. Read more

The Mosul Dam on the Tigris

The Mosul Dam on the Tigris  © Getty Images

The understandable focus on Syria, in particular on the horrific situation that has unfolded in Aleppo over the last few weeks, has distracted attention from the potentially more dangerous developments in Iraq.

Ten years after the execution of Saddam Hussein and five years after the official exit of American troops that was supposed to mark the end of a conflict which began with the US invasion in 2003, Iraq remains a war zone. The unrelenting bomb attacks on both military and civilian targets demonstrate the defiance of Islamist militants. As the battle to retake the strategic northern Iraqi city of Mosul – held by Islamic State forces since 2014 – comes to a head the risks are very high, with implications that will shape not only the future of Iraq itself but also the international oil market. Read more

Saudi Deputy Crown Prince Mohammed bin Salman

Saudi Deputy Crown Prince Mohammed bin Salman  © Getty Images

The downbeat mood of the times was confirmed before Christmas by the publication of the Bloomberg Pessimist’s Guide to 2017. The guide lists some of the things that could go badly wrong across the world in 2017. Last year the Guide predicted both Brexit and Donald Trump’s election as US president. This year the possibilities range from the collapse of the Mexican economy after Mr Trump pulls the US out of Nafta to the election of Marine Le Pen as the next president of France. Some of the predictions, such as California’s decision to declare independence from the US (Calexit), to the forced departure of the Saudi Deputy Crown Prince Mohammed bin Salman could be seen as ambivalent outcomes that many would welcome. Pessimism, however, has its limits and so here, are a few notes of hope for the New Year. As ever, I have focused on the core issues of energy but politics are never far away. Some of the possibilities listed seem to me highly likely to occur to one degree or another. Others are long shots – but then Donald Trump was a long shot a year ago. Read more

 

For most of those involved in the energy sector 2016 has been a year to forget. Oil prices have risen a little but despite the Opec deal are still almost 50 per cent down on where they were 2 years ago. Gas and coal prices are also down. Some US coal companies are in a desperate financial position – as are some of the smaller oil and gas businesses who do not have the deep pockets necessary to survive a downturn which is both cyclical and structural. Read more

The agreement by Royal Dutch Shell to explore for oil and gas in Iran marks another remarkable step in the transformation of the country over a period of less than 18 months from an international pariah state to a magnet for investment. There could be further steps to come, including Iran’s emergence as a source of stability rather than conflict in the region.

After another turbulent year across the Middle East, Iran is the only big country that ends 2016 stronger, both economically and politically. Read more

When will oil demand peak ? The very fact that the question focuses on demand rather than supply is in itself remarkable, given where conventional wisdom on the subject stood only a decade ago. Now there is a consensus that demand will peak first but there is no agreement on when that peak will come. Shell speculated a few weeks ago that it would be within five to 15 years. The Opec producers’ cartel suggested recently that the peak could come in about 2029. But the International Energy Agency in its latest World Energy Outlook predicts that oil demand will be rising up to 2040. Read more

Khalid A Al-Falih, Saudi energy minister

Khalid A Al-Falih, Saudi energy minister  © Getty Images

With less than 10 days to go until the next Opec meeting the gamesmanship goes on. Saudi Arabia has maintained its production at around 10.7m barrels a day while Iran has continued to increase output – opening three new fields which should together produce 220,000b/d. Iran’s public position is that it will continue to increase production from the 3.85mbd achieved in September to 4.2mbd, which it argues represents a fair share of the cartel’s total output.

Neither party seems ready to blink and there is little sign that the promised deal to make a co-ordinated cut in production, which was just about reached at the last Opec gathering in September, will be delivered when the cartel meets again on November 30. The optimism from then has evaporated. Perhaps an agreement will be reached in the next few days but there is little evidence that it would do more than dent the current surplus of supply over demand. Unsurprisingly, prices are falling – down from $52 a barrel in mid-October to below $45 last week. Read more

Anne Hidalgo (left), Mayor of Paris,  and French energy minister Segolene Royal celebrate the Paris COP21 climate accord.

Anne Hidalgo (left), Mayor of Paris, and French energy minister Segolene Royal celebrate the Paris COP21 climate accord.  © Getty Images

The Paris agreement on climate change has been ratified, earlier than most people expected. Some believes that means the issue is on its way to being resolved. That is absolutely not the case.

Donald Trump’s election as president is a major setback because it removes any sense of American leadership on the issue. But that is not the only cause for concern. The inconvenient truth is that the use of coal in growing emerging economies continues to outpace anything being achieved elsewhere. The global energy market is changing; oil demand is coming to a peak and renewables are getting cheaper. But that, however important, is as yet having no more than a minor effect on the climate issue. We have to be realistic and prepare accordingly. Read more

Simon Henry, Royal Dutch Shell CFO

Simon Henry, Royal Dutch Shell CFO  © Getty Images

On November 2 Simon Henry, the chief financial officer of Royal Dutch Shell and one of the most respected figures in the industry, told analysts on a conference call for the Shell results presentation that he believed “oil demand will peak before supply and that peak may be between five and 15 years hence”. I think he is right, and that the peak of demand will come within five years and possibly by 2020. The reasons for what sounds like a very radical challenge to the conventional wisdom are clear and the advance warning signs are already evident in the data.

Oil demand in the developed OECD world has already peaked and is 9 per cent below the level reached in 2005. In Europe, oil demand is down 17 per cent over the same period. Read more

President Vladimir Putin

President Vladimir Putin  © Getty Images

Twenty years ago, a small group of Russian businessmen saved the country from a return to communism. Boris Yeltsin, physically and politically weak, was close to being beaten in the presidential election by Gennady Zyuganov. In the first ballot, Yeltsin led by just 3 per cent. The money and organisation the oligarchs brought to the party put him more than 13 points ahead in the second and decisive vote. Now, in very different circumstances, the oligarchs may need to intervene again.

Russia is in a parlous state. Real incomes have fallen by 10 per cent in just a year. The rouble depreciated 37 per cent and in real terms gross domestic product fell 3.7 per cent, according to World Bank figures. Household incomes and investment fell sharply. The trends have persisted into 2016. Forget the bluster of President Vladimir Putin and the military activities in Ukraine and Syria. What was once a superpower is now a country in decline. Read more

Khalid al-Falih, the new Saudi oil minister

Khalid al-Falih, the new Saudi oil minister  © Getty Images

Are we on the verge of a real upturn in oil prices? Over the last 10 days, the price has risen almost 20 per cent. Is the talk of a sustainable upturn and a return to the situation of two years ago when oil was over $100 serious, or is the story just a silly season invention at a time when most traders are on holiday?

There are three potential explanations for the rise.

First, something could have changed in the physical market where supply meets demand. That can be dismissed very quickly. Supply is up and demand is flat. Iraq, Russia and Saudi Arabia have all increased supply this year. Iraq in particular, despite the continuing conflict with Islamist militants in the north and west, has managed to reach record production levels of 4.5m barrels a day. US production is slightly down but across the world most producers are maximising output to maintain much-needed revenue flows. Read more

Opposition protestors in Caracas last month amid demands for a refrendum on removing President Nicolas Maduro from power

Opposition protestors in Caracas last month amid demands for a referendum on removing President Nicolas Maduro from power  © Getty Images

After years of decline, the situation in Venezuela is becoming desperate. Could the latest fall in the oil prices provide the tipping point that finally brings to an end the unhappy period of Marxist rule begun by Hugo Chavez in 1999?

In the last two months the oil price has fallen by 20 per cent, ending the hopes of producers around the world that the downward slide of the last two years is over and that prices will soon return to a level that they used to regard as “normal”. For many, the latest fall will be the last straw. Numerous companies have maintained their dividend payments through borrowing. With prices falling again that looks unsustainable. Many, including the state companies, also face hard investment decisions on projects that need higher prices to be viable. With capex requirements outstripping revenue and little prospect of raising more money through rights issues more projects will be postponed or abandonedRead more

Energy demand in China appears to have decoupled from GDP

Energy demand in China appears to have decoupled from GDP  © Getty Images

The changes taking place in the world energy market are not just a matter of oversupply or the unwillingness of Saudi Arabia to rein in production. Demand has stagnated and in some areas is falling. The fall is unexpected — all the standard projections still cheerfully predict ever rising demand driven by population growth and the spread of prosperity in emerging economies. That assumption, however, begins to look too simplistic. The reality is more complex and, for producers, much more challenging. Forget the old debate about peak oil. Now it seems we are approaching peak energy. Read more

Oil rigs left in the Cromarty Firth, Scotland  © Getty Images

Is the North Sea doomed to enter a period of terminal decline once the current set of field developments is completed? Or can strong leadership from the UK’s new Oil and Gas Authority and radical thinking take it into a successful fifth decade? The answer is unclear but should be a matter of real concern to the UK Treasury and the Scottish government as well as to the companies directly involved and their staff.

Most of the facts are clear and undisputed.

For the moment production volumes are being sustained by virtue of projects sanctioned before oil prices started to fall in 2014. That should continue through to 2017. But the pipeline of activity beyond that is drying up. New exploration, in particular, has dwindled to minimal levels. It would be surprising if more than half a dozen exploration wells are drilled this year. Read more

Sampling crude oil at well operated by Venezuela's state-owned oil company PDVSA

Sampling crude oil at well operated by Venezuela's state-owned oil company PDVSA  © Getty Images

In strong contrast to the previous downturns in the energy market the sharp falls in prices seen over the last two years have not triggered a wave of restructuring in the industry. Merger and acquisitions activity has been minimal. But is that about to change? Could a wave of privatisation now reshape the business landscape?

Cyclical downturns in the oil and gas sector are relatively common and have occurred roughly once a decade since the 1980s. The response has traditionally followed a well-trodden path. Companies cut costs and postpone projects. They push for tax concessions and improved terms, while trying to maintain dividends. When that fails, heads roll and the stronger brethren take over the weak. Read more