Divin­ing the Fu­ture for Oil Prices: Where will it end?

Norway-Asia Business Review - - Contents -

“Oil data is dif­fi­cult to come by in global mar­kets be­cause it’s al­ways wrong. OPEC, the In­ter­na­tional En­ergy Agency [IEA] and the US En­ergy De­part­ment never even agree on the his­tor­i­cal num­bers,” he said.

“The IEA re­ported an over­sup­ply of 2 mil­lion bar­rels per day in its fourthquar­ter re­port for 2015. Then in Fe­bru­ary it raised the fig­ure for that pe­riod to 2.2 mil­lion, mean­ing the IEA found an ex­tra 200,000 bar­rels per day in the sys­tem. And the OECD in­ven­to­ries are in­creas­ingly ex­plain­ing less about what is hap­pen­ing with the over­sup­ply, which is sus­pi­cious be­cause such a shift should be grad­ual.

“Some­thing strange is go­ing on with the IEA data, as there are mas­sive amounts of miss­ing bar­rels. In the sec­ond quar­ter of 2015, the IEA orig­i­nally re­ported an over­sup­ply of 3.3 mil­lion bar­rels per day. Now they re­port an over­sup­ply for that same quar­ter of only 2.3 mil­lion.

“Based on these trends, and with my pro­jec­tions fac­tor­ing in China, we think de­mand is still un­der­stated based on sev­eral hun­dreds of thou­sands of miss­ing bar­rels per day. The fun­da­men­tals of oil mar­ket sup­ply and de­mand haven’t weak­ened since the last OPEC meet­ing in De­cem­ber, yet the oil price fell from USD 50 to 27.

“We have ar­gued the long-term Brent crude oil prices fell too much, down to USD 48 per bar­rel, which is the sup­ply de­struc­tion price. Sup­ply has in­deed fallen since 2014, but now we need to see a sup­ply cre­ation price. The only way you could jus­tify long-term oil prices drop­ping from USD 100 to 48 is if oil com­pa­nies cut their struc­tural costs by 50%. But these firms have only cut costs by 20-25%, and part of that is cycli­cal.

“With oil at USD 40, al­ready 300,000 peo­ple have lost their jobs in the oil in­dus­try. Oil states are ap­ply­ing for cri­sis loans for the IMF and World Bank. It is not a sus­tain­able price for the in­dus­try.

“But the price is grad­u­ally in­creas­ing and will con­tinue to work its magic. The key fac­tor was US shale oil pro­duc­ers fi­nally re­duc­ing their out­put, which should con­tinue for the rest of this year. The ma­jor US shale oil pro­duc­ers have guided cap­i­tal ex­pen­di­ture [capex] cuts of 58% this year, but if they want to live within their cash flow at a WTI [West Texas In­ter­me­di­ate] price of USD 40 per bar­rel, they have to cut their capex by 74%.

“Global capex is pro­jected to be cut another 27% this year af­ter a re­duc­tion of 25% last year, which is un­prece­dented, worse than even the 1980s. We could see more capex cuts in 2017 — a third straight year — even with oil at USD 60, which has never hap­pened.

“Much of the deep­wa­ter pro­duc­tion projects have been sus­pended un­til the next decade, which par­tic­u­larly hurts Nor­way as an off­shore pro­ducer.

“De­mand on the in­dus­trial side has weak­ened, but the con­sumer prod­ucts such as petrol, jet fuel and LPG [liq­ue­fied petroleum gas] have per­formed well be­cause the price is so low. In the US con­sumers have started to buy 3.6% more petrol for driv­ing and 58% of new ve­hi­cle sales there were light trucks, up from 50% the year a cou­ple years ago. The lower oil price led to an im­me­di­ate rise in the pur­chase of larger ve­hi­cles.

“Global elec­tric ve­hi­cle sales in 2015 num­bered 460,000 units, but in China they are sell­ing 800,000 SUVs in just one month, so it’s go­ing to take a bit of time to get a change in the global car fleet. Elec­tric ve­hi­cles will even­tu­ally make a large im­pact on the mar­ket, but for pre­dict­ing oil prices the next five years, the seg­ment is still too small to fac­tor in.

“Our 12-month oil price fore­cast is for USD 65, mean­ing we are op­ti­mistic about the mar­ket.”

Naren­dra Taneja, chair­man of the

En­ergy Security Group of the Fed­er­a­tion of In­dian Cham­bers of Com­merce and In­dus­try, was more con­cerned with why oil prices fell so low.

“Why did no­body pre­dict the drop in oil prices? An­a­lysts like to point to only sup­ply and de­mand, but where was the de­mand re­duc­tion? No­body can point to any ex­am­ple of this. Pol­i­tics seems to play a part, as the US tried to force its hand with Rus­sia and Saudi Ara­bia,” said Mr Taneja.

“I be­lieve it was a hys­te­ria that brought down oil prices, as ex­u­ber­ance for re­new­able en­ergy caught fire. Un­doubt­edly the share of re­new­ables in the en­ergy mix will grow, but it will be a grad­ual process, as this tran­si­tion is go­ing to take 40 to 70 years.

“Low oil prices help cer­tain coun­tries such as India that are ma­jor im­porters, as we can spend more of our an­nual bud­get on schools and hospi­tals. But is the short-term gain worth it in the long term, as weak oil de­mand is in part be­cause of strug­gling global economies, and India’s ex­ports are down across the board.

“Also, can India, China or Europe han­dle it if per­sis­tent low oil prices cause the Mid­dle East to go up in flames eco­nom­i­cally, so­cially and maybe po­lit­i­cally if key regimes buckle un­der the pres­sure?

“I think the right price for the next two to three years is USD 50-68. This is a price that will keep the Mid­dle East sta­ble.

“Oil will re­main the king of en­ergy for at least the next 30 years, but in my view, from 2080 and be­yond the en­ergy space is go­ing to be all about nu­clear power once we make it safe. I know it is not fash­ion­able to say this, but I hon­estly be­lieve this be­cause I in­clude so­lar as nu­clear power since the sun is a nu­clear re­ac­tor it­self.

“The talks in Doha [in April] on an oil freeze are more about try­ing to find a trick to raise oil prices rather than low­er­ing pro­duc­tion be­cause con­tin­ued low prices are not sus­tain­able for the Mid­dle East, Rus­sia and sev­eral other pro­duc­ing coun­tries.”

Mr Kjus noted some of the com­men­tary on a showdown be­tween oil pow­ers was mis­guided.

“While the showdown has been pit­ted as OPEC ver­sus US shale pro­duc­tion, with the for­mer try­ing to keep prices low to drive the lat­ter out of the mar­ket, I would con­tend the Saudis have known for some time they can’t put US shale oil out of busi­ness be­cause of its low pro­duc­tion costs,” he said. “The Saudis’ goal was to drive the ex­pen­sive, sticky oil out of the mar­ket, such as the deep­wa­ter projects and Cana­dian oil sands. This will leave the mar­ket for a long time as the in­vest­ment hori­zon is seven to 10 years, so in that re­spect the Saudis have been suc­cess­ful in driv­ing ex­cess ca­pac­ity out of the mar­ket.”

Mr Taneja is still quite bullish on oil de­mand over the medium term.

“We have 2.7 bil­lion peo­ple liv­ing be­low the en­ergy poverty line,” he said. “There are another 2 bil­lion peo­ple who have ac­cess to en­ergy, but not of the same qual­ity as in de­vel­oped economies. Both groups want to move up, which means de­mand for en­ergy is go­ing to go through the roof.”

“The IEA pre­dicted re­new­ables will make up only 30% of the en­ergy mix by 2040, so I think fos­sil fuels will still have a big role to play go­ing for­ward. But I think 50% of power pro­duc­ers will go out of busi­ness even­tu­ally as more power con­sumers use re­new­able en­ergy to pro­duce their own power.

Mr Kjus said it is im­por­tant to draw dis­tinc­tions in the fos­sil fuel-re­new­able en­ergy de­bate.

“In these debates peo­ple al­ways want to lump all fos­sil fuels to­gether against re­new­able en­ergy,” he said. “But in the OECD we don’t use oil to gen­er­ate power, un­like wind and so­lar. They are not di­rect com­peti­tors. Oil is used mainly for trans­port. Elec­tric cars are mak­ing in­roads, with Tesla’s new model sell­ing like mad, but it’s com­ing from such a low base it will take at least a gen­er­a­tion to make an im­pact on the total fig­ures.”

“For coal, you see it al­ready be­ing af­fected as re­new­able en­ergy takes a larger share. It’s ac­tu­ally a pos­i­tive for re­new­able en­ergy if the oil price rises, as that means gas prices in Asia will in­crease and there will be more in­cen­tive to de­velop re­new­able tech­nol­ogy quickly.”

“I like to say the ship­ping in­dus­try goes in vi­cious and vir­tu­ous cir­cles,” he said. “It just hap­pens we are in the for­mer.”

Mr words.

“We be­lieve the worst is still to come be­cause cash flows are dry­ing up and con­tracts ex­pir­ing that were signed be­fore the down­turn,” he said. “This means a ma­jor re­struc­tur­ing, with some firms go­ing out of busi­ness, as well as merg­ers or new own­ers. But Nor­way has been through this all be­fore and we are con­fi­dent we will come out stronger when the in­dus­try fi­nally re­bounds.”

“These are go­ing to be very tough times in the near fu­ture. Yet Nor­way has one of the largest ship­ping fleets in the world and one of the most di­ver­si­fied. And this is one of the most adap­tive in­dus­tries to change in the world. From oil tankers to gas tankers, ro-ro ships, self­load­ing de­vices, off­shore and spe­cialised ves­sels, we have ab­sorbed what­ever the mar­ket wants. Our his­tory demon­strates the in­dus­try has the ca­pac­ity to deal with sea changes to the mar­ket and new op­por­tu­ni­ties. But this will not be a fric­tion­less process as a num­ber of com­pa­nies are strug­gling to sur­vive.

“While some com­pa­nies are mov­ing to­wards mas­sive cost cuts, oth­ers have shifted to off­shore and re­new­able en­ergy such as wind farm main­te­nance and servicing. Ocean min­ing and fish farm­ing are now be­ing de­vel­oped. Some ship­ping com­pa­nies are in des­per­a­tion mode, but at least it’s a way for them to stay afloat.

“We also be­lieve en­ergy ef­fi­ciency in the mar­itime in­dus­try is poised for ma­jor im­prove­ments, whether it be new fuels or hull de­signs, so this will help with costs. Ship­ping is al­ready the most en­vi­ron­men­tally friendly form of trans­port. I think in the fu­ture we will be see­ing more Tes­las of the sea.”

The main rea­son Mr Hen­rik­sen is op­ti­mistic is Nor­way has built up strength in spe­cialised and tech­ni­cal skills.

“Go­ing for­ward it is crit­i­cal not to lose this crit­i­cal mass of com­pe­ten­cies, nur­tur­ing and adapt­ing to mar­ket changes. Cost con­trols, in­creas­ing ef­fi­ciency, lay­offs and laid-up ships are all al­ready a re­al­ity. This is a fiercely com­pet­i­tive in­ter­na­tional in­dus­try, mean­ing it is es­pe­cially sen­si­tive to small changes in na­tional mar­itime poli­cies, which the Nor­we­gian gov­ern­ment should note when de­vis­ing its new strategy,” he said.

“Fi­nally it is time for my gen­er­a­tion to con­trib­ute,” she said at the Nor­way-Asia Busi­ness Sum­mit 2016. “We’ve never had a na­tional cri­sis dur­ing my time, but ex­port devel­op­ment since 1998 in Nor­way has been worse than Den­mark, Swe­den and Switzerland.”

“The av­er­age life­span of a Nor­we­gian com­pany for the pre­vi­ous gen­er­a­tion was 60 years. Now it is 13.

“For­tu­nately Nor­way is wellplaced to suc­ceed as its in­no­va­tion strategy is based on clean tech­nol­ogy, sus­tain­abil­ity, whole sys­tem de­signs and re­new­able en­ergy. We have com­pe­tence in all these ar­eas al­ready and a proven sys­tem of in­dus­try clus­ters that helps new com­pa­nies de­velop.

“I see six sec­tors that of­fer strong op­por­tu­ni­ties for Nor­way: clean en­ergy, ocean space, health and wel­fare, bio-econ­omy, smart so­ci­eties, and tourism and cre­ative econ­omy. It is es­sen­tial that we ex­port, in­ter­na­tion­alise and com­pete as Nor­way is a small econ­omy.”

Mrs Traaseth called on the coun­try to work on in­dus­tri­al­is­ing the med­i­cal tech­nol­ogy in­dus­try as well to take ad­van­tage of an in­creas­ing num­ber of age­ing coun­tries.

“The key driver for in­no­va­tion is com­pe­ti­tion and fear of fail­ure,” she said. “This will be a chal­lenge for the pub­lic sec­tor and mo­nop­o­lies, but we can­not af­ford to sit back as al­most ev­ery en­trenched in­dus­try is be­ing dis­rupted by tech­nol­ogy.”

Wal­ter Qvam, pres­i­dent and chief ex­ec­u­tive of Kongs­berg Grup­pen, echoed her sen­ti­ments that in­dus­trial dig­i­tal­iza­tion is the wave of the fu­ture, point­ing to big data an­a­lyt­ics, the In­ter­net of Things, ro­bot­ics, 3D print­ing, soft­ware, au­ton­o­mous ve­hi­cles and con­nec­tiv­ity as tech­nolo­gies that are al­ready af­fect­ing its clients across a num­ber of sec­tors.

aug­mented re­al­ity, the In­ter­net of Things, big data, au­toma­tion and ro­bots, and underwater au­ton­o­mous ve­hi­cles (UAV) en­able nu­mer­ous im­prove­ments. There is par­tic­u­lar prom­ise for this last ap­pli­ca­tion — UAVs — and Kongs­berg is the mar­ket leader in this seg­ment. Ship­ping also gen­er­ates enor­mous amounts of data, much of which has not been an­a­lysed.

“There is de­mand for sur­veil­lance around the South China Sea, and UAVs can mon­i­tor in that area. Other po­ten­tial fields for mar­itime in­clude wire­less com­mu­ni­ca­tion un­der wa­ter, con­nect­ing var­i­ous sen­sors, and map­ping and sur­veil­lance for re­search, min­er­als and security is­sues.”

Mr Chia pointed to deep-sea min­ing, where de­vices pick up poly­metal­lic nod­ules on the seabed some 3,500 to 4,000 me­tres be­low the sur­face, as another ocean op­tion. The Sin­ga­porean gov­ern­ment has a con­ces­sion in the Pa­cific Ocean be­tween Hawaii and Cal­i­for­nia to ex­tract these po­tato-sized nod­ules from the seabed sur­face.

There has been much pub­lic­ity about the new North­east Pas­sage, an Arc­tic ship­ping route fol­low­ing Rus­sia and Nor­way’s coasts that used to be cov­ered by ice. Global warm­ing has caused part of this ice pack to melt, en­abling a mar­itime route some 33% shorter be­tween Asia and Europe.

“Right now much talk con­cern­ing the North­east Pas­sage has been about pol­i­tics and security, but maybe Sin­ga­pore and Nor­way could meet about busi­ness op­por­tu­ni­ties in the Arc­tic be­cause Kongs­berg is get­ting so many in­quiries about nat­u­ral re­sources, oil and gas, mar­itime sup­port ser­vices and tourism op­por­tu­ni­ties in that re­gion,” said Mr Qvam. “We also run po­lar satel­lites from Sval­bard and there is lots of in­ter­est in that is­land.”

“I think the North­east Pas­sage has been over­hyped thus far be­cause only a tiny frac­tion of the total ship­ping vol­ume takes that route,” said Mr Hen­rik­sen. “Hav­ing said that, Nor­way is work­ing within the Arc­tic Busi­ness Coun­cil to de­velop stan­dards for do­ing busi­ness there, in­clud­ing for the vast nat­u­ral re­sources.”

Sha­ran­jit Leyl, mod­er­a­tor for the ses­sion, said the World Wildlife Fund es­ti­mates the global fish­ing fleet is twoand-a-half times larger than oceans can sup­port. She won­dered how mar­itime could play a part in en­vi­ron­men­tal change.

“We know the global fish­ing fleet is too large to be sus­tain­able so one op­por­tu­nity is the use of sur­veil­lance de­vices to mon­i­tor vi­o­la­tors,” said Mr Qvam. “This tech­nol­ogy al­ready ex­ists so we just need en­force­ment.”

Newspapers in English

Newspapers from Norway

© PressReader. All rights reserved.