Trading of Brent oil as at October 28, 2017 closed at its highest level at $60.62 and at $54.17 for the WIT and for natural gas at $2.75 MMBtu, down 5.72%. Euphoria apart, this contribution would attempt to review the The Vienna agreement and the Oil & Gas 2017 – 2030 prospects. Indeed, the listing of $55 to over $60 a barrel, could be explained by the approaching winter, tensions in Iraq, decline of the Dollar from $1.20 a Euro to $1.16 and most importantly a timid revival in the global economy. Reassuring statements of respect for the Vienna agreement as envisaged by Russia and Saudi Arabia together with the proposed sale of 5% of the oil giant Aramco did concur to the above as well. But before we dwell into the Vienna agreement and the Oil & Gas prospects up to 2030, let us have look at the following first.
The determinants of oil prices
Eight key factors are determinant in oil prices.
First, central to the determination of oil prices is the growth of the world economy and especially that of China’s and its energy structure for 2020/2030. Added to that would be the other geostrategic factors such as the impact of tensions in Iraq, (the Kurdish zone producing 500,000 barrels / day) and statements of US President mulling to review the Iran agreement and the still on-going tensions in Nigeria and Libya.
- On the supply side, more rapid increase than expected of oil production, though unconventional mainly from the US Shale sector that upset the entire world energy map.
- Rivalries within OPEC with some not respecting their quota; the rivalry between Iran and Saudi Arabia; this latter being the only producer in today’s world that could affect global supply and hence bear on prices, depending on an agreement between the US, (the latter is not affected by the OPEC / non-OPEC accord) and Saudi Arabia to determine the floor price.
- The Russian expansionist strategy whose giant Gazprom (45,000 billion cubic meters known gas reserves) through the North Stream and South Stream (the latter currently frozen) from a planned capacity of over 125 billion cubic meters gas to supply Europe, not including new pipelines to Asia. Russia needs funding, tensions in Ukraine have not affected its exports to Europe, where its market share was 30% in 2013/2016. All this contributes to a measured support from Russia at a price regulation agreement. Recently, Russia has increased its production and open new fields in Siberia or the Arctic, showing an aggressive strategy.
- The return on the market of Libya with an easy 2 million barrels / day, Iraq with 3.7 million barrels a day (with production costs of less than 20% if compared to competitors) totalling up to over 6/7 million barrel / day. Iran with reserves of 160 billion barrels allowing it to export between 5/6 million barrels a day on top of its having gas reserves with more than 34,000 billion cubic meters gas.
- The new discoveries in the world including offshore especially in the Eastern Mediterranean (20,000 billion cubic meters of gas partly explains the tensions in this region) and Africa including Mozambique could be the third black gold reservoir of Africa and the new technologies that allow the operation and cost reduction of marginal gas fields and Shale oil.
- The US and Europe currently account for over 40% of global GDP with a population of less than one billion. These are pushing for energy efficiency with a planned 30% reduction and an urgent move towards energy transition, to notably reduce global warming because if the Chinese, Indians and Africans had the same pattern of energy consumption as that of the US and Europe, the world would need five planets. The global strategy should be based on limiting the efforts of exploitation and use of fossil fuels, coal, etc. and gradually move towards an energy mix of all renewables.
- The evolution of the Dollar and the Euro like for instance any rise of the Dollar, although no linear correlation between the two exists, would lower oil prices and as an immediate reaction to that the US stocks and often forgotten Chinese stocks would start building up.
OPEC and the Vienna agreement
Saudi Arabia’s share is over 33% of OPEC’s output. The Gulf countries alone account for 60% of this production. For countries outside OPEC, the most important traditional producer remains Russia. The corresponding commitment to the effort envisaged in the Algiers meet in September 2016 did somehow help lift oil prices from a range fluctuating between 55/60 dollars a barrel. Following the work of the High-Level Committee, which helped to smooth tensions between Saudi Arabia and Iran, the last meeting in Vienna in December 2016, enabled the member countries of the OPEC and non-OPEC countries to reach an agreement to reduce and for the first time since 2008 by 1.8 million barrels / day for a period of six months with possible extensions each time additional 6 months according to market conditions. Production limits set by the agreement affecting 11 of the 14-member countries of OPEC. The essence of the agreement of November 30 is carried by the largest producer’s cartel: Saudi Arabia, Iraq, United Arab Emirates, Kuwait, with Iran, Nigeria and Libya being temporarily exempted. Nigeria announced in late February 2017 an increase in production of over 300,000 barrels a day between 2017/2018 besides the return of Libya which can export between 1.5 and 2 million barrels a day. But at the last OPEC meeting, Russia producing more than 10 million barrels / day requested that these countries participate in the reduction effort to stabilize the market. We must recall that Iran has benefited from the most favourable reference with a volume of 3.97 million barrels / day (Mb / d) retained (against a level of 3.69 Mb / d, although Iran wants its production back to 4.2 Mb / d. Iran and Iraq might be tempted to exceed their quotas if they have surpluses. Saudi Arabia as the world’s largest oil exporter, has agreed to bring its production to 10.06 Mb / d and thus reduce its production of 500,000 barrels. non-OPEC countries agreed to a reduction of 558,000 b / d in addition to the reduction of 1.2 Mb / d of OPEC countries almost 1.8 Mb / d. For non-OPEC, Russia is the most important of these contributors with a reduction of 300,000 b / d. the other countries to participate in the effort will be Mexico, Kazakhstan, Malaysia, Oman, Azerbaijan, Bahrain, Equatorial Guinea, South Sudan, Sudan and Brunei.
What are the prospects?
According to OPEC the drop in the price of a barrel of oil from $102 to $45 since June 2014 caused a loss of $1,000 billion in revenues and $1,000 billion in terms of investment losses. At a price of $55, the reduction causes a loss of 3780 million barrels / year and about $219 billion for the OPEC countries. A survey of OPEC shows that average profitability for many OPEC countries to balance their budgets, the price that covers costs and a reasonable profit margin should be 60 Dollars. For Algeria profitability of marginal fields is at a price above $60, average deposits between 40/50 Dollars and large deposits between 30-40 Dollars per barrel. But many experts question the temptation for producers to “make up” natural declines, related to the depletion of some deposits and already integrated with forecasts, to pass them for voluntary reductions. OPEC while representing the world’s largest reserves, no longer has the same impact on the market than in the 70, with only 33% of marketed worldwide production, the remaining 67% being made outside OPEC. A barrel at the recovery price of 55/60 Dollars will naturally depend on the growth of the global economy, without prejudging the risk of an increase in supply that would be due to the increased production of non-OPEC countries, the US whose marginal fields becoming profitable. As from their rising prices, the massive influx of American Shale oil production of which costs have fallen for three years by 40 to 50% thanks to new technologies being profitable for large deposits to 30 Dollars, for average deposits by $40 and for marginal fields between 50/60 Dollars. According to Bloomberg as of February 2017, the unconventional oil producers have made huge efforts to reduce their profitability thresholds, earning money with a barrel between about 40/50 Dollars, whereas it required at least 70 to 80 Dollars. There are still two years and $30 in some Texas counties where investments should thus increase by 30% in the sector in 2017. Saudi Arabia, a leader of the cartel, had long supported a policy of low prices, hoping to oust competitors of OPEC, including US Shale oil producers, but the fall in prices had finally affected its economy, prompting it to change strategy. Most US stocks reached a record level, with a growth of a soft global economy, which takes demand to a higher price of up to $60 that could make the American marginal fields profitable, thus allowing them to increase their supply that in turn may then lead to a lower price due to oversupply. Hence the proposal of Saudi Arabia to have an equilibrium price which is around 55/60 Dollars a barrel to balance the interests of producers and consumers and specially to cope with the American competition.
In summary, the supply / demand in the short term, the structuring of the growth of the world economy and the new global energy configuration looming in 2017/2030, with the increasingly competing alternative energy, will in the future be the determinants of the price of oil and natural gas. Whilst avoiding thinking in terms of linear energy model, we should see an energy transition based on energy efficiency and all renewables that should know a boom according to the latest IEA report of October 2017 with cost cuts planned for over 60%.