Home' Trinidad and Tobago Guardian : October 23rd 2014 Contents BG8 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 2014 • WEEK FOUR
After declining gradually for three months, oil
prices suddenly tumbled almost US$4 on
October 14 alone. It was the largest single-
day fall in more than a year, and it brought
the price of Brent crude, an international
benchmark, to US$85 a barrel. At its peak in
June, a barrel had cost US$115.
Normally falling oil prices would boost global growth. A
US$10-a-barrel fall in the oil price transfers around 0.5 per
cent of world GDP from oil exporters to oil importers. Con-
sumers in importing countries are more likely to spend the
money quickly than cash-rich oil exporters. By boosting spend-
ing, therefore, cheaper oil tends to boost global output.
This time, though, matters are less clear cut. The big eco-
nomic question is whether lower prices reflect weak demand
or have been caused by a surge in the supply of crude. If weak
demand is the culprit, that is worrying: It suggests that the
oil price is a symptom of weakening growth.
If the source of weakness is financial, due to debt overhangs
and so on, then cheaper oil may not boost growth all that
much. Consumers may simply use the gains to pay down their
debts. Indeed, in some countries, cheaper oil may even make
matters worse by increasing the risk of deflation.
On the other hand, if plentiful supply is driving down prices,
that is potentially better news. Cheaper oil should eventually
boost spending in the world's biggest economies.
The global economy is certainly weak. Japan's GDP fell in
the second quarter. Germany's did too, and may be heading
toward recession; recent figures for industrial production and
exports were dreadful. America's growth has accelerated
recently, but its recovery is weak by historical standards. Imme-
diately before this week's oil-price slump, the International
Monetary Fund cut its projection for global growth in 2014
for the third time this year, to 3.3 per cent. It still expects
growth to pick up again in 2015, but only slightly.
Weaker growth translates into lower energy demand. This
week the International Energy Agency, an oil importers' club,
said that it expects global demand to rise by only 700,000
barrels a day this year. That is 200,000 barrels below its
forecast only last month. Demand has been weak for a while,
but the recent slowdown---notably in Germany---took markets
by surprise, hence the sharp fall in the price.
Feeble demand is not the only explanation, however. There
also has been a big supply shock. Since April 2013 the world's
total output of oil has been rising strongly. Most months'
output has been one million to two million barrels a day higher
than the year before. In September this expansion jumped
dramatically: Global output was 2.8 million barrels a day above
the level of September 2013.
Most of the growth in supply has come from countries that
are not members of OPEC, the oil exporters' club, and from
America in particular. Thanks partly to increases in shale-oil
output, the United States pumped 8.8 million barrels a day
in September, 13 per cent more than in the year before, 56
per cent above the level of 2011 and not far short of Saudi
Russian oil production also is inching up, suggesting that
sanctions have not yet begun to be felt in its oil fields. In Sep-
tember its output rose to 10.6 million barrels a day, within
a whisker of the highest monthly figure since the collapse of
the Soviet Union.
Non-OPEC production, though, has been rising for some
time. The biggest recent change has come from within the
cartel. In April Libya's production, hit by civil war, crashed
to only 200,000 barrels a day, but by the end of September
daily output was back to 900,000 barrels and heading toward
its prewar level of 1.5 million. No less surprisingly, Iraq's output
is rising too.
The upshot is that OPEC production started to grow again
in September, after almost two years of decline, compounding
the impact of growing non-OPEC supplies.
With demand weak, much of the extra output has gone into
rebuilding oil stocks in rich countries. That cannot go on
indefinitely, however. As the hoarding slows, prices are likely
to weaken again unless world demand picks up or oil production
Neither seems imminent. Antoine Halff, the IEA's chief oil
analyst, points out that little current production becomes
uneconomic even at US$80 a barrel. The break-even point
for most American shale-oil producers has been falling as
they have refined their fracking techniques, and is now well
below US$70 a barrel. Prices will have to fall further if they
are to drive marginal producers out of business.
New trade patterns reinforce the downward pressure on
prices. OPEC exporters once informally carved up the world
between them, with Nigeria and Venezuela selling to America,
smaller Gulf states to Japan and so on. American oil imports
have fallen from 309 million barrels a month in 2010 to 236
million a month now, and European demand is weak, so every-
one is competing for market share in Asia.
In September Saudi Arabia shocked the rest of OPEC by
cutting forward prices for Asian delivery and by increasing oil
output slightly, by 107,000 barrels, at a time when other
exporters wanted it to cut back. The organisation is due to
meet again in November, but, as Kuwait's oil minister remarked
recently, "I don't think there is a chance today that (OPEC)
countries would reduce their production."
How soon, and how much, lower prices will translate into
an increase in global demand, though, is far less certain.
@2014 The Economist Newspaper Ltd. Distributed by
the New York Times Syndicate
Cheaper oil: Both symptom and balm
A combination of falling oil prices and sky-
rocketing costs led Chevron to delay its US$12
billion deepwater gas development project in
While the offshore drilling operation is only
being temporarily delayed while Chevron revises
its calculations, there is no telling how long the
delay will last. In any event, this is likely just
one of many multibillion-dollar energy projects
that Chevron and its peers will delay over the
Chevron's Indonesia Deepwater Development
was initially expected to begin producing gas
in 2016, starting with the Bangka field and fol-
lowed by the Gehem and Gendalo fields in
2018. Those dates will likely all be pushed back
by at least a year while Chevron reevaluates
the project. While one reason for this reeval-
uation is a new gas discovery that could change
Chevron's development plans, the company is
also faced with skyrocketing costs and falling
energy prices, both of which have the potential
to hurt this project's economics.
This project, as the following slide notes, is
just one of about 25 Chevron has in development
that will cost more than US$1 billion each.
With so many projects to juggle, this delay
is just part of Chevron's portfolio management.
However, this delay could be a problem for
Indonesia, which might soon run low on natural
gas supplies. The country, which was once the
leading liquefied natural gas (LNG) producer
in the world, could become a net importer of
natural gas by the end of the decade if new
supplies don't come online. That's why it needs
Chevron's delay to be short. That, however,
might be too much to hope for given the prob-
lems Chevron and the industry as a whole have
had with these megaprojects.
The problem with big projects
Large natural gas projects have been costly
for Chevron. Its massive Gorgon project in Aus-
tralia, for example, was initially expected to
cost US$37 billion. However, the anticipated
price tag has increased to US$54 billion, 37 per
cent more than initially expected. The project,
which is 83 per cent complete, has been a heavy
burden for the company and its partners.
Industrywide cost overruns for megaprojects
yet to be completed totaled US$500 billion,
according to a 2014 report by Ernst and Young.
That report found that 64 per cent of multi-
billion-dollar projects exceeded their budgets
by an average of 59 per cent, while another 73
per cent missed project deadlines. These num-
bers were even higher in the Asia-Pacific, where
68 per cent of projects exceeded planned budgets
and 80 per cent fell behind schedule. This is
why Chevron is taking a harder look at its
planned Indonesia project, and other producers
will likely also press pause on megaprojects
that are not delivering as planned.
(The Motley Fool)
Offshore drilling: Chevron Corporation presses pause on US$12bn project
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