Home' Trinidad and Tobago Guardian : August 27th 2015 Contents AUGUST 27 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
ENERGY | BG9
Q: We started 2015 with oil prices falling
dramatically. They rallied in the early
summer to above US$60 per barrel. Are
you surprised to see prices plunging
A: No, because (in the spring) we could see
that the companies thought that they were in
for a longer period of low. I don t think anybody
was thinking this low.
We were hearing six weeks ago how US$70
was the new US$100 and US$65 was the new
US$90. But the thing that we kept seeing was
that the oversupply of oil was actually growing,
Since the big price collapse started last fall,
Saudi Arabia, Iraq, and the US have added
about two million barrels per day of new pro-
duction to the world market. And with demand
growing at about 1.4 million barrels per day,
it was clear that this renewed optimism about
higher prices was misplaced.
What s the catalyst for the price reversal
I think the new factor, although it s been a
factor all along, is the apparent greater weak-
ness and economic uncertainty in China. What
we re seeing now is that what China giveth,
China taketh away. And, in this case, China
really gave us the supercycle of commodities.
But the relative weakness of the Chinese econ-
omy and how it affects demand for commodi-
ties is the big new factor because it s become
so much more apparent.
So the China-driven demand story has
My colleagues in Beijing point out that as
the Chinese economy shifts, and there s less
construction, less expansion of cities, less
heavy industry, that leads to less demand for
oil---because an awful lot of the oil consump-
tion is the form of diesel is really trucks that
were part of the giant build-out of China. And
if that slows down it means a disproportionate
decline in oil demand. Even though people
are buying more cars in China than they are
in the US, they re not driving them anywhere
near as much. People always say China, but
it was really the build-out of China that was
driving global commodity markets.
There has been a confidence that the Chi-
nese really controlled the levers of their econ-
omy and could act in ways that other countries
could not, and keep this amazing growth story
going. But now, obviously, the concern is
whether that is, in fact, true. Or is China in
for a weaker period? They re committed to
seven per cent growth for all of the economic,
social, and political reasons, but maybe they
don t control all the tools.
US oil production, including shale oil,
has stayed pretty robust this year despite
lower prices. Can that continue?
What we ve seen is not just momentum,
but also that the industry got a lot more effi-
cient. We have this tool that we ve created at
IHS called the performance evaluator that
allows us to look at every oil well, every oil
field, every shale play, and what you see is a
very wide disparity in the performance of
these unconventional wells.
In 2014, 30 per cent of the wells were
responsible for 80 per cent of the growth. So
costs have come down a lot---and the balance
between company and service provider has
certainly changed a lot in favor of the com-
pany---and companies just became a lot more
efficient and cut out the peripheral activities.
And that s how they ve been able to keep
So you ve had companies saying that with
oil at US$65 they would be back in business
with as many rigs as they would have at
US$100 per barrel. We expect that at the end
of this year every dollar spent on unconven-
tional oil will be 65 per cent more efficient
than in 2014.
This is a very innovative, flexible industry.
With that said, I think that with prices where
they are, it s basically panic level.
What will that panic mean for oil com-
It means that in the autumn as banks are
reviewing their loans, if oil continues as this
level for another couple of months, we re going
to see a lot of distress in the oil patch.
Back in the winter, there were dire predic-
tions of bankruptcies and acquisitions this
year but that scenario hasn t materialised as
quickly as some thought.
Exactly. So I think the dire straits that were
anticipated---it s a delayed reaction and we re
going to see it now. The banks review loans
twice a year. I think they could be more flexible
in the spring. But at this level, there s going
to be a lot of turmoil and hurt.
Do you see signs that the major oil
companies are dialing back their expec-
tations even more than they were earlier
Yes, I think companies are now expecting
that prices are going to be in a lower range,
longer. This is definitely not a V-shaped recov-
ery. And it s going to be more of a stretched-
out U, with the right-hand side never quite
getting back to the level of the left. Because
certainly the (Persian) Gulf producers have
made it clear that they don t want to see
US$100-a-barrel oil again because of what it
does to their competitive position.
It was the refusal of the Saudis to cut pro-
duction last fall that caused prices to really
tank. They wanted prices lower to slow down
non-OPEC production, such as US shale oil.
With prices this low and perhaps stay-
ing low for longer, will the Saudis be
forced to buckle and cut production?
We don t think so. We think they re going
to stay resolute. I think this is a shock. But
I think from their point of view this is probably
a one-to two-year process. They have the
wherewithal to withstand it. And were they
to step forward and cut now, they would have
to ask themselves what they accomplished.
They re whole thesis starting last year was
that if they cut production they d have to cut
again and again. So I think they re going to
stay the course.
And then there s the other key factor, which
is the nuclear agreement with Iran. If it goes
ahead, that means that some time early next
year Iran starts putting maybe 400,000 to
600,000 barrels per day into the market. This
is a battle for market share and market position.
Given the geopolitics in the region now, the
Gulf producers are not keen to make room for
Iran. So they re looking at not only who s in
the market now---and of course Iran is in the
market but not with full volumes---but also
next year with Iran coming back in. That s
adding to the more bearish outlook of the
It s hard to see what would push prices
much higher any time soon.
Yes, it s kind of like everything has been
turned upside down. In recent years we ve
had strong demand growth and tight supplies.
Now we have tepid growth and oversupply.
But this is part of a cycle. The impact of the
cutbacks will not be seen quite as quickly as
might have been anticipated last November
when OPEC made its historic decision. But it
will show up in supplies that are not developed
a few years from now.
Can you attach a dollar figure to the
projects that won t get done now?
The industry response is canceling, delaying,
and postponing projects that, if you add it all
up, would be worth hundreds of billions of
dollars. If you exclude the impact of lower
service costs, IHS projects as much as a
US$600 billion reduction in upstream oil and
gas spending between 2015 and 2019, compared
to what was expected a year ago.
Play prognosticator for me: By the end
of the year, are we more likely to have oil
prices below $40 or above $50?
Well, who knows because events will inter-
vene that will change things. But at this point
for the fourth quarter we re seeing Brent crude
prices below US$50. We think that the next
few quarters are going to be tough, really into
the spring when oil demand goes down and
Iran is presumably coming into the market.
You say, What could change things? Well,
something from left field, some geopolitical
event that affects supply. But if you look at
it from the point of view of supply and
demand, the downward pressure on prices is
going to continue.
So, oil s new math is getting enough
Yeah, the new math is going to be even
tougher. There was a period of renewed opti-
mism but I think the hard times are really
now at hand.
On Monday, the price of benchmark West Texas Intermediate crude closed at US$38 per
barrel, the lowest level since the depths of the financial crisis in 2009. But that s just the
latest low in what has been a gut-wrenching ride for the oil industry over the past year.
As recently as June of 2014, WTI prices were above US$100 per barrel. By January, they
had tumbled by half thanks in large part to a supply surge driven by booming US production
of shale oil.
Producers got a reprieve when prices rallied to around US$60 in early summer---only to
see a new swoon in recent days.
The immediate reason for the current drop in oil prices is largely the same as the overall
market sell-off; new fears about weakness in the Chinese economy. But the stocks of big
oil companies have suffered much more than the broader market so far this year. Shares
of majors such as Exxon, Chevron, and Shell RDSA are all off by more than 25 per cent
year-to-date vs an eight per cent decline for the S&P 500.
To get a better sense of where oil prices might go from here and what the consequences
will be, Fortune called DANIEL YERGIN, author of a pair of essential books on the history
of the energy industry, The Prize and The Quest and easily the most erudite expert on
the oil and gas industry. His view?
Hard times are coming. Edited excerpts:
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