What are you up to Mr. Woolsey - confrontation or cooperation?
Published: Apr 18, 2010 00:34 Updated: Apr 18, 2010 00:34
Oil and politics go together. Crude markets remain mired in political games and battles yet to be won. Yet in the current setup, Saudi Aramco is confident and indeed buoyant. Its march to development is on. With returns on crude "fair," the energy giant seems inclined to avail itself of the existing window. Market prices are making investments in the sector feasible, indeed understandable, and the Saudi giant is on an investment spree.
The company is planning to drill at least 300 development wells on and offshore and 48 exploratory wells this year, says Zuhair Al-Hussain, the vice president for drilling and workover. "We are proceeding with our development and exploration program, (and) this year we are going to drill 48 exploration wells and 300 plus development wells," he told Reuters last week. Numbers of rigs in operation are often regarded as a fair barometer of ongoing drilling activity. Aramco has confirmed that it would maintain the level of rigs it is now operating at 96, of which 17 are for exploration and the rest for development wells. However, the focus is shifting - for obvious reasons. In the past 70 percent of rigs used to be for oil and the rest for gas. Now the divide is even, concedes Al-Hussain, indicating the emphasis on gas. With almost 4.5 million bpd capacity mothballed, the level of activity in the oil sector has to be low, one could easily deduce.
Indeed drilling activity prospers when prices are right. And what is a fair price, is never easy to judge. While, it is always difficult to draw the line, Saudi Arabia has been making noises for some time now that a price of around $75 a barrel could be termed fair to both producers and consumers. And that with prices at this level, the sector would be able to attract the required huge investments.
Not every one initially took that sympathetically. Many questioned the price level of $75 a barrel as too high, while some producers felt that the level was still low. However, now that some dust has settled on the issue and passions have some what subsided, others too are coming round the level of $75 a barrel as fair to both - the producers and the consumers.
Investment banker Credit Suisse while lifting its 2010 oil price estimate to $82.90 from $70 a barrel and 2011 estimate to $80 from $70, argued last week that, "$80 a barrel provides a better balance of an oil price which encourages marginal investment in new production, without crimping demand during the economic recovery phase, than our previous forecast of $70 a barrel."
A drop in oil prices to below $60 to $70 a barrel would stop investments to develop new energy supplies, BP Chief Executive Tony Hayward also underlined last month. "There's a floor now of $60 to $70 a barrel," Hayward said at the Peterson Institute for International Economics in Washington. "If the oil price fell materially beneath that floor for any period of time, investment in these new sources of supply would stop," he added. Hayward made it clear; deep water oil resources in areas such as the Gulf of Mexico and Brazil, as well as the oil sands need oil prices above this level to attract investors.
Indeed Aramco wants to capitalize on the current market conditions. It continues to work on the premise that that fossil fuel will continue to meet about 80 percent of the total world energy requirements for at least the next twenty years. Hence the state oil giant is planning to directly spend approximately $90 billion over the next five years on increasing production capacity. An additional roughly $80 billion is anticipated to be spent on joint refining and marketing projects. Already the company has spent over $62 billion over the past five years on increasing crude production capacity - to the current 12.5 million bpd.
However, most agree that any unrealistic drift or push toward an immediate transition to alternative energy sources could definitely hamper investments in energy sources that are tried and tested. And this very prospect is chilling - to say the least. Despite these pronouncements to continue investments by Aramco and the likes, noises made by influential people could have undesirable impact.
And that is an issue. R. James Woolsey is an influential name in Washington. A former director of the Central Intelligence Agency (CIA), he currently runs the consulting house, Woolsey Partners. In a recent article he says, "We urgently need to reduce oil dependence. This means lowering demand and utilizing substitutes as cheaply and quickly as possible." Unfortunately this urge is on political grounds and this is the disturbing fact - for all and sundry. Criticizing the producers he underlines, "OPEC sets oil's price at a level that exploits our addiction but is generally not high enough for long enough that we go cold turkey."
And then he urges Washington to pick up a fight with the producers - literally. "We can move quickly to strike a major blow at oil and OPEC's dominance if we'll adopt a portfolio approach and stop allowing the perfect to be the enemy of the good. We can get a long way using existing vehicles, existing technology and affordable natural gas. As other improvements become practical-like charging your electric car from solar panels on your roof-they can be adopted. In the meantime, we need Theodore Roosevelt's attitude. He decided to improve competition by taking on Standard Oil's cartel and breaking it into 30 parts. President (Barack) Obama, meet your cartel. It's called OPEC."
And this is dangerous thinking. It could result in retaliation. It could impact the fundamentals - rather adversely. It would definitely inhibit investments required - and in abundance - in the sector. This is real catastrophe.
Where would this psyche, the archaic CIA mindset, lead this world to - confrontation or cooperation? The call is yours, Mr. Woolsey. Indeed for cooperation a win-win scenario is required, and apparently the Woolsey mind set does not appear ready to yield that - yet. And that is the problem. Are we getting back to square one?
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ADAM M.
Apr 18, 2010 18:48
Report abuseCHARLES WEBER
Sep 18, 2010 19:25
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