The big question for US shale: Is it permanent or just ‘permania?’

A pump jack used to help lift crude oil from a well in the South Texas Eagle Ford Shale formation. US shale oil producers have upended old assumptions in the global energy market. (Reuters)
Updated 08 March 2018

The big question for US shale: Is it permanent or just ‘permania?’

LONDON: The Americans have a name for it — “Permania” — which they use to describe the frantic, even crazy, activity around the shale oil fields of West Texas.
In the past four years, the global energy market has been stood on its head by the boom in US crude production, to the point where the Americans are now producing more oil than Saudi Arabia and will soon overtake the world’s biggest producer, Russia.
The US’s 10 million barrels of oil per day account for roughly 10 percent of global output, and, as domestic demand for energy is saturated, they are being exported increasingly to the rest of the world.
That boom has unhinged the global oil market. The price collapse of 2014, the “Vienna Alliance” between OPEC countries and Russia, and the fiscal challenges of countries in the Gulf, are all down to the shale boom.
Sara Ortwein, president of Exxon Mobil’s shale business XTO Energy, told the CERAWeek by IHS Markit conference in Houston, Texas this week: “A decade ago, the idea of exporting US crude would have been seen as preposterous. Now, we have enough to satisfy US energy needs and sell it to the rest of the world.”
The Permian basin, west of Houston, Texas, and straddling New Mexico, is at the heart of the revolution. It produces 25 percent of American oil output, and has virtually changed the global oil equation on its own.
For traditional exporters like Saudi Arabia, it presents a big question: To join the party in Texas and other US shale fields, or to stick to pumping crude from the sands and seas of the Middle East?
“We have the golden goose, right before us,” said Tim Dove of Pioneer Natural Resources, one of the leading shale companies and among the first to exploit the Permian around the turn of the millennium. “We don’t drill dry holes, because we know the oil is there. Technology will only make it better. The sky is the limit,” he told the CERAWeek.
In a throwaway line, he seemed rather pleased about how he and other shale producers have caused confusion in the ranks of the traditional producers.
“I think that OPEC is impressed by what we’ve done, even if they are trying to get their arms about what it all means.”
He was speaking after a meeting with OPEC officials and traditional oil company executives in one of the many power-broking dinners around the CERAWeek venue.
It was the second year that OPEC had invited the shale barons to break bread in an attempt to end the undeclared hostilities between traditional oil producers and the Texans in place since the fall in prices in summer 2014.
Mohammed Barkindo, Opec general secretary, explains how the “peace” talks had come about. “We agreed last year to continue the dialogue with the Sahel industry. The last stage of the oil cycle has been the most injurious for all our members, and to everybody in the world. We all suffered. We had been operating in silos and we agreed to talk to the shale industry.”
Barkindo insisted that the meeting did not discuss oil prices or deals on limiting output, and Dove pointed out that US anti-cartel laws would make such agreements illegal.
“You cannot have these kind of talks in the US. We were invited and we went along. As far as I’m concerned, the dinner was congenial, and it may well become an annual event,” Dove said.
There has been speculation that some OPEC members might seek to do deals with shale producers as a way of balancing their portfolios and getting exposure to the upside in shale.
Amin Nasser, chief executive of Saudi Aramco, said that the company was always looking to get involved in growth areas, but he did not specify which ones.
But some in Houston questioned whether the shale industry had cured the “boom or bust” cycle of the past, when falling oil prices led to withdrawal of financial support from investors.
Others pointed out that shale still faced big problems in overcoming pipeline and shipping challenges, as well as opposition from the environmental lobby.
Mark Pappa, one of the pioneers of shale finance via his company EOG Resources, said that shale forecasts were too optimistic, and that the industry was exploiting cheap and easy assets that would quickly be exhausted.
“If shale does disappoint over the next four to five years, there are not a lot of safety valves in the system,” he said.
Dove dismissed these fears, pointing out that the shale industry’s cost breakeven price was only $19 per barrel. “There is no downturn price that would affect our profitability until it gets to below $40 a barrel,” he said.
Nonetheless, Papp’s skepticism was a wake-up call in Houston for an industry that was basking in its own considerable achievements.
But the convinced “Permaniacs” remained optimistic. Ortwein, who suggests the Permian could eventually be producing five million barrels of oil per day, half the total output of Saudi Arabia, said: “Permania is not a fad, it is permanent.”


INTERVIEW: Philip Morris International mideast chief on using hi-tech to progress toward a smoke-free future

Updated 18 August 2019

INTERVIEW: Philip Morris International mideast chief on using hi-tech to progress toward a smoke-free future

  • Tarkan Demirbas tells Arab News how smart technology will woo 9 million Gulf smokers and reduce risk

Alongside politics and religion, there is one other dinner party subject virtually guaranteed to push people to opposing extremes: Smoking.

In much of the world — especially the West but increasingly in the Middle East and other emerging markets — tobacco has been marginalized to the point where smokers feel shunned and lonely in many social environments, banished to pavements or poorly ventilated kiosks in airports.

After a series of multi-billion dollar lawsuits around the globe for the undoubted bad effects smoking has on health, Big Tobacco — the giant multinational companies that made billions out of the nicotine habit but neglected to say exactly how bad it was — is nowhere near as big as it once was.

All of which leaves Tarkan Demirbas with something of a challenge. He is vice president for the Middle East of one of the biggest tobacco companies, Philip Morris International (PMI).
Think Lucky Strike and the Marlboro Cowboy, legends of the industry and of marketing before grim, litigious reality overtook
the business.

BIO

BORN • 1968, Erzurum, Turkey.

EDUCATION • Bogazici University BSc Industrial engineering. • University of West Georgia, MBA.

CAREER  • Senior management positions at PMI in Hungary, Colombia, Malaysia, Singapore, Switzerland. • Vice President Middle East.

Demirbas is on message for the new anti-tobacco era. “There is no doubt that the best way to reduce the risks of smoking is to not smoke or use any nicotine product at all,” he said recently at an event in Dubai’s Capital Club, an oasis of tobacco-friendliness in the anti-smoking desert of the Dubai International Financial Centre.

On the surface, that seems a strange line from somebody who for the past 15 years has been promoting PMI’s products around the world, from southeast Asia through Budapest and on to Bogota with a stint at PMI’s Swiss HQ along the way.

But it coincides with a new direction PMI has taken. The new buzz-phrase in the company is “a smoke-free future.”

PMI launched the initiative with a “commitment and ambition to replace cigarettes as soon as possible with better alternatives to smoking for the millions of men and women who would otherwise continue to smoke.”

That might sound like turkeys voting for Christmas, but there is a sound business logic, as Demirbas explained. “The reality is that the vast majority of smokers simply do not quit. Even the World Health Organization’s own predictions forecast that there will continue to be more than 1 billion smokers by the year 2025,” he said.

“This is why a growing number of experts believe that public health policies should not be based solely on discouraging initiation and encouraging cessation, but need to leverage the potential of scientifically substantiated smoke-free products for the benefit of smokers and public health,” he added.

Technology is key to the campaign, and the product that PMI has come up with is IQOS. The Dubai event marked its regional launch. Imagine a slim mobile phone with a stubby cigarette sucking out of one end, encased it in a stylish carrying case-cum-charger, and you have an idea of IQOS.

Unlike other electronic smoking devices which vaporize nicotine juice, avoiding the harmful effects of the pathogens produced by burning tobacco, IQOS stays with the weed but does not burn it.

By heating tobacco sticks — called Heets — that look like mini-cigarettes to 350 degrees Celsius, the nicotine that smokers crave is released, but the tobacco is not burnt. Demirbas cites respected scientific sources as well as PMI’s own research indicating that 95 percent of the harmful by-products of tobacco are avoided.

Amid jokes that the Marlboro Cowboy would find it hard to use IQOS and ride his horse at the same time, nicotine-hooked cigarette smokers at the event said the result was pretty close to the “real thing.”

There is potentially a big market to go for, globally as well as regionally. Worldwide, some 150 million people use PMI’s tobacco products, still overwhelmingly traditional cigarettes. By 2025, he aims to get 40 million of those onto heated tobacco products like IQOS.

“This year, our priority is to go deeper into existing launch markets. We are encouraged by the results to date, including that there approximately 8 million smokers who have completely abandoned cigarettes and switched to IQOS. Japan is the best example of IQOS’ success, where we have achieved nearly 17 percent of the national share of the market,” he said.

IQOS is currently in nearly 50 markets, including Japan, Korea, Canada, a number of European countries such as Germany, the UK and Spain, as well as Russia, Ukraine and Colombia.

PMI passed a significant milestone in its campaign to go global with IQOS when the American Federal Drug Administration authorized IQOS and other variants. It will market its products in the US in partnership with Altria, the big investor which has made a commitment to the “smoke-free future” with multibillion dollar funding of Juul, the market leader in the worldwide vaping craze.

 “There are 40 million American men and women who smoke. Some of them will quit, but most won’t, and for them IQOS offers a smoke-free alternative to continued smoking,” Demirbas said.

Progress towards smoke freedom remains elusive in China, the world’s biggest market, where PMI markets Marlboro and in turn promotes traditional Chinese tobacco brands around the world.

The UAE joined the list of countries heading smoke-free last year when an IQOS stand appeared in Dubai International Airport’s duty free section. The UAE was ambivalent about the value of trying to lure smokers off tobacco and onto safer products, with the Emirates’ health authorities warning against the use of e-cigarettes and vaping devices. 

But the IQOS airport stand was a sign of a change of heart, and was followed by public pronouncements that vaping would also be made legal. Users in the UAE had previously resorted to some pretty furtive measures to get their nicotine fix, but non-tobacco nicotine products appeared to be here to stay, judged by the large numbers of people seen sucking on devices in many outdoor public places.

After the UAE launch, non-cigarette nicotine is going mainstream. The Heet sticks will be on sale for around DH20 (SR20) per pack — roughly the same as a pack of Marlboro — in most traditional smoking shops, while the devices — retailing at around Dh250 — will be sold in Carrefour supermarkets and, eventually, branded flagship stores.

Demirbas sees the UAE as a testing ground for expansion into other Middle Eastern markets, with Saudi Arabia high on the list of targets. PMI already knows there is an appetite for its device in the Kingdom from the large numbers of Saudi citizens buying them at Dubai airport.

At the airport, they have to present national ID cards or passports as proof of age — 18 is commonly the age limit for buying tobacco products in the Gulf region — as well as making a declaration that they are already smokers who wish to quit cigarettes. “I stress that we are trying to convert existing smokers, not trying to get anybody started on nicotine,” Demirbas said.

“From a public health standpoint, we see great potential for reduced risk products in Saudi Arabia. In our view, it is important to set the right regulatory framework to ensure companies adhere to best practices and comply with local legislation with the adult consumers of these products in mind, particularly as alternative forms of nicotine consumption are being recognized in leading global markets, including Saudi Arabia,” he said.

“Our ultimate goal is to convert all the 9 million adult smokers across the GCC, who would not otherwise quit, to IQOS,” he added.

PMI faces significant competition in its mission. Juul, the trendy but controversial device that has grabbed a big slice of the global market as the “iPhone of the vaping business.” Several other vaping products already have a foothold and a cachet that could be challenging for PMI.

At the Capital Club, the test audience for the IQOS launch was a mixed band of cigarette and vape users who gave the new product serious consideration. Some were sold on it straight away, others said they would give it a try and were gifted samples by PMI. The stylish look of the new product was a big selling point for the tech-style savvy consumers.

Others were put off by the charging process that has to be carried everywhere and used between smokes. One complained that the taste was simply too similar to the cigarettes he had been trying to kick for years.

As Big Tobacco seeks to reposition itself in the new anti-smoking age, the multibillion dollar nicotine industry will always be controversial. Maybe IQOS will be the hi-tech product that helps millions finally kick the smoking habit. Demirbas hopes so.

“We’ve invested $6 billion in it. It’s the most advanced technology there is,” he said.