Lack of investment is key concern at OPEC
Before last week’s eagerly anticipated OPEC meeting, the group organized its triennial seminar, which was attended by the great and the good of the industry.
With more than 80 speakers that comprised heads of major international oil companies, shale oil producers, ministers, analysts and academics, participants were given great insights on the state of the industry and what is on the minds of its leaders.
The highlight of the event was an extensive interview with Saudi Energy Minister Khalid Al-Falih.
Consensus among speakers emerged quickly on several aspects. Shale was definitely a new force in oil markets. It redirected trade flows and will allow the US to overtake Russia as the world’s largest producer later this year. There are, however, limits to its potential.
The industry worries about underinvestment. During the lean years of 2015/2016, IOCs canceled up to 40 percent of scheduled investment.
Shale production currently accounts for around 5 percent of global production. All players, including Hess Corporation President, John B. Hess, expect production to plateau toward 2025 at 10 million bpd, which will constitute about 10 percent of global supply. This means that shale will continue to be an important factor, but never the silver bullet solution to supply shortages. US participants were also confident that infrastructure bottlenecks in the Permian, which is hindering shale barrels from reaching the market, would be overcome within the next 18 months.
The industry worries about underinvestment. During the lean years of 2015/2016, IOCs canceled up to 40 percent of scheduled investment. It has rallied a bit, but not enough to guarantee sufficient production to satisfy future demand.
Andrew Gould, former Schlumberger CEO and Aramco board member, also worried that short-termism had entered the boardroom and Wall Street. Shale oil is a short cycle business. A dollar invested will result in cash flow within six to 18 months, conventional oil is a long cycle business with a time range of four to 10 years, with offshore in particular being at the long end of that cycle. This leads to marginal dollars flowing to shale rather than conventional oil.
If the industry does not invest in the conventional side, we will see shortages in the early 2020s given current demand patterns.
Here the image of the industry is pivotal. Carbon-based sources of energy still make up way more than 75 percent of global supply. As Al-Falih put it, Aramco will produce oil and have a market for the next 80 years. However, if the industry suffers from a bad image, it will be harder to attract that incremental dollar. (For instance the worrying recent announcement that pension funds and even the Norwegian sovereign wealth fund will no longer invest in carbon-based sources of energy.)
The Aramco IPO, while important on the agenda of the Saudi government and stock exchange alike, was only mentioned on the margins of the conference and then only in passing.
Lastly Khalid Al-Falih went into detail about how the alliance of OPEC with 10 non-OPEC countries (OPEC+) has been working. If the last 18 months have taught us anything, it is how quickly things can change.
In December 2016, markets were awash with crude and OECD inventory levels stood at close to 400 million barrels above the five year average. Thanks to concerted action by OPEC +, this overhang is gone and markets are now really tight.
The decision by OPEC + to release about 1 million bpd last weekend was the right one. However, oil producers are subject to the vagaries of the markets and the global economic outlook is less rosy than it was at the beginning of the year. We have moved from a goldilocks scenario with synchronized global growth to more selective growth. In case trade wars further escalate and rate hikes by the Federal Reserve end up drawing money out of emerging markets, the demand picture may change quite quickly.
In line with OPEC’s mandate to ensure that markets are adequately supplied, it will be important to have that quick response mechanism at hand. This is also important in terms of investment flowing into the sector. BP’s CEO, Bob Dudley, never tires of emphasizing that oil companies need stability and for the price of oil to trade in a predictable bandwidth.
Only then will investors allow these publicly quoted companies to commit the capital so badly needed for long-term projects.
- Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources