The message came from the top and was crystal clear. It’s a two-way traffic. Let us be assured of “fair pricing” and we would ensure enough crude.
When Custodian of the Two Holy Mosques King Abdullah rose to make his annual address before Saudi Shoura last Saturday, energy markets eagerly awaited what the King had to say. His words carried immense weight and ramifications for the industry and in fact the entire global economy. And keeping with his reputation, the King did not mince words. The mathematics was pure and simple!
Riyadh, the global gas station, was ready and capable of standing up to the challenge of meeting the galloping energy requirements of the world and keeping the growing global economies well oiled. “The Kingdom is aware of its international duties and acts to achieve fair prices for oil that safeguards the interests of producers and consumers,” he said in his address before the advisory council.
Oil producers — and gas producers, too, now — have been insisting on “fair returns,” for a considerable period of time.
In order to ensure uninterrupted supply as per requirement, massive investments are required in the sector. Most estimates, including those from the IEA, confirm that oil supplies at considerably higher level than current could be ensured, if the required investments are made.
In free economy, investments enter a sector only if returns are attractive, free world leaders keep on reminding the developing and the underdeveloped. The same applies to the energy sector, too. Returns need to be fair so as to justify hefty investments, so essential for the continuation of this fossil fuel-driven civilization of ours, one has to underline.
But what is a fair price? One could recall when OPEC was striving for a market crude price of somewhere between $22-28 a barrel. That benchmark now has jettisoned, it seems. There is no current official OPEC price ceiling. Some analysts, feel an unofficial ceiling is somewhere around $50 a barrel. Market indications at times, make one feel that the minimum price ceiling is hovering around $60 a barrel. Things keep changing reacting to circumstances and environment.
Market oil prices cannot be established in air. It has to take into account a whole lot of variables — and not all of these are controllable.
It’s the market forces that would assign a fair and justified price to this product, too.
Oil producers cannot be compelled to increase supplies to the extent that markets get derailed. That would serve no purpose, too. According to recent estimates, world oil requirement would rise by another 23 million barrel per day or 28 percent to around 106 million bpd by 2020 from the average demand level of 2005, estimated at around 83 million bpd.
Much more oil is required than available. And indeed fair pricing is essential; one has to concede, to meet this growing demand.
With the passage of time, exploration is getting costlier. Bringing new resources online is costing more than what it used to be decades back. Incremental costs are creeping. New technology has to be deployed and all this could come at a cost.
Major Gulf producers have announced plans to increase capacity by more than 50 percent by 2020, equivalent to an unprecedented average of one million barrels/day of net productive capacity per year. These plans take on new significance in light of increasing global energy demand and domestic and international economic growth.
Saudi Arabia is working to bring on stream new resources. Manifa offshore development is in the cards. It would add an additional 900,000 million bpd over a four-year period. Khuraisaniyah project is moving ahead. Production from Shaybah and Central Arabian fields are also to go up by 300,000 barrels per day next year. Production at Khurais would also go up to 1.2 million barrels per day over the next couple of years.
Enhancing the capacity is not only about developing new projects, but also maximizing recovery from existing fields with the aid of technology. Achieving capacity growth is a function of bringing new projects on-stream while at the same time mitigating the decline of a mature base and maximizing the field’s ultimate recovery, pundits agree.