There usually isn’t much context when we hear daily oil and natural gas prices, Thomas Petrie, chairman and chief executive officer of Petrie Parkman & Co. told the Alaska Support Industry Alliance Meet Alaska conference in Anchorage Jan. 27.
But, he said, if you look at a time-weighted distribution of prices, based on the number of days the price was traded at a certain level, you can see a $10 shift between the second half of the 1990s and the first half of the current decade.
In the second half of the 1990s, Petrie said, “we have kind of a time-weighted center of gravity at $19 a barrel. … If we fast forward to the half decade of the current decade that’s just finished … we’ve got a full $10 a barrel move to the right. A fairly significant market signal,” he said.
Many observers view the rise in oil prices as “an insecurity premium,” Petrie said, a premium that covers issues around Middle East supplies, unrest in Nigeria and Iraq, the Chavez regime in Venezuela, Yukos in Russia, the weakness of the U.S. dollar, strong economy performance in major world economies, Hurricane Ivan, demand in China and a perception of no spare capacity.
This all comes, he said, at the same time as resource maturity, “maturation of the conventional petroleum resource base,” which means the share capacity is just a few million barrels, not a lot in the context of an 80 million to 82 million barrel consumption base.
Big factors in oil price: transformation in China and India
Petrie said a big factor in the oil price is “a transformation in the society and economy of both China and India.” Per capita consumption has been 1.6 barrels per person per year for China and eight-tenths of a barrel per person per year in India. Coastal China, with some 500 million people, is moving toward the South Korean model of some 17 barrels per person per year. And India, at least its middle class, is moving toward a Brazilian model of 4.5 barrels per person per year. Russia, where consumption is at some 7.4 barrels per person per year, is moving toward an East German model of 11.4 barrels per person per year.
“Not overnight,” Petrie said, “but certainly in the context of the next half decade, moving into the next decade, these kinds of changes can be very significant.”
With the growth of consumption, “the time-weighted center of gravity … for oil prices in the second half of this decade conservatively may be somewhere right around that $35…” This is more of a hypothesis than a projection, Petrie said, and the reality could be even higher prices.
Could prices be lower? “I won’t suggest there’s no way we penetrate $30 oil, but I think it’s going to take some very huge shocks to the global economy — a very hard landing in China and probably Indian — to really get a serious penetration of $30 oil prices,” Petrie said.
Gas hypothesis: $6 an mcf
The time-weighted distribution of natural gas prices was $2.50 a thousand cubic feet in the last half of the 1990s, and about $4.50 an mcf in the first half of this decade, a price move upwards of about $2 an mcf.
For the coming half decade, Petrie said, “I would argue for something around $6 an mcf.”
He said that over the last year and a half he has frequently been asked if liquefied natural gas coming into the United States won’t put downward pressure on gas prices. The short answer, he said, is no.
LNG infrastructure development, he said is comparable to the build up of Middle East conventional oil infrastructure after World War II or perhaps the new tanker infrastructure built after the seven-day war in 1967.
While LNG has been around for 30 years, Petrie said, “it’s really moving into a different phase, where large amounts of stranded gas have been found and basically bottled up for years,” but are now being exploited and “fully integrated systems” are being put in place.
The growth is dramatic, he said: LNG trade doubled from 1980 to 1990; doubled again from that level in the decade of the 1990s; “and it’s up another 20 percent in the first three years of the current decade.”
Between now and 2007 or 2008, a 50 percent expansion in total liquefaction capacity will occur.
Dramatic LNG infrastructure spending
Over the next decade or decade and a half, Petrie said, the global dollar investment in LNG infrastructure will be in the range of $150 billion to $200 billion.
Indonesia has long been dominant, but its fields are mature and “the Middle East, especially Qatar and Iran, and Australia, are coming on strong in the Pacific Rim,” he said, with Pacific Basin demand dominated by China and India.
Atlantic Basin trade will grow, with supplies over the next decade coming from “Algeria, Libya, at some point down the road clearly Nigeria, Equatorial Guinea, Qatar, Iran and … Angola, Venezuela maybe someday with a regime change. Trinidad clearly is here now and ongoing.”
While LNG has been landed at $3 per mcf and $4 per mcf in the United States, he said that is “predicated on 75 cents to a dollar per M at the wellhead. If you look at the capital intensity of these projects … it’s hard to see why the national companies and the oil ministries, the foreign ministries of these countries, are going to settle for that.” Many of the gas exporting countries are members of the Organization of Petroleum Exporting Countries, and either OPEC will become Oil and Gas PEC, or “they’ll be a separate organization called Gaspac that will be determining those values.”
Given these factors, Petrie said he does not believe LNG will seriously undercut “a price structure that’s good for development of Alaskan gas and other unconventional gas sources in North America.”
And if there is an undercutting effect, he said, it would be to undercut the risk of gas at $10 per mcf to $15 per mcf, and bring that back into a range of $5 per mcf to $7 per mcf.
Landing capacity issue in Lower 48
The big issue for getting LNG into the United States is “going to be landing capacity,” with a challenge for permitting and building re-gasification sites.
Petrie said landing sites on the Gulf Coast make a lot of sense because with existing infrastructure “you can deliver gas to Freeport, Texas, and deliver it to Boston, Massachusetts, cheaper than you could deliver it into Maine and bring it down … because of the infrastructure, because of the economies of scale.”
LNG, he said, should be able to meet needs in the southern half of the United States, but Alaska gas will be needed in the rest of the country. The Mackenzie gas, he said, looks more likely to end up in the oil sands than it did two years ago: “I don’t see the degree of competitive interplay between these two pipelines today that was there, at least on paper, conceptually two years ago…”
As for taking Alaska gas to the West Coast as LNG, “it seems to me that while ultimately that may be a project that has merit, it’s probably not the right project for the cornerstone development of Prudhoe Bay gas and other Arctic gas in Alaska, because it would have to go head to head with the most competitive LNG markets in the world and with Jones Act issues and so on, it’s hard to see how it could be effectively delivered cost effectively in the relevant time frame.
“In terms of the balance of these issues, the final point I’d make is West Coast re-gasification capacity promises to be a significant bottleneck and there’s the disinclination on the part of Californians to have LNG facilities on their coast…”
Once an Alaska gas pipeline is built from the North Slope to Alberta, the infrastructure to move gas out of Alberta “and then divert meaningful parts of that both east and west is in place.”
