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Vol 21, No. 24 Week of June 12, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Worst over for oil price

Daniel Yergin sees $50 oil in third quarter if no supply disruptions

Kay Cashman

Petroleum News

In the last three weeks Daniel Yergin, IHS vice chairman, historian and author, has been talking about $50 per barrel crude oil in the last half of this year; and that’s without any significant supply disruptions and without a production cut from OPEC nations, which the Organization of the Petroleum Exporting Countries said June 2 would not happen.

Yergin thinks the “worst of the collapse is over,” but $50 oil at this time is “not going to provide a signal for the investment that will be needed to meet demand by 2020, so I think we will see higher prices. … But unless there is some big surprise or supply disruption,” prices won’t go back to $100 a barrel, by 2020.

“Our view is that the recovery has begun in the oil markets.” The past two years proved that price “is really powerful. It has lowered the amount of supply coming in and increased demand,” he said.

Yergin thinks that if a minimum $50 per barrel price is sustained through the third quarter of this year, it would signal the beginning of a recovery to banks and investment groups.

Yergin appeared alongside Canada Natural Resources Minister Jim Carr at a June 6 event hosted by Canada 2020 in Ottawa. The following remarks were taken from that affair and from interviews conducted with Yergin by Bloomberg and the Associated Press during the previous two and a half weeks.

Yergin is best known for his Pulitzer Prize-winning book “The Prize: The Epic Quest for Oil, Money and Power.” He was founder and head of Cambridge Energy Research Associates since 1983, until CERA was purchased by research firm IHS in 2004.

When asked by AP May 23 whether Saudi Arabia, with a new oil minister, would change its thinking about how much oil it produces, he said no.

“They are not going to cut back in order to balance the market and enable other people to increase production. That is their new policy since the November 2014 OPEC meeting. … The tension between Saudi Arabia and Iran is a very decisive force in the oil market today. The Saudis do not want to reduce their number of barrels in order to make room for more barrels from Iran.”

Is the idea of a production freeze dead?

“The Russians have floated the idea again for June, but the Saudis have made it clear they are not going to join any freeze unless everybody joins. That means Iran, and Iran is saying ‘We’re not going to join a freeze because we want to get our production back to where it was.’”

Yergin told Bloomberg before OPEC’s June 2 meeting in Vienna, “Iran and Saudi Arabia don’t even have diplomatic relationships with each other. I don’t think there will be a freeze.”

Observations of the Middle East

Yergin, Carr noted, recently returned from a trip to the Middle East, including Saudi Arabia, leading member of OPEC.

The June OPEC meeting and its decision not to establish a production ceiling but to let the markets balance prices, was not an “obit for OPEC” as suggested by many analysts, but instead “restored the credibility” of the organization under its new secretary general, Nigeria’s Mohammed Barkindo, Yergin said.

The meeting’s outcome “reinforces the fact that control of the market has been handed to the market itself,” he said.

“What is striking is the change in thinking in the region,” Yergin said.

“It is reflected in this vast reform program in Saudi Arabia” to diversify its economy beyond dependence on oil and gas, a program led by the country’s 30-year old crown prince.

Yergin also saw the move to diversify in other Middle Eastern countries.

“Now the grandchildren are in charge, and they want to monetize the oil, diversify it,” he said. “Partly it’s a question about more competition, but the other thing is what happens when you budget at $100 barrel and it’s $40 or $50 and you’ve got all these commitments. They are making their economies more resilient, more diversified mixing of the old and the new.”

As an example, Yergin mentioned Saudi Arabia’s Public Investment Fund’s recent investment in U.S.-based Uber, the car-booking app to generate growth and aid transportation sectors.

Middle East looks to lower costs

He also observed in Saudi Arabia and other Middle East countries, which currently produce the lowest-cost oil and gas in the world, a desire to reduce their costs even more, thereby making their oil more competitive on the world market.

Producing oil and gas more efficiently, at lower costs, is a noteworthy worldwide development, he said.

Yergin quoted an unnamed oil company CEO who recently said, “We used to chase barrels. Now we chase efficiency.”

In reply to AP’s question, “when will U.S. oil production recover?” Yergin said the following: “The shale producers were quite amazing in terms of their resilience and innovation. For quite a number of months after prices fell they were continuing to increase production. The realities, the economics have finally caught up with them. Our estimate is that next year U.S. production will be down 1 million barrels from its peak in April 2015. At around $50 is where you would see U.S. production stabilize.”

“We’ve been saying since February that the second half of the year will be quite different because we could see production going down in the United States, but that production is now accelerating,” Yergin told Bloomberg. “Our notion in the second half, $50 oil … is based upon no major disruptions.”

Any disruptions in supply, such as “Venezuela blowing up as some fear,” means “we are looking at a different situation,” at higher oil prices, he said, noting the recent impact of losing “a million barrels of oil per day of Canadian oil sands” had had on prices.

He mentioned a number of supply disruptions, including Nigeria, “which is down to levels it hasn’t seen in a number of years. … It’s an unbelievably steep decline.”

In the early 2000s Nigeria was “shut down for a long time,” Yergin said. “Maybe we will see a repeat. … Seventy-nine percent of its government income comes from oil. Nigeria is a country with a lot of problems.”

Nigeria is a factor when considering possible major supply disruptions “as well as continual disruptions in Libya.”

When asked what kind of oil prices more disruptions would produce, Yergin said, “I wouldn’t put a number on it.”

The current disruptions, he said, are “eating at the market but we’ve had enough supply to offset them, but that’s going to change. … Downturns don’t last forever and this one really started 18 to 20 months ago.”

Yergin also noted that “OPEC and Iran are looking at putting more oil into the market.”

“But we see next year, assuming 1.3 million barrels a day of demand growth … we really think we’ll start to see the balance in the third quarter (of this year). … $50 will probably stabilize U.S. production, $60 changes that.”

Investment advice in current market

When Carr asked him, “If you were advising investors what are the best opportunities worldwide in the energy world, what would your advice be?” Yergin said he would advise looking at enterprises that were focused on lowering their costs, increasing efficiencies.

“You just came back from the clean energy summit,” Yergin asked Carr, “what did you see in terms of what’s important to focus on?”

“I saw alignment across the 23 countries. Their modalities might be different but their goals were very similar. I … think there is a real meeting of the minds, even in the language they used. And I think there will be competition for investment dollars. That’s going to be important … and also relationships will be important. … There is an awful lot that is unpredictable in the world of oil, the price is certainly one. Whenever I am asked by a journalist, what do I think the price of oil will be in six months, I laugh, because how does … anyone know?

“So, we can’t predict that, nor can we predict the results of the American presidential election,” Carr said, “but I can ask you the consequences on … energy policy depending on who wins?”

“It’s still early days,” Yergin said. “Obviously we know what Secretary Hillary Clinton’s energy policy will be and it will be very congruent with what you see from the Obama administration. … It is interesting, we have a Republican nominee who isn’t a Republican and Bernie Sanders isn’t a Democrat. He’s a socialist. We’re having an unusual time in American politics. … We heard Mr. Trump’s energy speech and let’s say it would be very different from what the Clinton policies are. ... One of the things that people are puzzled by is when he said that he would approve an (Keystone) XL pipeline but would want a share of the profits. Think about what that means.”

Tax policy can draw investment dollars

Carr said Canada has “typically not done well” in drawing green investment dollars. How, he asked, does a country attract venture capital?

“A tax policy change helped attract investment to develop the oil sands, so looking at tax policy would be one way” to attract venture capital, Yergin said.

Venture capitalists are not always attracted to new ideas or new projects in the energy industry because “things take longer and they involve government and they involve regulation”; thus, tax policy can help.



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BP’s Dale sees OPEC logic

In a speech about BP’s newly released energy benchmark report in Washington, D.C., on June 8, the company’s group chief economist, Spencer Dale, said the behavior of the Organization of the Petroleum Exporting Countries over the last two years was understandable in light of its history and today’s competitive oil market.

“I would have behaved exactly as OPEC did,” Dale said.

In response to temporary price shocks, the organization has a lot of power to boost oil prices for the short-term, and has done so several times over the years.

In 2008-09 when oil prices quickly fell from $145 to $35 per barrel, “OPEC pulled back production. That’s exactly what they did,” he noted.

But in response to long-term shocks, OPEC has much less power, Dale said.

If OPEC would have decided to put a ceiling on its production at its June 2 meeting in Vienna, higher-cost producers would have said, “that’s fantastic,” and produced more oil, Dale said.

Instead, OPEC has been protecting its market-share over the past two years.

—KAY CASHMAN

24M new vehicles in India give oil prices lift

A June 7 article in the Wall Street Journal reported that the rebound in oil prices is getting help from an unexpected source: “surging demand from Asia’s emerging economies.”

India, especially, the article said, is helping to “up the slack from struggling economies, whose lackluster growth has contributed to oil prices’ long slide.”

The durability of India’s demand could be a big factor in whether oil’s recent run to a six-month high over $50 a barrel can be sustained, WSJ maintained.

“The big news in demand is growth in India, which now rivals China,” said Daniel Yergin, vice chairman of consulting firm IHS. “India really is seen as the growth market for oil.”

India’s consumption reached a record 4.35 million barrels of refined fuels a day during the first three months of the year, according to the International Energy Agency, up more than 10 percent from a year earlier.

The country’s demand for oil in the first quarter grew more rapidly than China’s for the first time in nearly four years, WSJ reported.

The IEA estimates India refined-product demand grew by 400,000 barrels a day in the first quarter, compared with 353,000 barrels a day for China.

“Much of it is heading straight into Indian consumers’ gas tanks as a driving culture expands. Government data show gasoline demand grew by 14.5 percent in the 12 months through March,” WSJ reported.

In the latest fiscal year, the country built 24 million new vehicles and sales of new passenger vehicles rose 7.2 percent, according to the Society of Indian Automobile Manufacturers, reported WSJ.

The government of Prime Minister Narendra Modi is encouraging the trend, the WSJ said, “with a commitment to build 30 kilometers of new roads a day.”

—KAY CASHMAN