Oil’s “Kodak Moment”?

Calais – August 2015,  Eurotunnel Tesla super-charger station

As noted in previous posts, I believe the Oil and Gas industries are going to go through a fundamental change in the next decade.   This is a combination of environmental concern, social pressure etc, but fundamentally by technological innovation.  The driving force for the oil industry is the price of oil; this in turn is dictated (outside of various conspiracy theories) by supply and demand economics.  The key point here is that of the c. 93million barrels of oil used daily, only 1 or 2 million of those affect the price – these are the excess or missing barrels that flip us into glut or scarcity.

Of these c.93 million barrels, roughly half goes into vehicular transport – and the majority of that is cars (autos).  So if you remove just some of the demand from the equation, you could create over-supply.  As most readers will be aware, this is not what happened in 2014; that was a supply-side bust, driven (if you’ll excuse the pun) by the success of the US unconventional oil industry.  But in the near future, it may well also be demand driven.

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Sunset in the Desert

Not so many years ago, the Peak Oil media bonfire was in part ignited by Matthew Simmons book “Twilight in the Desert”.   Huge middle-eastern oil fields soon to water-out, extreme secrecy around the data on those fields – a ticking time-bomb for a world ‘addicted to oil’.  So far as I know, there may be merit in many of the arguments.  However, the world has changed.

 In my post on Blind Spots, I discussed briefly how we all missed the oil price crash of 2014.  One part of the equation I glossed over was the highly significant decision in November 2014 of OPEC, and in particular Saudi Arabia, to maintain production levels in face of declining prices.

As the historical price setter and swing-producer, Saudi was faced with a conundrum.  

  • If they cut production to help keep prices high, the US shale-oil juggernaut would have just kept going, leading to further oversupply – eventually lower prices, and reduced market-share (and consequent waning influence for OPEC).  
  • Conversely, maintaining or increasing production would protect market share, but inevitably drive prices down, handing the role of swing-producer to the US shale.  

So heads was lower revenues, and tails it was lower revenues.   Commentators are now generally agreed that over-supply caused the crash of 2014 and it is most similar to the mid 1980s.  Back then, various conflicts in the Middle East had resulted in very high oil prices, which had driven supply substitution.  OPEC had seen its market share and influence diminish as GOM, North Sea and Alaskan crude came onto the market.  Over supply led to a decade long period of stagnant, low oil prices.

Yes, the challenge posed by US oil shale was new, but was this just another business-as-usual adjustment of policy to the classic boom and bust of the oil industry?

I’d suggest yes, but this view might be hiding a potentially a bigger concern.  

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Investor Strike in Oil and Gas?

In my previous posting “Blind Spots” I referred to the 2014 Oil Council Africa conference and how certain questions had sparked in me a wider reflection on the state of the Energy industry.  This year at the Oil and Gas Council (more on that timely rebranding in a subsequent post…) in Paris some of us were really surprised by the almost bullish atmosphere of the O&G companies.  The oil price rally from the “depths” of $43 in the spring, to the then almost $65, was being seen as a strong indication that ‘the worst is over’.   

The two main sessions on financing were at the very end of the three day conference – which allowed the mainstream presentations and panels (corporate and NOC/Governmental) to proceed with ‘business as usual’.  Seen from the lens of the financing community this could be better characterised as sleepwalking.    Many great projects, top notch geology and technical stories, as well as mediocre ones  – and no consideration (I exaggerate for effect) of the financing of these project or of the likely returns on capital that these projects might, or indeed should, create.

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Blind Spots in Oil and Gas

Didn’t see the 2014 oil price shock coming? nope neither did I.   Having missed that one I am going to explore in a couple of blog posts the question of whether we are walking into another “unseen” and bigger industry shakeup. 

At the Oil Council conference in summer 2014 there was a panel on HSE – or whatever acronym is currently used to cover our myriad concerns – and a question was asked, “What keeps you awake at night?”.  It became a bit of a race to the top for the moral high-ground, of how each panelist had deeper and more sincere concerns than the previous on safety, security, environment, social etc.  Although the HSE issue is rightly a cornerstone of our industry, the question itself got me thinking; and the thing that keeps me awake at night is nothing to do with our industry.

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