Oil Enters New Era as OPEC Faces Off Against Shale; Who Blinks as Price Slides Toward $70?
OPEC’s decision to cede no ground to rival producers underscored the
price war in the crude market and the challenge to U.S. shale drillers.
The
12-nation Organization of Petroleum Exporting Countries kept its output
target unchanged even after the steepest slump in oil prices since the
global recession, prompting speculation it has abandoned its role as a
swing producer. Yesterday’s decision in Vienna propelled futures to the
lowest since 2010, a level that means some shale projects may lose
money.
“We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC,” said
Mike Wittner, the head of oil research at Societe Generale SA in
New York. “It’s huge. This is a signal that they’re throwing in the towel. The markets have changed for many years to come.”
The fracking boom has driven U.S. output to the highest in three decades, contributing to a global surplus that
Venezuela
yesterday estimated at 2 million barrels a day, more than the
production of five OPEC members.
Demand for the group’s crude will fall
every year until 2017 as U.S. supply expands, eroding its share of the
global market to the lowest in more than a quarter century, according to
the group’s own estimates.
Photographer: Eddie Seal/Bloomberg
Floor hands on the Orion Perseus drilling rig near Encinal in Webb County, Texas.
Benchmark Brent crude fell the most in more than three years
after OPEC’s decision, sliding 6.7 percent to close at $72.58 a barrel.
Futures for January settlement sank to $70.15 today, the lowest close
since May 2010. Prices peaked this year at $115.71 in June.
Market Signals
“We
will produce 30 million barrels a day for the next 6 months, and we
will watch to see how the market behaves,” OPEC Secretary-General
Abdalla El-Badri told reporters in Vienna after the meeting. “We are not
sending any signals to anybody, we just try to have a fair price.”
OPEC
pumped 30.56 million barrels a day in November and has exceeded its
current output ceiling in all but four of the 34 months since it was
implemented, according to data compiled by Bloomberg. OPEC’s own
analysts estimate production was 30.25 million last month, according to a
report Nov. 12. Members will abide by the 30 million barrel-a-day
target, El-Badri said yesterday.
“OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,”
Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in
London, said yesterday by phone. “It wouldn’t be surprising if Brent starts testing $70.”
Conventional Producers
Conventional
oil producers in OPEC can no longer dictate prices, United Arab
Emirates Energy Minister Suhail Al-Mazrouei said in an interview in
Vienna on Nov. 26. Newcomers to the market who have the highest costs
and created the glut should be the ones to determine the price, he said.
“That is what OPEC is hoping for,”
Carsten Fritsch, a commodity analyst at Commerzbank AG in
Frankfurt, said in an e-mail. “It’s the question of who will blink first.”
OPEC
may now be prepared to let prices fall to force some drillers with
higher production costs to stop pumping, said Julian Lee, an oil
strategist who writes for Bloomberg First Word and has worked in the
industry for 25 years. That scenario would mark the start of a fourth
oil-market era since the end of the 1970s, he said.
Fourth Era
Since
the early 2000s, surging demand growth drove up prices allowing
companies to apply new extraction techniques and develop deep-water and
other costly oil. That ended an era that pervaded since the mid 1980s,
which was characterized by low prices and OPEC regaining the market
share that it had previously sacrificed in an attempt to preserve high
prices, Lee said.
OPEC will face pressure too, with prices now below the level needed by nine
member states to balance their budgets, according to data compiled by Bloomberg.
“They
haven’t taken collective action,” Richard Mallinson, an oil analyst at
London-based Energy Aspects Ltd., said by phone. “That doesn’t mean they
won’t do it in the next few months if prices stay low.”
U.S. Production
U.S.
oil production has risen to 9.077 million barrels a day, the highest
level in weekly data from the Energy Information Administration going
back to 1983. Output will climb to 9.4 million next year, the most since
1972, it forecasts.
Middle Eastern exporters including Saudi Arabia,
Iran and
Iraq
can break even on a cost basis at about $30 a barrel, Sanford C.
Bernstein & Co. They need more to balance their budgets. Some U.S.
producers need more than $80, the consulting firm said in a report last
month.
OPEC’s policy will spur a crash in the U.S. shale industry,
Leonid Fedun, a vice president and board member at OAO Lukoil,
Russia’s second-largest oil producer, said in an interview in London before the group’s decision.
“In
2016, when OPEC completes this objective of cleaning up the American
marginal market, the oil price will start growing again,” said Fedun.
“The shale boom is on a par with the dot-com boom. The strong players
will remain, the weak ones will vanish.”
The share prices of
U.S. oil producers including Exxon Mobil Corp. and Chevron Corp. fell by
at least 4 percent in New York trading today.
No Cut
Igor Sechin, the chief executive officer of OAO Rosneft, Russia’s largest oil producer, said after a meeting with Venezuela,
Saudi Arabia and
Mexico that his nation wouldn’t need to cut output even if prices fell below $60.
“The question is, what price level will be low enough to slow U.S. production growth?” Torbjoern Kjus, an analyst at DNB ASA,
Norway’s
biggest bank, said by phone. “What price will get U.S. growth to slow
to 500,000 barrels a day from this year’s rate of 1.4 million barrels?”
Only about 4 percent of U.S. shale production needs $80 or more to be profitable, according to the Paris-based
International Energy Agency.
Most production in the Bakken formation, one of the main drivers of
shale oil output, remains profitable at or below $42 a barrel, the IEA
estimates. The agency expects U.S. supply to rise by almost 1 million
barrels a day next year, with increasing flows to international markets.
OPEC has gone “cold turkey” on balancing the oil market,
Goldman Sachs Group Inc. said in a report yesterday. Prices may have
further to fall until there is evidence of U.S. production slowing,
according to the bank. It said last month that oil markets were entering
a “new oil order,” with OPEC retreating from its role as a swing
producer.
“OPEC’s decision means it is over to you America,”
Miswin Mahesh, a London-based commodities analyst at Barclays Plc, said
in an e-mail. “This opens the window for the U.S. to be the new swing producer.”
Source: Bloomberg
The perils of cheaper oil
COME Dec 1, Malaysia will enter a new era long desired by the advocates of free market.
The pump price of petrol and diesel at the kiosk will be based on a managed float system depending on global oil prices. This will replace the current system where the Government fixes the price at the pump, a process that involves a huge amount of subsidy.
For years, the Government adopted the fixed price mechanism because it brought about an element of stability.
Unlike most other countries where the price at the pump varies from day to day, Malaysians are used to planning their expenditure based on a fixed price.
Right from a typical consumer to large companies, they all depend on oil or some form of energy to carry out their daily lives or operations. The fixed price has helped in their planning.
But the biggest disadvantage of having a fixed price for oil is that it involves a huge amount of subsidy, especially in an environment where oil prices go beyond what is anticipated by the Government.
Malaysia’s tale of subsidy woes is a subject matter that is often spoken about.
The subsidy bill is estimated at about 14% of the Government’s total operating expenditure of RM271.94bil for next year. The bulk of the RM38bil that has been set aside for next year is to ensure that the fuel cost remains stable.
There is a sales tax of 58 sen per litre on petrol sold at the pump. But the mechanism to collect the tax has not kicked in because the subsidy per litre is much higher than the sales tax.
Beginning July this year, the oil and gas dynamics changed with the United States becoming a large producer, thanks to the shale oil and gas.
The implications of the shale oil and gas on the global economy are huge. It has gone beyond the oil and gas industry. Oil-dependent nations such as Iran, Iraq and Venezuela are in trouble because a low oil price means less revenue and less money to fund their development programmes and, more importantly, to pay off their debts.
Venezuela is high on the list of countries that could seek some reprieve from bondholders because it needs oil price to be more than US$160 per barrel to balance its budget.
The Russian rouble has depreciated by more than 45% against the dollar and state-owned Rosneft has seen its profit almost collapse due to the depreciating currency.
Russia’s problems have exacerbated the slowdown in Germany, the strongest economy in Europe and this has in turn affected the entire eurozone recovery.
As for Asia, the best thing that the low oil prices have brought about is an era of low inflation and allowed some governments to carry out their reforms of energy policies. It has allowed governments to dismantle the subsidy system that has for long artificially kept the cost of production low.
Indonesia removed subsidies last week, a move that was cheered by foreign investors, because the system apparently only benefited a handful of powerful businessmen.
For Malaysia, when global oil prices are less than US$80 per barrel, which is the case now, there is no more subsidy for petrol and diesel sold at the pump. What kicks in is the sales tax of 58 sen per litre.
Come April 1 next year, the sales tax will be replaced with a goods and services tax of 6%. What this means is prices at the pump will be substantially lower than what they are today – provided global oil prices remain at less than US$80 per barrel.
Theoretically, this should translate into Malaysia having a lower cost of production due to cheaper energy prices. When oil prices went up over the past years, wages and all other costs followed suit. When the reverse happens, shouldn’t the cost of production come down?
Unfortunately that is not the case. The US is benefiting from the low energy cost era, at the expense of Asia. In fact, Asia as a whole may be losing out as a result of the steep fall in global energy prices.
Since the 1980s, Asian countries have been the destination for foreign manufacturers from the Europe and the US to relocate their operations because of the cheap cost of labour.
But manufacturers increasingly are paying more attention to destinations with low energy cost. Cheaper cost of energy is seen as an adequate substitute for low wages.
European manufacturers have turned to the US, where the cost of natural gas is one-third that of South-East Asia, to relocate their operations.
BASF, the large German chemical company, is planning to build a US$1.4bil plant in the Gulf Coast, apart from increasing its annual capital expenditure of US$20bil into that country.
An Austrian steel company, Voestalpine, is building a US$500mil facility in Texas to export iron for its steel plants. It will use natural gas to blast the furnace instead of coking coal in Europe.
Previously, these companies would make Asia their destination because of its low cost of production.
The flow of new manufacturing investments to the US is also assisted by the low rise in wages there compared with Asia. According to a report, between 2006 and 2011, Asian wages rose by 5.7% compared with only 0.4% in developed countries.
For decades the big gap in the wage rate increases between Europe, the US and countries such as Malaysia determined the flow of foreign investments. But now that is no longer the case.
Malaysia has to raise productivity or it will lose out on attracting new investments. Low wages alone will not do, especially now when prices of oil and gas resources are in a tailspin.
By M.SHANMUGAM The Star/Asia News Network
Petronas cuts capex
PETROLIAM Nasional Bhd’s (Petronas) announcement of its third-quarter results comes at a delicate time, considering that it is being watched by all and sundry.
Petronas president and CEO Tan Sri Shamsul Azhar Abbas
Amidst a scenario of a free-fall of oil prices and the politically-charged Umno General Assembly, it comes as no surprise that Tan Sri Shamsul Azhar Abbas (pic), the oil major’s president and chief executive, says he has to be “politically correct” in delivering his key message.
At a press conference yesterday, Shamsul also explained that Petronas had waited for the all-important Organisation of the Petroleum Exporting Countries (Opec) meeting to conclude before addressing the media in Kuala Lumpur.
And rightly so
The 12-member Opec decided on Thursday not to lower its output target, leading to oil prices plunging by a further 8% on Friday, cumulating in an almost 40% dip since mid-June.
The Brent crude oil price is now at US$72.84 per barrel and some forecasters are predicting that oil prices could hit US$60 per barrel.
Petronas itself is now predicting that oil prices could settle at US$70-US$75 next year.
This is a far cry from the US$108 per barrel that Petronas had averaged last year and the US$106 per barrel, which is the average price of the Brent crude for the first nine months of this year.
Shamsul lays out the bare truth on what the falling oil prices would mean for Petronas, the oil and gas (O&G) services industry and the federal government’s coffers:
- Capital expenditure (capex) on the O&G industry will be cut by between 15% and 20%
- Petronas’ contribution to Government coffers in the form of dividends, taxes and oil royalty for next year will dive by 37% to RM43bil, assuming the Brent crude settles at US$75 per barrel;
- Petronas will not proceed with contracts to award new marginal oil fields unless oil settles at levels above US$80 per barrel
- Projects in Pengerang that have yet to receive the final investment decision (FID) will be affected by the cut-backs. Projects worth US$27bil that have received FID will not be affected, but Petronas does not have 100% equity in all the projects approved.
The capex crunch is expected to send chills down the spine of the already fragile O&G sector, with the stock prices of listed players already haemorrhaging in light of the free-fall of oil prices.
Apart from the 40-odd listed O&G companies, there are close to 4,000 other smaller companies that depend on Petronas for O&G service jobs.
“Nearly all depend on Petronas for jobs,” says an official in the O&G industry.
The capex cut by the national oil company is likely to have a negative impact on these companies and runs contrary to what research houses have been projecting.
Global slide
Several research houses have been stating that the Malaysian O&G industry is sheltered from the global slide in crude because Petronas will keep up with its spending of about RM60bil per year.
Taking a jibe at the forecasters, Shamsul says he has been warning of a shake-up in the industry in all his quarterly briefings.
“But nobody wants to listen to me. The worst part is, some of them have been listening to these so-called desk-top analysts who say this cannot happen because Petronas is always there to help them out … dream on.”
Shamsul says it is also reviewing the feasibility of some of its projects and could shelve projects that are no longer viable and for which Petronas has yet to make its FID.
“For the last nine months, we have been telling you guys about the likelihood that oil prices will drop. So the declining oil price is no surprise to us,” says Shamsul.
“But like every international oil company (IOC) out there, declining oil prices will impact us, and as such, we have to review our capex plans for next year onwards, which is also what the IOCs are doing. We have to assess the feasibility of projects,” Shamsul says.
He adds that at current oil price levels, marginal oil fields are no longer feasible for Petronas to get involved in, and warns that companies seeking to get involved in this business are “dreaming”.
When asked what was his message to the service providers seeking to do more work for Petronas, Shamsul said: “I’ve been singing this song for the last nine months, to watch out because things are not going to be that rosy.
“But not many seem to want to listen to me. So, I’ve stopped singing that song. But when they (service providers) get hurt, they will know,” he said.
Clearly, Shamsul is referring to how the sluggish oil price will force it to become more cost-effective in its projects, cancelling some, shelving others and negotiating down the terms of others.
Impact to federal government coffers
Meanwhile, Shamsul also explains that based on the assumption that oil prices average US$75 per barrel for 2015, the state oil firm would be paying the Government about RM43bil in dividends, royalty and taxes.
This would be 37% less than the RM68bil it plans to pay the Government this year.
“The lower dividend and other payout contributions is to ensure Petronas has enough money to replenish the reserves. If we are to maintain the payouts, it will have a significant impact on our growth plans,” says Shamsul.
As such, he says the Government should relook and rebalance its budget planning to adjust to the new level of oil prices.
He also reiterates that Petronas still needs to keep investing in new technology, in overseas projects and increasing its oil reserves in order to maintain its growth, considering that current production levels decline by some 10% every year, naturally.
At present, Petronas produces some two million barrels of oil equivalent per day.
“In five years, if we don’t replenish our production, our production will be down to half of what we have today,” he asserts.
By RISEN JAYASEELAN, NG BEI SHAN The Sunday Starbizweek Nov 29 2014
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