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‘Low oil prices keep us sane’ says chairman

Petroleum Economist talks to Dr Fereidun Fesharaki, chairman of consultancy Facts Global Energy, about the future of the energy industry

How is the low oil-price environment affecting the oil and gas business?

It makes people more sane. Too much money can make you less careful. They splurge and waste money. But lower oil prices make a substantial readjustment in thinking, and that will be good for the industry. 

In fact, the low oil prices are at the same levels as they were only five years ago. They’re not going back 50 years. It’s just the last four to five years of excess, which was an aberration. They are being corrected to something more sustainable.  

Do you think oil prices will continue to hover around $60 a barrel? Or will we see prices above $100/b again? 

Certainly for the next 10 years it will be in the $60/b range. In the longer run, 15-20 years, it’s hard to say. It’s possible to think of prices going back to $100/b again, but not before 2030.

How can the oil and gas industry start producing at lower costs? 

Every time the oil price goes down it has resulted in significant cost cutting. In 2009, in the upstream business we had cost cuts of 25-35%. We’re in the middle of that adjustment again, so I think cost of production will go down. 

People will adjust, but it’s like losing weight: it’s painful and it’s difficult. You have to exercise every day and not eat all the stuff you used to, but at the end it makes you healthier. As we are in the middle of this readjustment, so not everyone is happy.

There is a lot of talk about the rise of gas. What role does gas have to play in the global energy picture? 

Gas plays an important role. But it doesn’t really compete with oil. As gas is a power sector and industrial fuel and oil is a transportation fuel. While some gas can be used for transportation and some people use oil for power plants, more and more oil will get pushed out of the power and industrial sectors with gas to take its place. So yes, gas will rise, but not as serious competition, just different roles. 

What are the main challenges facing the gas industry today? How can they be overcome?

Oil is like dating. Gas is like getting married. Gas is a prisoner of infrastructure. If you bring in liquefied natural gas (LNG) from the US to Asia, the current price would be $10 per million British thermal units. 

But only one-third of that price is gas with the other two-thirds attributed to infrastructure. The challenge for gas is building infrastructure and committing to long term. With gas, just like marriage, you cannot change your mind. You have to accept the long-term relationship. 

Also gas is fuel for the poor. Oil is fuel for rich. If you don’t have a car it’s OK to walk or bicycle, but if you don’t have gas, you don’t have electricity for heat or for cooling. It affects the poor man more than the common man. So you have to be very careful how you price gas.

How is the low oil-price environment affecting the LNG business? 

Actually most of the LNG demand in the world is already satisfied. People are sold out. Low oil prices create the priority for new projects. Some new projects go faster and some go slower. But even if the price of oil was $200/b, many of these projects would not go ahead because there is no demand. Remember US and Canada are both planning to offer as much LNG as the current global market. So it cannot fit. Prioritisation is taking place. 

What does the future hold for the LNG business? Will North American become an LNG powerhouse? Will exporters emerge from East Africa? What role will Russia play?

The US will become a powerhouse. But it will be a bigger challenge for Canada. Exporters will emerge from East Africa in 2020s. While in Russia only Yamal is going ahead. No other project can be financed in Russia due to international sanctions. Only one Russian pipeline can go ahead to China, not two. But there is a possibility to bring the gas from western Russia instead of the East. Because the costs to bring gas from the undeveloped eastern fields will be horrendous.

What is the outlook for LNG trading, particularly in the Asia Pacific region? 

The hub story is not going to take place. These hubs in Shanghai, Singapore, and Japan. They are all dreams. There is not enough liquidity. But definitely the trading volumes will increase from 25% to 30%. 

Finally, what does the future hold for international oil companies (IOCs) and national oil companies (NOCs)?

I think that the NOCs will still be in the driving seat. IOCs bring technology and capital. One thing the price of oil has come down but the IOCs share price is still holding because people believe and trust they have the capability to hold. So still plenty of room for them to play.

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