Industry must hold its nerve
The sector has yet to fully find its feet following the collapse of oil’s latest bull run.
The investment climate is uncertain, the markets have yet to regain equilibrium, investors and the public demand more and believe less that they once did.
It is arguable that, leaving aside the dip in 2008 as the global financial crisis hit, the decade-long price surge oil enjoyed was, essentially, an anomaly. While there were economic and geopolitical factors fuelling Brent’s rise, speculation and trading-floor exuberance surely added a hefty premium, keeping prices well above $100 a barrel (/b) for far longer than realistically sustainable. So much so that now, as the markets face a surplus, it is obvious that the higher prices oil traded at between 2011 and 2014 did not - could not - accurately reflect the commodity’s true value.
What that value is remains to be seen. Brent was trading at around $65/b as Petroleum Economist went to press, but the recovery is as weak as it is uncertain. For Opec, intent on retaining market share by squeezing US tight-oil producers’ margins, $65/b is too high. Given the persistent surplus of crude available to the market, the cartel may well be right. Neither producers, traders nor analysts are agreed on where a suitable price band should sit (remember too that shortly before the 9/11 attacks, Opec’s preferred price was in the region of $25/b), nor do they agree when crude is likely to stabilise.
This time, unlike previous downturns, the industry is operating in a far less ordered and predictable environment. Long-term global demand projections have been revised, rejigged and revised again. Structural changes are making themselves felt. The industry’s 10 good years brought with them a shift in consumption patterns; these are likely to be permanent. As this journal has reported, renewables and other disruptive technologies are subtly changing energy demand in almost every consumer nation. Environmental concerns, too, are forcing changes in how the world consumes oil and gas, and how and where hydrocarbons are developed. We face a gassier future but one in which oil still plays a key role. The swift, savage end to the boom has forced operators across the supply chain to revise their operating practices. Bigger is not necessarily better. Efficiency, sustainability and standardisation are now key at almost every stage in the hydrocarbon ecosystem.
The geopolitics of energy has shifted too. While Petroleum Economist has often been an astute analyst of the markets and macroeconomics, we understood that events at regional and national level have a greater longer-term impact than decisions made on the trading floor. Geopolitics remains a compelling force. For all the management consultants’ talk of new paradigms, rationalisation, transformation and optimal business practices, events on the ground ultimately decide who wins and loses in the 21st century’s version of the Great Game.
We are still living with the effects of decisions taken in Washington, London and New York in the tense months following 9/11. The continuing impact of the wars in Afghanistan and Iraq, for example, undermined the geopolitical certainties of the 20th century. The Arab Spring, the emergence of Islamic State and its loose network of jihadi affiliates across the Middle East and North Africa, subtle shifts in the political dynamic in Saudi Arabia, Russia’s return to authoritarianism and China’s rise as a major power will have a decisive impact on the way the industry evolves in years to come. We have striven to analyse these events lucidly, providing vital context, background and insight, weighing up scenarios and indicating likely eventual outcomes and effects, sometimes looking beyond the confines of the energy industry. We have often been prescient in our analysis. It is, I believe, one of this publication’s greatest, unsung strengths.
When I joined Petroleum Economist, resource nationalism was a potent force. This potency has waned somewhat, but in its place is a determination on the part of host countries - established and emerging - to ensure the benefits of the energy economy are felt domestically. National oil companies (NOCs) may not have the pre-eminent role they once had, but they remain a force to be reckoned with.
We look at two countries closely associated with the phenomenon in this edition. In Venezuela, the story is one of vast potential squandered to political expediency, with predictably dire results. Nigeria, long the epitome of wasted opportunity, appears to be edging towards meaningful reform in its hydrocarbons sector. This has been hastened by the growing presence of local companies in its oil patch and a degree of renewed political will to bring about structural domestic reform. Whether Africa’s “great, wounded elephant” can indeed move beyond permanent crisis remains to be seen. Past experience suggests disappointment, but Nigeria’s political and business elites know wide-ranging reform is essential if the country is to avoid joining the ranks of failing petro-states.
In the 15 years I have covered energy, the most remarkable change has been China firmly establishing itself as a major market mover. As this journal has consistently pointed out, China is now a bellwether for both the markets and the energy industry as a whole. Where China goes, we are compelled to follow.
When he was elevated to the presidency, Xi Jinping pledged to create a “great renaissance of the Chinese nation”. That renaissance saw the country’s economy expand almost exponentially, and its state-run producers emerge as significant international players. China’s explorers and producers were the ne plus ultra of NOCs, the ultimate expression of energy firms as an instrument of foreign, economic and energy policies, tools to be used to further the national interest. As the economy grew, so too did Chinese energy consumption, to the point where the country’s domestic demand was significant enough to have an impact on global markets.
Despite the recent slowdown in the Chinese economy, decisions taken in Beijing still have the force to shape the energy industry’s future. The country’s policy shift to a “new normal” - including moves to reduce oil consumption in favour of gas, and imposing stringent emissions limits in an effort to tackle the country’s appalling pollution problems - will have a far greater long-term impact on the energy industry’s evolution than decisions taken by traders at Goldman Sachs, BoA Merrill Lynch or Deutsche Bank.
Hand in hand with China’s rise as the world’s swing consumer came the US’ metamorphosis from major consumer to major producer. Petroleum Economist tracked the rise of US unconventionals closely. This journal is of the opinion that while US production may slow in the short-term, this is a temporary state of affairs. The sheer potential of the oil- and gasfields of the Lower 48, the technological innovation their development brought to market and the economic benefits they have already delivered to the US will ensure that, despite Opec’s machinations, there can be no return to the pre-crash status quo ante.
The industry is adjusting to a new global operating environment, and it must tread carefully. It has not only to keep investors happy, but consumers too. Environmental concerns and the need to strictly limit carbon emissions has brought energy operations into tight focus. Environmental campaigns targeting oil and gas operations require deft, intelligent handling from the industry. The environmental movement has tapped into a deep seam of public anxiety about how the energy industry operates. In the post-Macondo world, a company’s assurance that its operations are safe is no longer good enough. The arguments of Greenpeace and their peers may well have serious flaws, but activists are winning the propaganda war. A catchy slogan, coupled with a well-spun story of plucky, youthful activists risking life and liberty to halt a faceless corporation’s pursuit of a commodity that has contributed significantly to anthropogenic climate change plays well in the court of public opinion. The energy industry has been caught on the back foot. As well as improving operations, and being seen to do so, it has no choice but to shake off its reticence and assume a leading public role in global climate negotiations. To survive, the industry must become the main driver of the world’s shift towards a low-carbon economy.
The bull run’s juddering halt is no bad thing. Nothing breeds innovation like adversity. A new balance must be struck, the markets and the global economy need to find equilibrium. It is time to reassess the global operating environment, to adapt and to adjust to new realities. The question is whether the energy industry can conquer its nerves and rise to the challenge.