By Cees Bruggemans
Forget for a moment about the vested interest of global oil companies in defending their huge existing investments in expensive, high-cost, non-Opec oil and gas ventures around the world needing high oil and gas prices (nearer $100 Brent) to make money rather than turning these into enormous cash drains needed to be shut in (or written off).
Instead focus on mission and old truths. At Davos, the CEOs of two global oil majors became very explicit:
According to Eni Spa, unless Opec acts to restore stability in oil prices, these could overshoot to $200 several years hence (taken to mean within 5-10 years).
According to Total, there is a natural decline of 5% annually from existing oil fields around the world. By 2030 (in 15 years time), over half existing global oil production will disappear. Much capital needs to be invested to get another 50 million barrels daily new oil production.
That presumably won’t be forthcoming at $50-$70. At least not sufficiently so to prevent new oil price instability in time.
Certainly, international oil companies have not been shy in already announcing slashed capex budgets for 2015 on account of lower oil prices.
The essence of the story is simple.
Keep oil prices down long enough, taking out many marginal production fields and inhibiting new investment ventures, and the steady (if slow) growth in global oil demand will in a matter of years create a growing supply shortfall that will cause energy prices to sky rocket (again, an old refrain in oil’s history), given very long development times for new production to come fully on stream.
This cannot yet be seen in forward pricing, but watch those longer curves very carefully.
What’s in it for us? Two things.
Firstly, an immediate major oil and gas windfall to SA consumers and businesses as spot prices have collapsed (Brent below $50), with at least for some years average oil and gas prices at least 30%-50% below the average of 2000-2014 (when not counting the 2008-2009 recession collapse).
Secondly, a Karoo fracking boom delayed but probably not forever, possibly at most a decade, after which this fixed investment and energy-use windfall could be given a second wind, unless derailed anew by other forces.
Moral of the story: We have apparently entered another Epic of globally-inspired Windfalls, possibly for decades to come, this time energy focused.
One hopes we will know how to make the most of it as a country rather than favouring just a few elite elements.
Reference: Reuters “Opec, oil companies clash at Davos over price collapse” Engineering Week 23 January 2015
