A prediction of an oil price slump in less than a decade prompts Andrew McBarnet to onder on the prevailing wind currently favouring the marine seismic business.
Possibly the most provocative oil industry analysis to surface in the last few months emanates from the portals of academia, Harvard University's JFK School of Government to be precise which houses the Geopolitics of Energy Project in the Belfer Center for Science & International Affairs. This is where Dr Leonardo Maugeri has spent time authoring "Oil: The Next Revolution" the unprecedented upsurge of oil production capacity and what it means for the world.
The gist of his thesis is that oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. He warns that this could lead to a glut of overproduction and a steep dip in oil prices.
This is a surprising prediction but he says it is based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world leading to the conclusion that unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million b/d of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 million b/d.
After adjusting this substantial figure considering the risk factors affecting the actual accomplishment of the projects on a country-by-country basis, the additional production that could come by 2020 is about 29 million b/d, according to Maugeri. Factoring in depletion rates of currently producing oilfields and their 'reserve growth' (the estimated increases in crude oil, natural gas, and natural gas liquids that could be added to existing reserves through extension, revision, improved recovery efficiency, and the discovery of new pools or reservoirs), the net additional production capacity by 2020 is estimated at 17.6 million b/d yielding a world oil production capacity of 110.6 million b/d by that date. As Maugeri rightly states this would represent the most significant increase in any decade since the 1980s. And before you ask, this scenario is based on a price of no lower than $70/bbl for the period, which seems to be the current benchmark used by oil companies in deciding on new E&P investments.
Maugeri argues that the expected surge in production was spurred by an investment cycle that started in 2003 and climaxes from 2010 on, with three-year investments in oil and gas exploration and production of more than $1.5 trillion. The 2012 second quarter financial reports of the major oil companies certainly bear out the notion that they have plenty of cash, are undeterred by current global economic uncertainties and are committed to long term projects. Shell boss Peter Voss echoed the sentiment expressed by all the big hitters when he said: 'Our industry continues to see significant energy price volatility as a result of economic and political developments. Shell is implementing a long-term, consistent strategy against this volatile backdrop.'
Of course the rise of unconventional oils has a lot to do with Maugeri's forecast and its impact in North America. He also points out that three of the four countries with the highest capacity for growth Iraq, the US, Canada and Brazil are in the western hemisphere which certainly changes the global geopolitics of oil and the traditional patterns of supply.
So the obvious questions arising are whether we should be taking Maugeri seriously and what if any is the relevance to the marine seismic business. It turns out that Maugeri is something of a legend. Still under 50 years old he is currently on sabbatical from Eni where he was senior executive vice president of strategies and development between 2000-2010 helping to drive a period of company expansion and most recently executive chairman of Polimeri Europa, Eni's petrochemical branch, where turnaround of the organisation was the order of the day. He has authored a number of internationally well regarded books on oil and is credited with having warned about the price collapse of 2008. Bottom line, his commentary can surely not be dismissed out of hand.
Main points from the study stem from the conclusion that oil is not in short supply. From a purely physical point of view, Maugeri suggests there are huge volumes of conventional and unconventional oils still to be developed. He is not afraid to state that no 'peak oil' is in sight. Issues over future oil production will be above the surface, not beneath it, and relate to political decisions and geopolitical instability. Any significant setback to additional production in Iraq, the US and Canada would have a strong impact on the global oil market, considering the contribution of these countries to the future growth of oil supply.
The study notes that the shale/ tight oil boom in the US is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation over the next decades that might bear surprising results, given the fact that most shale/tight oil resources in the world are still unknown and untapped. What's more, the application of shale extraction key technologies (horizontal drilling and hydraulic fracturing) to conventional oilfield could dramatically increase world's oil production.
Conventional oil production is also growing throughout the world at an unexpected rate, according to this study, although some areas of the world (Canada, the US, and the North Sea) are witnessing an apparently irreversible decline.
Maugeri makes clear that the age of 'cheap oil' is probably behind us, but it is still uncertain what the future level of oil prices might be. Technology may turn today's expensive oil into tomorrow's cheap oil. His prediction is that the oil market will remain highly volatile until 2015 and prone to extreme movements in opposite directions, thus representing a major challenge for investors, in spite of its short and long term opportunities.
After 2015, however, most of the projects considered in the study will advance significantly and contribute to a strong build-up of the world's production capacity. This could provoke the major phenomenon of over-production â€“ the headline grabbing point of the analysis â€“ and lead to a significant, stable dip of oil prices, unless oil demand was to grow at a sustained yearly rate of at least 1.6% for the entire decade.
Maugeri does caution that a revolution in environmental and emission-curbing technologies is required to sustain the development of most unconventional oils along with strong enforcement of existing rules. Without such a revolution, a continuous clash between the industry and environmental groups will force governments to delay or constrain the development of new projects.
Some of the major geopolitical consequences of this oil revolution include Asia becoming the reference market for the bulk of the Middle East oil, and China becoming a new protagonist in the political affairs of the whole region. At the same time, the Western Hemisphere could return to a pre- Second World War status of theoretical oil self-sufficiency, and the US could dramatically reduce its oil import needs. However, quasi oil selfsufficiency will neither insulate the US from the rest of the global oil market (and world oil prices), nor diminish the critical importance of the Middle East to its foreign policy. At the same time, countries such as Canada, Venezuela, and Brazil may decide to export their oil and gas production to markets other than the US for purely commercial reasons, making the notion of western hemisphere self-sufficiency irrelevant. Meanwhile the growing role of unconventional oils over the next decades will make the Western hemisphere a new centre of gravity for oil exploration and production.
There a temptation to dismiss this type of forecast as crystal ball gazing, but in fact given the investment lead times for major oil and gas developments, the flood of oil expected by Maugeri in 2020 is not so far away at all. The date sort of fits into the kind of cycles that the marine seismic business has experienced starting with the oil price slump of 1986, the 1998/99 industry turmoil, and the 2008 bust. The consequences are always depressingly similar. As is frequently observed, the fortunes of the business are uncannily tied to the price of oil, in effect the good times roll when oil companies are cash rich as the major players definitely are right now.
So from one perspective, the marine seismic companies just have to judge which way the prevailing oil price wind is blowing and set their sails accordingly. Maugeri sees volatility over the next two or three years but most analysts seem to agree that the seismic business has got that covered for a number of reasons. First and foremost oil companies are indeed on a big E&P spending spree, in some cases investing record amounts with the emphasis on exploration, and that means a proportion of this expenditure filters down to seismic.
In their second quarter results, all the major seismic players report tendering for new projects is up and bookings for 2013 are already encouraging. In addition this is showing up in the financials. The bosses of the major seismic players talk in terms of a recovering or strengthening market although in reality the demand for 3D seismic has been strong for some time. What's happening is that the capacity imbalance caused by the ship newbuilding and conversion strategies of 2007-10 is finally being straightened out. New capacity in the next couple of years adding less than 10% to the world fleet should not threaten the firming prices expected for 2013, and as yet there is no sign of maverick investors trying to cash in on the improved conditions with extra capacity as happened in the last decade.
In fact it is arguable that as the technology of seismic acquisition continues to swing towards broadband, wide-azimuth and other advanced techniques, the entry level for any new outfit has become more daunting and hence less attractive to the investment community. This is perhaps borne out by the difficulty being encountered by Fugro in its strategic review of its marine seismic fleet operations, generally interpreted as wanting out of the business. The for sale package includes four high-end vessels built in the last five years but Fugro has traditionally been a follower rather than a leader so its marine seismic acquisition equipment is not leading edge and clearly will be starved of new investment while uncertainty over its future reigns.
The other real positive for marine seismic becoming very apparent is that the exploration world has all of a sudden become much more prospective for the international oil companies. At one stage they looked to have been boxed in by the preponderance of expected future oil coming from national oil company territory and the seeming lack of big elephant finds elsewhere. A look at the map these days has changed all that witnessed by the scale and scope of marine seismic around the world. No-one a few years ago predicted the current frenzy of activity off east Africa, in the Caribbean, in the eastern Mediterranean to mention just a few completely new areas of serious interest. The Arctic appears to be beckoning, and we can assume that offshore Brazil and West Africa still have plenty to give, while the Gulf of Mexico, the continental shelf of northwest Europe, and the Asia-Pacific region are certainly not lost causes yet.
To an extent marine seismic is riding on the back of drilling and production advances that have enabled oil companies to forage in much deeper water. At the same time dramatic improvements in 3D seismic imaging, notably beneath the subsalt, have contributed to oil company confidence in its ability to push the exploration boundaries into previously uncharted territory. Indeed with oil companies looking at a potential bill of over $100 million per well for the more challenging prospects, the information that can be gleaned from modern marine seismic technology is likely to increase in value in the bid to reduce the investment risk involved in these major undertakings.
The prevailing wind seems set in the right direction, but there are so many factors that could blow the seismic business off course long before the glut in oil price at the end of this decade forecast by Dr Maugeri. For a start, an upcycle of this length would be unusual for seismic operations. This is not to say that this time it could happen. However, common sense and historical experience would suggest that the emphasis of oil company E&P expenditure upon which seismic is dependent will change well before 2020 from the current exploration to more production-oriented priorities once new reserves have been identified. This might be a cue for the seismic business to intensify its efforts to offer more reservoir characterization products and services, although it is hard to see these activities ever overtaking the profitability of acquisition and processing of exploration data.
It is also obvious that marine seismic companies need to keep their own house in order. On that score, they should enjoy the moment with the market in equilibrium and no immediate threat of disruption to what seems like healthy competition. At this juncture they certainly should not worry too much about the musings of Dr Maugeri, however valid they might be. OE