Politics, prices uncertain in 2010

Russell McCulley
Wednesday, January 6, 2010

Each new year brings with it a new round of industry prognostication. So what does 2010 hold in store for offshore? A lot of hand-wringing, for one thing, reports Russell McCulley.

As Gary Adams, US oil & gas leader for Deloitte, put it recently, 'there is a lot of high anxiety' thickening the industry atmosphere as 2010 gets underway. Adams, speaking at Deloitte's annual Oil & Gas Conference in Houston, was referring to the results of a new survey of industry professionals, and specifically to concerns over pending climate change legislation in the US. But the feeling might well apply to most aspects of the business these days.

Most economists, including Deloitte's, say the global recession has probably bottomed out and recovery begun. But energy demand is down, and is likely to remain subdued through 2010. In the US, the world's largest energy consumer, oil demand is down 9% from its peak early in the last decade 'and we are unlikely to ever get that back,' Steven Kopits, managing director at Douglas-Westwood, who said at another Houston conference in December, the 2010 Industry Forecast Forum. Even with rapid growth in China, which is projected to equal US per capita energy consumption around 2018, Douglas-Westwood predicts global consumption will 'top out about 100 million barrels a day,' Kopits said. 'That used to be a really pessimistic forecast two years ago. Nowadays I would say it's slightly on the optimistic side.'

Analysts have pegged the average price of oil in 2010 at around $75/ barrel, rising to an average $82 in 2011. Those numbers might be a tad on the optimistic side as well, Deutsche Bank chief energy economist Adam Sieminski told the Deloitte conference. Although Sieminski is 'in broad agreement' with the 2011 average, he puts the 2010 average at closer to $65/barrel. Deutsche Bank analysts are 'a little bit more pessimistic' because 'we're concerned that economic recovery will look a little bit more like a sine wave,' he said, with a 'hiccup' in 2Q 2010: 'not a double-dip, not another recession, just a slowdown'.

The Deloitte conference took place as world leaders were gathering in Copenhagen to hammer out an agreement on greenhouse gas emissions, and that backdrop emphasized the political uncertainties that were on a lot of people's minds going into 2010. Health care reform and war in Afghanistan dominated the headlines, but US lawmakers were also tossing around various plans to cut CO2 emissions, including some form of cap-and-trade measures. 'We know we're going to have a price of carbon,' said Deloitte senior advisor Joseph Stanislaw . What form it takes, however, will likely vary by region, country and industry, he said. Acknowledging that oil and gas interests are somewhere at the 'bottom of the totem pole' in Washington these days, Stanislaw said natural gas 'needs to be rethought in a US national policy context', a theme his colleague Branko Terzic , Deloitte's regulatory policy leader for energy and resources, took up. Federal policies should encourage the move from outdated coal-fired power plants to less carbonintensive gas-fired plants, Terzic said, and push some sectors of the transportation industry toward greater use of natural gas for fuel. Looking for bright spots in a murky business climate, Terzic argued carbon capture and storage will become 'a growth industry for oil and gas' as more companies find ways to inject CO2 into reservoirs to both enhance recovery and cut emissions.

Another growth area could be operations and maintenance, said Kopits, citing a recent Douglas- Westwood report. 'We see $53 billion spent in this segment growing to $330 billion over the next five years,' he said. 'There are a great many resources now in the water,' including subsea wells, pipelines and rigs, many aging and in need of service or decommissioning, he said. 'This is actually a very interesting area for business development.'

Stanislaw, author of a white paper on CO2 policy that was introduced at the Houston conference, described a 'very dramatic, not very healthy' divide in the energy industry between the businesses of traditional oil & gas and alternative and renewable sources. Each side, he said, has a reputation for espousing the most extreme view of the other: oil & gas as unrepentant fouler of the environment, 'green' energy as impractical and impotent. 'This schism is dangerous,' Stanislaw said, arguing that the debate should be reframed as a common quest for 'clean' energy. 'We need all forms of energy.' All sectors of the industry should seek common cause in lowering carbon emissions, he said, and any technologies that show promise in that effort 'should be allowed on that playing field'.

Climate change was something of a preoccupation among the 200 oil & gas industry professionals Deloitte interviewed early 4Q 2009 for the annual industry survey. Sixty percent of respondents expected some form of climate change legislation under discussion in Congress would pass within the next two years, and a full 90% said such legislation would lead to higher fuel and natural gas prices for consumers. Some 75% said climate change legislation would significantly cut into industry profits and fail to create jobs, while almost as many (68%) said it would lead to more layoffs. The survey results were a curious mix of pessimism – about half believed there will be more industry layoffs in 2010, threefourths said their companies are reducing operating expenses, and 56% said overall capex would be lower – and optimism, with 76% expecting higher revenues at national and international oil companies and 61% expecting revenue increases at supply and service companies. Like many conference speakers, respondents were bullish on natural gas: 84% said the best days of the natural gas industry segment are still to come, a stark contrast with the 60% who said the best days for oil are behind us.

Not surprising, perhaps, with recent discoveries of vast gas reserves around the world coupled with the reality that much of its oil lies in areas that are increasingly hard-to-reach, technically or politically. As Sieminski put it: 'The world's remaining oil reserves are in places where you don't want to take your family for vacation – except for Brazil.' OE

Categories: Oil Asia North America Regulations

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