INSIGHT: Lacking the tools to deal with oil

11 June 2008 15:48  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--BP’s latest review of world energy paints a stark picture of sharply rising oil prices, slower production growth and still-high oil demand.

Mostly, this annual statistical publication passes with little direct comment but this year is different.

As oil hovers around $130/bbl, and the talk is of prices of more than $200/bbl - Gazprom chief executive Alexey Miller, warned on Monday of prices of $250/bbl - the disconnections in the global supply/demand picture demand greater clarity.

The BP review shows that while oil consumption growth slowed last year compared with 2006 it was still above the 10-year average.

Oil supply was weak and the growth in consumption outside the OECD (Organisation for Economic Cooperation and Development) was the real challenge.

According to the BP records, the oil price has been on an upward path for more than six years which is the longest sustained period of rising prices since 1861.

Dated Brent crude averaged $72.39/bbl in 2007, up 11%. WTI benchmark crude traded at a discount to Brent in 2007 for the first time since 1979.

Global oil consumption grew by 1.1% last year, or 1m bbls/day, slightly below the 10-year average. OECD consumption fell by 0.9%, or nearly 400,000 bbls/day.

Consumption in the oil exporting regions of the Middle East, South and Central America, and Africa accounted for two-thirds of the world's growth, BP says.

The Asia-Pacific region grew by 2.3%, even though growth in China and Japan was below average, with strong growth in a number of emerging economies.

Global oil production fell by 0.2%, or 130,000bbls/day, the first decline since 2002. OPEC production dropped by 350,000 bpd due to production cuts and production growth outside OPEC remained weak. OECD output fell for a fifth consecutive year. Proved oil reserves were essentially flat in 2007- at 1.24 trillion barrels - and are sufficient to meet current production for more than 41 years, BP says.

Statistics can provide something of a haven in a world of sharply rising prices and volatility. But there is not a great deal of comfort here.

The BP numbers, drawn from many different sources, show that while the world may not be short of oil, it is running short of the means to extract a great deal more.

Significant trends are playing out as the make-up of the barrel changes.

Publicly-held companies, like BP, are losing out in the race to exploit new fields.

And, BP notes, demand growth is focused in countries that subsidise consumer prices, such as the oil producing nations and non-OECD states such as China and India.

“The world’s fossil fuel resource base remains sufficient to support growing levels of production,” says BP CEO Tony Hayward in his introduction to the 2008 review. “But the continued weakness in oil supply and increasing demand outside the OECD also highlight the challenges we all face in maintaining secure energy supplies.

Maturing basins in the OECD, limited access elsewhere, constrained capacity, higher costs and rising resource nationalism challenge consumers and producers alike,” he adds.

The review highlights the interconnectedness of the world’s energy markets, Hayward says “and how they require producers and consumers to collaborate in solving our mutual challenges”. BP’s data show that the world’s oil and energy problems lie above the ground and not below it.

The world’s energy challenges encompass not only the availability and price of oil but the development of coal as an additional hydrocarbon resource and the growing strategic importance of gas.

“We need all types of energy from all possible sources,” Hayward said at an oil industry event in Kuala Lumpur, Malaysia, earlier this week.

The world is not running out of hydrocarbons, he stressed. The solutions to soaring crude prices lie in four areas: investment, strategic alliances, free markets and technology, he said.

The industry is lacking, however, as Hayward admitted, the tools to deal with the challenge of rising demand and consequentially rising prices.

For more on the drviing forces behind high-priced oil see Paul Hodge's Chemicals & the Economy blog
To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
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