FocusOil industry cautiously optimistic after recession

09 June 2010 05:30  [Source: ICIS news]

By Pearl Bantillo

KUALA LUMPUR (ICIS news)--Oil demand has improved from the slump of last year but its prospects in the near term are being dimmed by threats to global economic recovery, while its bright long-term future may be constrained by supply-related problems, industry players said late on Tuesday.

Topics ranging from the recent spike in oil prices above $80/bbl (€67/bbl), to the industry repercussions of the massive Gulf of Mexico oil spill, to critical investments for technological innovations were discussed at the two-day 15th Asia Oil & Gas Conference in Kuala Lumpur.

The mood was more upbeat than in the previous year, said AOGC chairman Fereidun Fesharaki, with expectations that oil prices would move higher for the remainder of the year, in line with better economic prospects.

Oil prices would likely range between $85-95/tonne in the second half of the year, and possibly move towards $100/bbl in 2011, said David Greeley, chief commodities strategist at Goldman Sachs.

But the problem of spare capacity, to the tune of 5m-6m bbls/day, would likely stay on for some time and cap oil price gains, industry analysts said.

The ongoing global economic recovery remains fragile, and is under threat from the developing debt crisis in Europe.

"The pick-up in economic activity has been uneven and in my view remains vulnerable to any mistimed withdrawal of fiscal and monetary supports. And, as the recent Greek debt crisis reminds us, it may still be too early to breathe a collective sigh of relief," Malaysian Prime Minister Najib Razak had said in his opening address to the AOGC.

Economies have yet to regain solid footing that unwarranted spikes in oil prices could do more harm, he said.

Offshore exploration came into sharper focus and scrutiny following the 20 April explosion and sinking of BP's Deepwater Horizon rig that caused the worst oil spill in US history.

Gushing at the ruptured undersea oil well was unabated for more than seven weeks now, with BP having limited success so far in siphoning off part of the 12,000-25,000 bbls/day leak.

The incident may push up the cost of production for Gulf oil and gas exploration going forward as the US government would likely tighten regulations in the wake of BP's oil spill, according to industry experts.

"It is tough to speculate right now [on the extent of US policy response]. [The] best [thing] to do is get the well capped, clean up and figure out what to do," said Ryan Lance, senior vice president for international upstream operations of ConocoPhillips.

Possible US restrictions in Gulf exploration, however, were unlikely to prompt a general shift of upstream exploration focus into other regions, said Petronas vice president for corporate strategic planning Arif Mahmood.

“It is very unfortunate what happened to the Gulf but I don’t think that will make people shift to other regions. What probably would happen is tighter requirements, higher premium for insurance,” said Arif.

Notwithstanding the near-term challenges, oil companies must not deviate from continuously investing in research and development to pursue technological innovation that made massive shale gas production possible in the US.

US' shale gas has a strong potential to shake up the gas markets, industry players said. Asia has yet to feel the impact of shale gas production but it may be just a matter of time.

“For the time being, I don’t think there is a direct impact in Asia,” said Hiroshi Ozaki, president of Osaka Gas in Japan – the biggest market for liquefied natural gas in Asia.

“But if China decides to develop coal bed methane … that will potentially change the map of natural gas market in Asia,” he said, citing that India and Indonesia may also pursue the same.

Technological advances would also translate to better energy efficiency, effectively tempering demand growth.

ExxonMobil projected that global energy demand would surge 35% in 2030 from 2005 levels due to population growth and economic expansion, largely coming from Asia. Without energy efficiency, demand growth would have been 95% over the same period.

Fesharaki, however, cautioned that strong projections on oil demand may not come about given uncertainties on the supply side, with OPEC countries like Kuwait not committing to hefty increases in supply.

He had said that a peak global oil production of around 95m bbl/day is likely to be reached by 2015-2020 due to policy constraints rather than geological limits.

Fesharaki said that oil demand would grow by 1.0-1.5m bbls/day each year, while OPEC faces a natural annual decline in reserves by some 1.5m bbl/day and would need to build huge new capacities to cover the expected increase demand.

Iraq, with its vast energy resources, is a “key wildcard”, he said.

Iraq oil minister Hussain Al-Shahristani said that Iraq can be a “safety valve in the global oil market”, given its aggressive plan to beef up production by 60% to 4m barrels/day over the next two to three years.

The country has reserves of some 115bn bbls of oil, equivalent to a tenth of the world’s total.

Energy investments cutbacks that totalled about $170bn on fears of overcapacity during the economic downturn needed to be reversed "to avert a potential supply shortfall several years hence", said Shamshul Azhar Abbas, CEO of Malaysian state oil firm Petronas.

Additional reporting by James Dennis

($1 = €0.84)

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By: Pearl Bantillo
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