Monday, October 08, 2012

What's Next for Oil & Gas?

UK based think tank Chatham House has published a new report: What Next for the Oil and Gas Industry? The report predicts a continued lessening of demand for middle eastern oil on the part of both North America and Europe. The authors see significant changes coming in the global oil & gas industry and the geopolitics of the middle east, as a result.
‘Peak oil’ is proving a misleading idea. The foreseeable problem is not finite resources but the rate at hich these very large resources can be converted into reserves for potential production. Reserves of oil and gas have each more than doubled since 1980 – faster than the increase in production. Technologies are developing which are creating new reserves of ‘unconventional’ oil, as they already have for gas.

These technologies have more places to go, many of them outside the existing oil-exporting countries. These new areas are opening a field of growth for private-sector companies which was not foreseen a few years ago. The companies also still have opportunities for collaboration with state companies, in half of the world’s oil reserves, provided they meet each country’s terms and conditions and bring technology to complement the state company’s own resources. In some countries whose economies depend on oil exports, expansion of production is problematic, because their governments may choose to keep oil in the ground for future production, while gaining time to diversify their economies. Technology is the master key to both sets of opportunities.

With demand vulnerable to other industries, and supply growing from ‘unconventional’ sources and new areas, there is no long-term escalator for oil prices. There is no clear trend; all depends on investment by competitors for the transport market and on the creation of new reserves.

... _Chatham House Exec Summary PDF
This report focuses on several critical challenges facing the industry: The effect on the demand for oil of the substitution of oil-avoiding technologies (such as in energy efficient vehicles) and the use of alternative fuels;
  1. The resulting split between growth and no-growth downstream markets and its consequences;
  2. The changing role of OPEC;
  3. The uncertainties facing gas producers in markets defined by government policies towards alternative fuels for power;
  4. The perception that limits to the expansion of oil production have weakened;
  5. The continuing role of national oil companies;
  6. The financial challenge from investors in the private-sector companies;
  7. The geopolitical connotations of the shift in oil trade to Asian developing countries
Each chapter sets out the current position, analyses changes in technology, policy and competition, and concludes with the implications for the oil and gas industry. _Chatham House report description
The authors of the Chatham House report see oil prices as staying in the $100 range or higher indefinitely.

Full Report PDF Download

Energy analyst Andrew McKillop thinks that oil prices are too high for the fundamentals, and expects oil prices to drop about 10% to 15% for WTI and 25% for Brent, from today's prices.
Declining oil consumption... is spreading like green algae on European beaches in several countries, linked to massive agrochemical and municipal waste runoff. Staying with Europe, 2012 is the sixth straight and consecutive year of falling oil consumption in Europe - not "declining growth of consumption". If the global economy uses less oil per unit output for slow-growing or no-growing output, only idiots and oil traders could imagine prices have to go higher. This the traders can do, be sure about it.

How long they do it is the open question. Oil is overpriced and needs at least another 15% cut in WTI prices and 25% off Brent. Knowing the oil trading community and its circus act, it will soon find the "killer numbers" enabling it to further talk down prices without losing face and having to be bashful. Opec and Nopec may help, or may not, that is their problem in a global economic context where overpriced oil is a real luxury we do not need. _Andrew McKillop
Both Chatham House and Andrew McKillop see continuing reductions in demand coming from Europe and North America. If one combines such a reduction with a lessening in demand from the BRICS countries that are currently experiencing economic slowdowns, one should see significant deviations from IEA and EIA demand projections -- on the low side.

Even with the ongoing devaluation of the US dollar by the Obama administration and the Federal Reserve, significant reductions in global demand should be reflected in significant reductions in price.

And while all of that is happening, a large number of oil & gas projects are scheduled to come online around 2020, which should add significantly to supplies. In addition, several gas to liquids (GTL), coal to liquids (CTL), and heavy oil / oil sands projects should also begin production over the next 10 years.

What the world is truly waiting for, in terms of high volume oil substitutes, is the opening of the flood gates that should accompany the commercial factory mass production of gas cooled nuclear reactors. The copious high temperature process heat from scalable gas cooled reactors will almost certainly be an important game changer in a larger scale development of petroleum substitutes from unconventional hydrocarbons.



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