Welcome to 2009 – a guaranteed roller-coaster of a year, of that one can be sure. It will be a case of fasten seatbelts and prepare for a rattling. I regularly harp on about Opec and the criticality of its decisions to the non-Opec community, of which the North Sea is clearly a member. Well, in recent weeks, Opec decided to make two major output cuts.
Even if some member producers default on pledges made in Vienna, broadly, prices will begin to claw back up the hill to the target $65 or so barrel, notwithstanding some predictions that global consumption may actually contract during 2009.
If so, that’s no bad thing in my mind, but it will likely be only temporary as, with oil prices as low as they now are, China especially will use this as an opportunity to stock the latest 6.3million barrels capacity phase of its strategic reserve – this is an ongoing programme to build emergency capacity to 50million barrels.
Bearing in mind its powerful foreign reserves position, I rather think Bejing will consider the current situation as an opportunity to help Chinese oil companies go shopping for oil in the ground worldwide while prices remain low.
Also, I can’t help thinking that, despite the big scare of oil hiking to nearly $150 per barrel, shell-shocked Americans are already developing energy amnesia and will rapidly slip back to gas-guzzling habits, given half a chance.
That would suggest a return to rising US oil imports within a relatively short period. Admittedly, all this would appear to be rather dependent on shiny new President Barack Obama firing up the populace and getting them back to work big-time, so turning the American economy around.
It would be good if the Yanks have at last even half-learned the lesson that profligate consumption is not a right and that urban assault vehicles are thoroughly inappropriate for toting the children to school.
Few pundits appear to be talking about India and what the impacts might be there. Bear in mind that this economy has been industrialising rapidly, plus it has developed a vibrant service economy geared to the West – call centres, computer help lines, that sort of thing.
It should be remembered that India is now one of the strongest economies in the world. Indeed, it has the second fastest growing economy behind China and now ranks 12th globally.
Desk research and asking around point to India having had the good sense to take appropriate measures to minimise impacts from the credit crunch, though this does mean that the availability of debt to fund acquisitions is drying up. Bear in mind, Indian companies/entrepreneurs have made numerous acquisitions across the US and Europe, especially in recent times.
It is because of this that many of the large Indian services and IT players, for example, are now embedded in the EU and US and are possibly very well placed to absorb the impact of, for example, the plummeting pound against other currencies.
Might the present situation also help India’s energy companies such as ONGC, which is currently finalising its convoluted takeover of London-listed Imperial Energy? I’m less sure about this than I am the Chinese position, but probably yes.
However, I’m reasonably sure that oil prices will rally significantly over the next few months. It helps that Russia and, to my initial surprise, Azerbaijan, have expressed a willingness to stand alongside Opec and cut output, too.
One of the impacts of the current oil-price slump is that it may call time on a number of elderly North Sea production installations. That very point was made only a few days ago by Richard Cockburn, of Scottish law firm Shepherd and Wedderburn.
He said in a statement: “For some time now, there has been concern in the UK oil service sector that the expected bulge of contract work arising from the decommissioning of oil and gas installations in the North Sea was being repeatedly postponed as the high oil price … which peaked at just over $140 a barrel in 2008 … led operators to extend the life of their facilities. The trading environment is changing as the pace of the global economic slowdown quickens, and this is likely to signal the start of boom time in the decommissioning of rigs. The oil-price collapse in recent weeks is changing the operators’ views on the sustainability of some of their older facilities.
“Whereas, a year ago, the high oil price justified the capital expenditure required to extend the operational life, the much lower oil price is calling those calculations into question. Calculators are hastily being pulled out of drawers and formulae rerun to check if the bottom-line figure is still black if an installation’s life is extended.”
Hmmm. If Cockburn is right then, through such actions, oil companies would reveal just how short-term their thinking and planning really is and that pushing the frontiers of abandonment out to the mid-2010s was never seriously on the agenda.
It might also suggest that current incumbents will be even less keen to pass on platforms to second and third-division players no matter how inventive schemes to protect decommissioning liabilities might be.
Of course, the fact that the banks will be even more stringent in their demands than they already were pre-credit crunch hardly helps.
If a major operator decided tomorrow to pull the plug on a field – the economics of which are too finely balanced in today’s climate despite its perhaps strategic value as a present/future hub for satellites – could you blame it for doing so.
Well, no. Not unless the Treasury steps in with a credible offer of fiscal subvention of some form. Bear in mind, of course, that the Government has, in recent years, been very keen to promote a hand-me-downs culture in the North Sea, though it has been singularly reluctant to offer financial enablers.
Oh, woe, I hear some of you cry. But hark, I have a provocative thought.
Is the industry correct in its assumption that the current network of aged platforms and pipelines is somehow the door to so much of what remains in the UK North Sea?
Or is it time to get radical, get rid of the expensive creaking, rusting platforms and thinning pipelines and switch to harvesting based on a progressive network of flexible, modest, modern, autonomous floaters and subsea packages?
I can’t dislodge the idea from my mind.
Well? Knock me down. E-mail address is jeremy.cresswell@ajl.co.uk
