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Geopolitics to have greater sway over oil market

by Arabian Oil & Gas Staff on Dec 6, 2016

Colin Chapman is the president of Euro Petroleum Consultants.
Colin Chapman is the president of Euro Petroleum Consultants.
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We have seen continued volatility for oil prices over the past few months and this is expected to continue, now that the results of the US presidential elections have been declared - the outcome of which will have an impact on future trends in the industry. The future US energy strategy will impact the global markets.

Given the circumstances and multiple changes in the industry this year, this has impacted all activities in oil and gas production even in prosperous regions such as the Middle East. To keep up with the pace of volatile oil prices, major companies have to review their investment strategies and operation plans in order to minimise potential losses and possibly gain more strength in the market. Since markets are undergoing structural changes, now is the perfect time to try and win a more favourable position, which companies can only achieve via a strategic marketing approach.

Companies worldwide are focusing on their competitive advantage, which for ME companies definitely means getting the most out of low cost of production ($2-5/barrel versus $20-30/barrel for more difficult oilfield locations in areas such as the North Sea or other offshore locations), as well as closing the gaps that lead to failures in a number of companies (it could either be safety and environmental protection, or inappropriate risk and asset management).

A key factor to maintaining stability in oil prices is to have agreements on production levels between the key producers.

Iran has been taking the back seat for some time due to applied sanctions, but after they have been lifted, there has been a surge in activity in the country. Many researchers predicted that it would take Iran two to five years to build up production to pre-sanctions level, but in reality it has taken only four months to recover (+25% to the volume of last year), Tehran then continued to increase this level by approaching 4mn bpd during the summer.

To sustain the planned level and reach an increase of up to 4.8mn bpd in the next five years, the country would need significant external resources to finance the growth ($70-100 billion as per estimates).

Many international companies and foreign banks have shown interest in investing in this business. Nevertheless, there are some limitations: a need to secure funds and guarantees for the risks taken, as well as strong governance of the industry from the government create some challenges that have made some potential investors hesitate and wait until the situation becomes clear and stabilises. It may lead to Iran having to scale back its ambitions to develop at a swift rate. The situation definitely leads to some uncertainty and concerns in other producing countries that did not anticipate such a strong competitor in a matter of half a year.

The framework of the Iran Petroleum Contract (IPC) was a bright new way to sign agreements with partners more easily as an alternative to buy-back contracts, and although it needs to be modified to fit in all essential aspects, it will have an impact on the region’s market and others might need to find their own solutions to remain competitive. NIOC also plans to put efforts in improving oil recovery at brownfields which means it will be ready to attract engineering companies to help with that or even form JV for major projects.

Iraq, another major player in the region, is breaking records this year too. An ouput of about 4.8mn bpd was reached, making up the base for export buildup – and profit as well. But most of the progress was diminished by the oil price situation which affected international operators working inside the country.

Since most of the contracts were signed on a partly reimbursable basis, Iraq’s government now has to compensate risks that were not included in them (+15% of the country’s budget compared to 2014’s level) and pay extra $3.5 billion to cover the debts. But still Iraq does not want to reduce production targets planned for 2020 – set at 6mn bpd.

Another country that has suffered from lack of investment over the past few years is Egypt, and it is now seeking investments to revive the oil and gas sector and the economy in general. Egypt was an oil exporter before the crisis, but now it imports about $5.5 billion worth of oil and gas products from its regional producers (Iraq and Jordan mostly).

Egypt is now looking to take on the role of a producer again, at least to meet internal needs. It has large offshore gas resources that are yet to be developed since they will need to attract outside investors and foreign partners. Projects are now being actively evaluated.

If we are to see stable oil prices which should be in the interests of all parties, then it will be essential for OPEC and major non-OPEC countries to reach some agreement on limiting production levels.

It will be important to see if the continued discussions at the next OPEC meeting result in an understanding between the different parties, namely Iran, Saudi Arabia, Iraq and Russia to limit production so as to ensure some price stability.

Much of the global over-production has been caused by the growth of shale oil production in the USA. It will be important for the new administration of Donald Trump to follow the Energy Security Strategies. Questions such as the future of oil production, renewables and the state of the coal sector are very important issues that will impact the global oil and gas industry. Over the next few months we shall see the impact on oil prices. This could lead to even more uncertainty for the coming period with respect to the factor of crude oil price stability.


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