In search of Goldilocks
The story of Goldilocks and the three bears has a little girl rummaging through a house uninvited to try all three bowls of porridge until she finds one that is not too hot and not too cold. The OPEC cartel -- producers of about 40 percent of the world’s oil -- is not living through a fairy tale, but in reality is finding it difficult to secure the right price for its crude as economies tumble into recession.
After choosing not to take action at an emergency meeting in Cairo, energy ministers have made their opinions known about what is the Goldilocks price for their product. Saudi Arabia’s Oil Minister, Ali al-Naimi, the swing producer of the group, surprised those who follow this business by declaring $75 a barrel as a “fair price” for crude today.
His Qatari counterpart Abdullah bin Hamad al-Attiyah was hot on his heels saying that colleagues were searching to stabilize prices of $70 to $80 because it is a level which will lead to investment in future production.
During the last quarter, oil has fallen more than $100 a barrel. Formal cuts of one and a half million barrels a day were announced in September and October, but it is taking a while to get those reductions implemented. In the meantime, the only thing related to oil that is going up is the amount of storage.
From his office tower overlooking the waterfront in Sharjah, Hamid Jafar, the polished Executive Chairman of Dana Gas, talks about the need for less volatility: “The worst thing for the industry and for investments is wide fluctuations, because it creates uncertainty,” says Jafar, “That’s not healthy because a lack of investment today will create a bigger spike for the medium term.”
From his headquarters in the United Arab Emirates, Jafar has fanned out in the region to develop fields in Egypt and the Kurdish Region of Iraq. Dana Gas and another company he owns, Crescent Petroleum have invested two-thirds of a billion dollars in the Kurdish gas project. Jafar is keen to see state-run oil companies accelerate their investments in partnerships with private sector firms like his. The trend in the business is the opposite. State run oil companies have been eager to control as much of their production as possible in an effort to maximize profits.
Oil industry insiders say Saudi Aramco is one of the exceptions. Neil Fleming of Platts put it bluntly on the sidelines of a London conference, “What tended to happen with other OPEC producers is they’ve milked what they had in terms of resources and revenue. The impetus to really invest in increased production was not there.”
With oil hovering around $50 a barrel, it is difficult to fully embrace the recent report from the International Energy Agency that predicts oil will average double the current amount between now and 2015. The Paris-based agency notes that a half billion dollars a year needs to be invested to compensate for the drop in production in countries like Mexico, Norway and Russia. Yes, the second largest exporter today, Russia, is seeing its fields drop by an estimated six to eight percent a year. The bulk of those investments need to go into Middle Eastern fields, where reserves are plentiful.
Kuwait Petroleum Company, for example, wants to expand production by one million barrels a day to 3.5 million in the next seven years. To do so, their Managing Director of Planning, Jamal Al Nouri said during an interview in Dubai that $60 to $70 would suffice in terms of his production pipeline.
“It is a complex combination of projects in terms of exploration, infrastructure, drilling and facilities for export and maybe securing markets outside,” Al Nouri said. KPC for example is a joint venture partner on a $6 billion dollar refinery in Vietnam.
Here is the rub. Despite their coffers overflowing when oil was over $100, the Middle East can have too much of a good thing. When prices are sustained above $90, it prompts owners of more expensive projects such as tar sands in Canada for example to go into production. That might be good for balancing supplies, but at the same time the trend reduces the influence of regional oil producers. Also, high prices push consumer nations to accelerate their investments into alternative sources of fuel.
Peter Barker-Homek is Chief Executive of Abu National Energy Company, better known as Taqa. His group owns oil and gas assets, plus clean burning power generation projects.
With a broader portfolio he is advocating that a higher price will prompt smarter investments: “I think the dialogue is moving from simply oil demand and supply balance to what is the whole global energy mix. And we have to change ourselves to a low carbon society, a low carbon planet. The only way to do that is to have relatively high pricing over the next five to ten years which will cause a migration from fossil fuel in transportation and cause us to switch to more efficient power-generation.”
So, while this blueprint for future energy is still being drawn up, OPEC finds itself only a quarter of the way through a story it was hoping not to be part of. It is called a deep correction in the West and falling demand for their number one asset. Oil producers are searching for Goldilocks, but like in the fairy tale, she remains elusive.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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