The G-8 meeting in the Umbrian hills of Italy served less to inspire unity, and more as a historical turning point, marking the passage of a tired institution.

The G-8 or “Gee-Otto” as the Italians say is misleading by both description and substance. For one, the members are no longer the leading industrialized nations, with China now the second largest economy in the world. Number two, the G-8 does not and cannot live life in isolation. In fact, 16 leaders were invited, with China’s President Hu Jintao needing to duck out early to attend to protests back home.

There was little agreement from the core G-8 on the next steps to combat the worst downturn in six decades. Germany’s Chancellor Angela Merkel called for an exit strategy from the deficit spending and pump priming to inflate the global economy.

A global climate change commitment remains challenging -– despite verbal commitments -- as the developing countries focus instead on job and wealth creation. This should not be at the expense of the environment. As mobile phone technology helped developing countries leap-frog after years of underinvestment in that sector, so too can rapidly evolving green technologies. Environmental policy is a prime example of why the G-20 is a more modern body and why the door should be shut on the creaking G-8.

We will get a better idea if the G-20 can stand on its own in September when leaders gather in the old steel town, now modern research and development hub, of Pittsburgh. One cannot miss U.S. President Barack Obama’s motivations here. Observers can almost hear him saying “You too can modernize with the times as did the old rust belt of America.”

While this summit was short on real solutions, there was a non-binding consensus on what is a quickly evolving fair price for a barrel of oil. The range of $70-80 was floated at the meeting and a spokesman for Russia’s President Dmitry Medvedev confirmed this raised few objections. Like most G-8 efforts, enforcement and follow through may be difficult, but the Goldilocks scenario –- of a price that is not too hot nor too cold –- is gathering momentum.

At the recent European Union-OPEC Meeting in Vienna, a similar consensus emerged from the closed door sessions. When oil prices slid from a peak of $147 a year ago down to $35 in December, OPEC members decided to shelve 35 of 150 projects on their books. What we have not heard since this recovery to $60 plus is whether more and more of them will come back on-line.

Middle East in Italy

Summit host Silvio Berlusconi, under fire at home for what may have happened at his private parties, wanted to use this meeting as a means to shore up poll ratings. Rather quietly, the billionaire also extended invitations to help secure Italy’s long-term energy supplies.

Leaders from Algeria, Egypt, Libya and Turkey attended this G-8 meeting. Three of the players are key natural gas exporters to Italy, the fourth, Turkey, is a key transit hub for both oil and natural gas.

A few interesting facts to be aware of: Algeria ranks fourth in natural gas exports today; a large share of that gas ends up in the Italian market. Not surprisingly perhaps, Italian contractors are playing a major role in Algeria’s natural gas development with two of the first nine tenders going to Italian companies.

There is a similar storyline playing out in Libya, where it is the largest holder of proven oil reserves in Africa, estimated at 41 billion barrels. Libya plans to expand oil production from 1.8 million barrels a day to three million in less than five years. It too is starting to ramp up natural gas production.

Prime Minister Berlusconi had a two-pronged strategy when he visited Libya last summer. He apologized for Italy’s 30-year colonial rule and committed to a $5 billion compensation package spread out over two decades. The money will be used to modernize Libya’s infrastructure and very likely cement Italy’s relationship in this neighbourhood where energy is plentiful.

Berlusconi was not reserved in saying during President Qaddafi’s recent visit to Rome last month that Italian companies should have priority or be “prima fila,” the front row, for future contracts.

The G-8 may be short on concrete solutions for the global economy, but it may very well have served a purpose for Italy and by extension the European Union when it comes to energy.

Labels: berlusconi, g-8, libya, oil prices

Labels: Davos, oil prices, World Economic Forum

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.

Labels: Abu National Energy Company, fossil fuels, oil prices, OPEC