Increasing Oil Supplies: Are NOC’s Up To The Task At Hand?

RelevanceAttention will now shift to the supply side, and in particular the recent under performance of NOCs and countries with nationalist oil policies in growing oil production. We are coming to a point where NOCs may be forced to return to IOCs for assistance in increasing supplies. That it is in their interests to do so cannot be in doubt. For some NOCs this will be a political nonstarter. For other, more enlightened NOCs, new partnerships with IOCs will prove very fruitful.

AnalysisMuch has been written about the current world supply – demand balance for oil and how it has driven prices upwards. Robust increases on the demand side have come from China, India and many oil producing countries (who are now consuming more through downstream investments). These have only partially been offset by falls in demand from the traditional large consumers (such as the U.S. and E.U.). Supply, on the other hand, has struggled to keep up. OPEC production fell by 350mbd in 2007, and now Russian output has started to decline. 

Commentators point out that resource nationalism is restricting the ability of the majors and other IOCs to bring on stream new supplies in a timely fashion. This fact seems to be born out by the reduced exploration spend of IOCs – SEB Enskilda estimates that exploration spend in this group fell from 26% of total capex in 1994 to 18% in 2007. Oil reserves that are open to IOC exploitation are from much more technically challenging areas such as Canadian oil sands, the Arctic and ultra deep water GOM.

Given the current trend in resource nationalism and that NOCs directly manage over 80% of the world’s oil reserves, we can now expect NOC performance to come under much greater scrutiny. Unfortunately, such scrutiny will disappoint those seeking help from the supply side to reduce oil prices.

A review of the recent oil production growth performance of NOCs and countries with a high degree of resource nationalism does not make for pretty reading. Russia is struggling to maintain production at the 10mmbd level, and one senior Rosneft executive has already forecast that 10mmbd will never be beaten. OPEC’s production rate actually declined in 2007, and OPEC’s mainstay, Saudi Arabia, has already indicated that it will struggle to grow production after its current raft of projects come on stream (this is seriously bad news for supplies – Saudi Arabia enjoys relative political stability, a good NOC, big reserves and high quality oil fields – this begs the question: if Saudi Arabia can’t do it, who can?).

Venezuela’s production is collapsing. Mexico’s situation is not much better. Its biggest field, Cantarell, has seen production falling off a cliff. While Pemex struggles with outdated technology and a severe lack of funds, foreign oil companies are barred from investment due to a mixture of cultural and constitutional restrictions.

The one bright spot for production growth is Iraq, which recently released an aggressive target to increase production from a current 2.5mmbd to 4.5mmbd by 2013. Iraq is encouraging foreign investment, no doubt under the guidance of the U.S.

That it’s in the NOCs interests to increase supplies is not in doubt. Consider the following reasons:

  1. Increased supplies put downward pressure on prices reducing the risk of a collapse in demand (through a recession, conservation or substitution of oil by another form of energy).
  2. Increased supplies would help improve world stability – the social tensions that are appearing due to high fuel and food prices could get out of control if left unchecked.
  3. Cumulative producing country revenues from oil would actually increase over time.

Thus, we are not far off from a point in time where we witness the supreme irony of some NOCs welcoming back their IOCs with open arms. IOCs still enjoy a technical lead (though not as great as previously); still have access to significant quantities of capital; and still have unmatched capabilities in project management to bring supplies on efficiently, quickly and in a cost effective manner.

 

24 July 2008

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