Global View

 What is happening in global gas markets?

There is more gas available today for import, but the important issue for producers is whether or not there is going to be sufficient demand for it. In North America particularly the conventional gas revolution has cast into doubt whether there will be a real need for imported gas.

Two massive gas fields (Haynesville Shale and Marcellus Shale) in the US could be two of the largest gas fields in the world. These aren’t just big in North American field comparisons, but big in North Field and South Pars terms.

Recent estimates are in the region of 600-900 trillion cubic feet in those two accumulations alone.

This means we’re starting to see a dramatic turnaround in the prospectivity of North America for gas production, brought about by changes in technology and know-how that is allowing that gas to be unlocked in a commercial way.

 Can shale gas really compete with the low extraction costs of Qatar?

Everybody assumed that because it’s shale gas it would be costly to produce, but in actual fact, through the drilling of horizontal wells and fractures of those wells, rates of 3 – 10 million cubic feet a day are starting to come through. What was initially perceived as costing $8-12 per million cubic feet is actually coming in at much more competitive rates than that.

What we’re seeing there now is an excess of drilling prospects, and rigs can be mobilised very quickly, so any increase in the price and you’re likely to see an increase in rig utilisation and associated increases in production. The lead times on turning that around are really quite short now.

 

Will the USA become a gas exporting to rival Qatar on the global scene?

Currently there is no mechanism for export so that gas would have to be swallowed up by domestic consumption. What that means is that earlier predictions, ranging between 5 – 15 billion cubic feet per day of imports – pretty much in line with the expansion coming on stream from Qatar and Nigeria, that now is not necessarily required.

If I’m an LNG producer and I’ve got a choice between oil indexed sales in Europe or gas on gas competition in North America, it’s more likely that those volumes will find their way into Europe than North America because at least the European market doesn’t clear solely on price, which its North American counterpart does.

 Does this pose big problems for the companies geared towards the US market, such as the major JV’s in Qatar?

I don’t think so. The joint venture companies developed these projects with a 30 year timeframe in mind, and there is no doubt that the world is going to need that gas at some point and in some form. However, it may be the case that this is a bump in the road for them. North American demand was probably the impetus for a lot of these JV gas megaprojects to get off the ground.

However, these projects will most likely become hugely profitable for the developers even if that gas never makes it to the United States.

 So new markets will be easily found?

Ultimately, natural gas is becoming more fungible. There is no question that the proportion of LNG that is fungible between markets is increasing, and that’s only good news for developers, because it means they don’t have to bet their investments or long term strategy on one particular market.

 

 Does this extra available capacity mean Qatari exports will replace Russian ones in European markets?

Despite the furore over supply issues last year, Russia has historically been a very reliable supplier of gas. There are both sides to the Ukrainian cut-off story, and I think these discussions draw a lot of parallel’s with the ‘oil-weapon’ scares of the 70s which was, in practice, very rarely deployed.

However, to say that doesn’t that mean there isn’t a growing desire to diversify away from a perceived over-reliance on Russian gas to Europe. In some countries Russian gas is actually a smaller part of the portfolio than the media makes out, and primarily it is Eastern European countries where it is a majority supplier. Diversity is always good, but how much people are willing to pay for that diversity is an important question to ask. It wouldn’t surprise me if politically European countries wanted to lock-in long term supplies from Qatar just as much as they want to lock-in long term supplies from Egypt, and Algerian and Libyan expansions.

 What’s different about the current oil price slump to the low price era a decade ago?

One of the topics I touched upon in the keynote address is that typically it is the big ticket projects which normally fall first. That’s not been the case this time, but that’s largely attributable to the rapid speed of the decline. If you go back to 1988-89 it was actually quite a long run-in, over a period of three years before we ended up in the abyss of sub-$10 oil.

As a result, back then, there had been a deferral of big capital projects. Also, as a share of overall supply these big projects were not as important to overall supply as they are now. That’s the big difference.

In the late 90s there was a foreseeable decline which saw the big capital projects taken out of the equation, companies ran for cash flow and laid people off, and IOCs reduced exploration and reduced their dividends. This time around, the run-down happened in such a short time frame, just six months, that the response has been back-to front compared to normal run of events in slowdowns. Once the market has had a chance to normalise we’ll likely see a reversion to the norm”

 

So some big projects could still be cut?

If oil stays where it is I think we’ll certainly see some companies deferring big capital projects. However, if we have some sort of supply interruption that kicks the oil price back up, then all bets are off. All capital can be funded at $70, and we’ll see no major cutbacks should that happen this year.

 Will the more expensive enhance recovery projects be cutback in the meantime?

EOR using thermal recovery is actually one of the last things to be cut back in a run down, because once it’s shut it down you lose that heat from the reservoir. Building up that steam front again is costly and time consuming, so if there is any way of avoiding that then you do. In Canada there has been some cutback as they’ve reduced the volumes of steam injection, and reduced production, but they’re looking for the minimum level that maintains the heat in the reservoir which would enable them to step up production again when the time was right.

Worldwide it’s impossible to characterise because the scaling down of production doesn’t lend itself well to being classified by any particular geography or region, rather the classification of field.

 What does this mean for projects in the pipeline in the Middle East?

Every country in the Middle East is hungry for energy in one form or another. We’ve seen a change in emphasis because of the demands of domestic consumption. People were once looking at how to develop as much gas as possible so that it can be freed up oil for export.

Now Oman and Dubai are good examples where the maths dictates that investment in any form of energy they can get is needed. It’s no longer about freeing up oil for export; it’s about keeping the lights on. On a wider scale this means that it’s really not inconceivable that you could see coal fired power stations being built here in the Middle East. We’re almost certain to see nuclear power stations being built in the region.

You’ll see much more solar development. In fact with solar it’s already being pushed as a major area of focus, however, it will be interesting to how long those plans survive in any long-term oil price slump, because ultimately the economics does matter. In general terms it’s wrong to think of the Middle East as being different from any other region. Looking at a portfolio approach will be key in the years ahead, because right now we simply can’t say for sure what the advantage fuel will be.

 

 Are you seeing any change in the IOC – NOC relationship?

People always assume that when the oil price comes down everyone gets more collaborative, and when the oil price goes up the reverse is true. That’s a massive over-simplification.

Resource holding governments have a desire to maximise the amount of economic activity and the amount of the value chain that’s captured within their own jurisdiction.

They are often focused on more than just the most profitable extraction of the oil because they are looking at a bigger picture. It’s undoubtedly the case that if you measure things in profitability terms, the National oil companies generally come out worse – but that’s often because the scoring systems used fail to take into account the other dimensions of what they are being asked to do.

Some of the National oil companies are the most effective institutions in their field, and that’s why they’re asked to lead projects outside the traditional remit.

For example, Saudi Aramco has been asked to lead research centres, and similar tasks because they’re good at doing these things. It shows through if you do a full accounting of their costs it appears that their extraction costs are higher, but they have many other missions. The scope is there for the impression of inefficiency to creep in, but I don’t think those charges are valid.

Ultimately NOCs are going to want IOCs as partners. Maybe not at home – possibly oversees. Benchmarking and learning from what they do is invaluable. There have to be benchmarks of some kind. Saudi Aramco is remarkable in the lengths that it goes to in order to benchmark its performance without actually having IOCs operating alongside them.

However, if the IOCs don’t bring something new to the table, if they just rely on having good project managers, being good at deploying capital technology, then that’s last year’s song. In order to retain that key relevance they need something new.

 

Is there a major challenge common to all IOCs this time around?

To pick one would be to oversimplify, but this market is putting a much greater emphasis on the value of liquidity than anyone has ever been inclined to apply before. Liquidity is what will allow any company to avoid strategic swings through the cycles, and I think that’s the biggest challenge because if you look at the resource base for the IOCs there is enough to keep them busy for a long time to come.

Forum snapshot

The second Microsoft Middle East and Africa Global Energy Forum took place in Dubai in April, with a renewed focus on how technology can address regional challenges for the upstream sector.

“The worldwide economic downturn along with the resulting industry trends in the energy sector such as mergers and acquisitions, cost escalation and the drive for productivity enhancements remain key focus areas for Microsoft,” said Ali Faramawy, vice-president, Microsoft International. “We also recognise the critical influence of the region on the global energy sector and we aim to provide an unparalleled view of how we can help the entire oil and gas value chain leverage technology to cope with the fast changing business environment.”

According to Faramawy, the portrayal of the current situation is lacking some perspective. “I feel absolutely saturated with crisis talk. It’s important to remember that the preceding boom years allowed a lot of companies to be in a very solid financial situation before the fallout began.”

Omar Saleh, oil and gas sales manager for Microsoft Middle East and Africa said that embracing technology solutions was an imperative for companies looking to stay ahead in tough times.

“In periods of economic uncertainty oil and gas companies strive to empower insightful decision making and develop sustainable business strategies” “The proper utilisation of technology enables companies to drive optimisation across the entire value chain, capitalising as well as fundamentally changing the way people work.