Curabieren Bubble Bursts?
WILLEMSTAD - Today 28 October marks the first anniversary of the establishment of Curacao’s national oil company, Kompania di Petroli I Gas di Korsou (or KPG). Precisely one year ago, and with a certain amount of ceremony, then Prime Minister Ivar Asjes signed the notary act and congratulated his government on successfully putting these project proposals in motion after decades of political arguing.
Very unfortunately, however, the launch of KPG also coincided with one of the major slumps of recent history in global oil prices. Only weeks prior to incorporation of KPG, on Tuesday 9 September 2014, Brent crude fell below USD 100/barrel for the first time in essentially three and-a-half years. By late October and the time of the launch, the price was around USD 90 per barrel.
Since then, while there have been significant price upswings or short-term rallies, created by transient market and geo-political forces, these have not been sustained and the general momentum has been downhill. This morning in London Brent crude was trading at USD 47 per barrel. Indeed, these present price lows are in entirely line with some of the most pessimistic predictions of late 2014.
While present lows may have been triggered by recent stock market plunges in China and uncertainties in Chinese future growth, it represents the latest part of the continued downward slide in oil prices that has persisted in global markets over the past 12-months.
Readers of Curaçao Chronicle will be aware, this slide was initiated by the Organisation of Petroleum Exporting Countries (OPEC), and in particular Saudi Arabia. With increasing production and stocks of oil worldwide, OPEC took a deliberate policy shift preferring to defend its market share, rather than cut production to stabilise the price of the barrel.
In doing so, they made a strategic gamble deciding to let market forces determine the price of the barrel. At the time, this was seen by most analysts as an attempt by the Saudis to force a global price war and shut down higher cost shale oil and gas producers in the United States.
If this was an effort to close down American shale oil and gas producers it has clearly failed. Indeed, rather than capitulate to OPEC, American producers immediately rose to the challenge by introducing cost cutting measures, improving efficiency and introducing new technologies wherever possible.
In doing so, in a matter of only several months, average shale oil breakeven prices have been reduced from above USD 60-70, to below USD 50 per barrel today. Production from the Bakken Shale , one of the major shale oil and gas plays, has recently been reported to be reduced in some areas to USD 30/barrel. This is highly significant because it is on parity with Saudi Arabian production costs, some of the lowest in the world.
While high production and oversupply continues around the world, low oil prices will remain. Indeed, as petro-autocracies, in particularly Venezuela and Russia, struggle to balance their faltering economies they have no other alternative than to produce more oil and gas. OPEC and Saudi Arabia show no intention to back down and ease production, which was increased to 31.5 million barrels per day in July.
Other changing geo-political dynamics, namely restoration of normal trade relations of Iran with Europe, possibly the United States and the rest of the world will further contribute to an oversupply in the medium term.
The problem is further exasperated at the corporate level, where major international oil companies have been announcing production increases in an attempt try to protect revenues and share price. For example, Marathon recently announced total company production is to increase 5-7% year-over-year, with a 20% jump in production in the United States. This at the same time it reported a 48% drop in profits for Q2 and a net loss of USD 386 million.
By early 2015, major international oil companies had announced budget cuts of 10-20%, the Russian giant Gazprom cuts of 50%, and junior explorers in the range 20%-50%. These cuts, as I write, are still coming but now “at a faster pace”. Industry job losses worldwide, in particularly in exploration, were reported by mid-2015 to be in the many tens of thousands.
Recent analysis of employment figures for the United States alone, estimate job cuts in the range of 120,000-180,000 for this year, in a sector that at the beginning of the year had about half-a-million jobs. This represents, at the upper end of this range, an elimination of some 35% of the oil and gas jobs, which indicates the oil and gas sector in the United States is not exactly a ‘rosy’ picture either.
This therefore has not been an encouraging environment for Curaçao’s company KPG and the Government’s aspirations to attract international oil companies and new investment to explore its ‘frontier’ territorial waters. With breakeven costs for deep and ultra deep water areas, such as offshore Curaçao, of greater than USD 60-80/barrel, most oil company board rooms will view these as economically unviable.
Following the last collapse in the oil sector of this magnitude in 1986, the exploration sector did not fully recover for several years. Already major oil companies including BP and Shell, as well as international analysts such as Goldman Sachs are predicting prices will remain stuck around USD 50/barrel until 2020. During this period the face and make-up of the oil industry could dramatically change.
As I indicated nine months ago, a steep and precipitous fall in oil prices to as low as USD 40/barrel will present serious challenges to the short-medium term management of KPG. Increasingly frontier areas will be seen as higher risk and loose investment interest in this low-cost oil world.
This now rings very true. What is not so clear is how the Government is proposing to adapt or proceed in this new global oil environment. Still the formal legislation for this sector has not been presented to Parliament. Or has the Curabeiren bubble already burst? We will have to wait to see what next year brings for KPG.
Dr. John Wright is a retired consultant geologist with over 30 years’ experience in natural resource exploration.