Published On: Tue, Dec 2nd, 2014

Oil and Gas Curacao – Tumbling World Oil Price

In early morning trading in London yesterday (1 December) the international benchmark Brent crude fell to below USD 67.53/barrel hitting a five year low.

Gas Oil Curacao

International commentators are already indicating oil’s price plunge is proving to be the worst since the collapse of the financial system in 2008, and perhaps threatening to have similar global impacts to the oil crash of 30 years ago. This not only led to this author (as a Senior Petroleum Exploration Geologist in Jakarta) being made redundant, but also led to the Mexican debt crisis and the end of the Soviet Union.

Last week the Organisation of Petroleum Exporting Countries or OPEC, and in particular Saudi Arabia decided to let market forces determine the price of the barrel. In what is seen by many as an attempt by the Saudis to force a price war and shut down higher cost shale oil/gas producers in the US, a deep slump in prices could have significant geopolitical and socio-economic consequences around the globe.

Obvious countries at risk are Russia (the world’s largest producer) whose economy is already under pressure from EU and US sanctions resulting from its political and military interference in Ukraine; Iran suffering from similar sanctions; Nigeria from an Islamic insurgency; and Venezuela from political and economic turmoil already with a budget deficit of 16% GDP.

Against this backdrop of tumbling oil prices, Curacao’s national oil company Kompania di Petroli i Gas di Korsou (KPG) was launched on 28 October. Its principal aim will be to provide the legal and fiscal framework to attract, negotiate and monitor international oil companies exploring under license for oil and gas in Curacao’s territorial waters. Although there appears some confusion, even at parliamentary level, KPG will not directly be exploring or drilling, the risk being with the oil company.

As I have indicated previously (Curacao Chronicle 7 November, 2014), Curacao is a frontier exploration area with no known oil or gas. Indeed about 90% of its territorial waters that hold any commercial licensing interest are deep water (60%) to ultra deep water (28%). While there has been increasing interest in more extreme and unproven areas in the past several years, it is only a very high oil price environment of USD 100/barrel-plus that has supported such exploration.

Most analysts see new ultra deep water projects as unsustainable with oil below USD 80/barrel based on break even cost estimates. USD 65-60/barrel is the next level when a critical mass of projects including Gulf of Mexico deep water projects (even in an area of proven oil and gas) will become economically unviable.

Higher cost deep water exploration is also more likely to be sacrificed before shale. Deep water projects need longer term price guarantees to support upfront capital-expenditure (e.g. exploration drilling, production infrastructure), while onshore shale fields can be more flexible with regard to oil price fluctuations and scaled down or up on a well-by-well basis.

A steep and precipitous fall in oil prices (some commentators are even now suggesting 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.

Any business model based on USD 100-plus therefore needs to be quickly re-assessed. Or put more bluntly, it is unrealistic to be now expecting international oil companies to be ‘queuing up to knock on KPG’s door’.

But are there any alternatives in the meantime to add value to KPG?

I suggest there are and, on the positive side, a low oil price presents the opportunity to make a comprehensive technical review of legacy seismic and any additional data held in the former Netherlands Antilles Office for Oil Affairs archives, and other publicly available and non-public resources.

Like in any retail business, ‘unless you know what you have, it’s difficult to understand what you are selling’, and it might be prudent to find out first!

Dr. John Wright is a retired consultant geologist with over 30 years’ experience in natural resource exploration. At the time of the mid-80’s oil crash he was working for Jackson Oil exploring the Kutei Basin in Indonesian Borneo.

Image: Price of Brent crude over the past 12 months.

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