Editorial comment
OPEC’s announcement at its 152nd ministerial meeting in Vienna this week, that it had decided against further supply cuts, appears to be an admission of defeat. Certainly it is a radical change in OPEC’s policy. Until this point, the cartel had been very clear in its determination to make whatever supply cuts were necessary in order to force crude prices up to its notional target of US$ 75.
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OPEC’s announcement at its 152nd ministerial meeting in Vienna this week, that it had decided against further supply cuts, appears to be an admission of defeat. Certainly it is a radical change in OPEC’s policy. Until this point, the cartel had been very clear in its determination to make whatever supply cuts were necessary in order to force crude prices up to its notional target of US$ 75. That it capitulated at this juncture suggests recognition that it is ultimately powerless to influence oil prices in the current global economic crisis. To date, it has made 4.2 million bpd of production cuts with little impact on the price of crude, which has remained firmly below the US$ 45 mark. A further, and widely predicted, reduction of 1 million bpd would very likely have had a similarly lacklustre effect. In actual fact, with Saudi Arabia, UAE, Kuwait, Algeria and Qatar the only OPEC members to fully honour their pledged cuts in production quotas, any further reductions were fast becoming counter productive. Having decided not to act until the cartel reconvenes in late May, the organisation is now wholly reliant on world leaders, meeting at the G20 Summit in London in April, to provide the necessary economic stimulus to kick-start a recovery in crude oil demand.
The problem of crude oil prices in the mid US$ 40 range is a concern not just for struggling OPEC finance ministers but also for all western oil companies. Crude oil at this level makes significant investment distinctly unattractive. One need look no further than Canada where investment in Alberta’s recently booming oil sands patch has all but ground to a halt. However, without continued major spending on oil and gas projects, any economic recovery will inevitably bring with it an eventual associated supply crunch. In this scenario, without the necessary investment during the current downturn, July’s high of US$ 147 could very easily appear quite reasonable in the not too distant future.
For Shell, this is not a mistake it is prepared to make a second time. A lack of investment in the 1990s resulted in dwindling proven reserves in the early 2000s. Under pressure from investors to demonstrate sufficient resource growth, the company was caught out in 2004 by the Securities & Exchange Commission for misreporting reserves and heavily fined. This time around, the group plans to maintain spending on exploration and new projects with US$ 32 billion set aside this year alone. Similarly, ExxonMobil’s Rex Tillerson has reiterated his company’s commitment to record levels of spending in the years ahead with US$ 29 billion slated for 2009 and a firm commitment to spend between US$ 25 billion and 30 billion each year over the course of the next five years.
Whilst Shell and ExxonMobil are at the vanguard of investment, it is key that this level of investment is not confined to solely the oil majors but is maintained across the industry. The International Energy Agency’s 2008 World Review of Energy identified a requirement for US$ 26.3 trillion of investment to be made in energy supply by 2030 to meet projected demand. Nobuo Tanaka, Executive Director, International Energy Agency, reiterated this prediction earlier this week at the Vienna OPEC meeting, asserting that ‘by 2030, two thirds of world production will come from new fields that are either awaiting development today or are yet to be found. This will require significant investment, and it suggests that the current dip in prices may not be long lived.’
Whilst OPEC will doubtless recommence its struggle, when it reconvenes in late May, to manipulate crude prices upwards towards its US$ 75 target, the industry must ignore the distractions of the current downturn, be patient and above all focus on meeting future demand. The underlying fundaments in the oil and gas industry remain unchanged. Inevitably, demand will increase and the industry must learn from past mistakes and be ready to meet this challenge.
