For a cyclical and, by nature, a reactionary industry, the current recession has some hard lessons. Last year’s US$ 147/bbl peak crude price tag has been replaced by a weakened global economy and oil prices hovering at US$ 40/bbl.
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For a cyclical and, by nature, a reactionary industry, the current recession has some hard lessons. Last year’s US$ 147/bbl peak crude price tag has been replaced by a weakened global economy and oil prices hovering at US$ 40/bbl. Recession means many things to the industry, pipeliners included, and among these is a reduced demand for energy and a low point on the boom and bust cycle. The extent to which oil and gas exploration and development, and subsequent pipeline construction, will be affected is the key question.
A recession, and associated credit drought, typically means that the pace of infrastructure development will slow, and this may mean that pipeline projects get pushed back, oilsands development slows to a walk from a run, and the industry decelerates whilst demand is lower.
A recent report by Douglas-Westwood describes the dramatic effects that the current recession has had on global oil consumption, which in September 2008 fell 3 million bpd below its historical peak, with most of this shortfall accounted by a drop in US demand.1 It is estimated that global consumption could fall by 7%, reaching a trough in mid-2009, which would amount to a decrease in demand of 6 million bpd. Douglas-Westwood expects the economy to rise out of recession from the beginning of 2011, with oil demand resurging at the same time. The report notes that with every recession in the last 35 years, except the 1979 one, demand is recovered fairly quickly and, in some cases, it soars following the recovery.
There are things we know for sure. We know that in times of recession, oil prices tend to accompany the currency when it dips down, and when it rises again. We know that the world is growing, and huge parts of it are industrialising. The so-called emerging economies of China and India represent untold future growth and potential for the international oil and gas industry. Recent respite from the high oil prices experienced in 2008 has brought down fuel prices and enticed vehicle owners, certainly those in the US, back into their cars and onto the road, showing that low oil prices can stimulate demand, even in a recession.
We know that China is set to be a driver for future growth, and that new fields in Angola and Brazil will add to international oil production. Canadian oilsands production is an opportunity too good for Barack Obama’s administration to pass up. Iraq’s oil production is set to increase by 3.5 million bpd by 2011, adding 4% to global supply. New pipelines will be needed to transport oil and gas from Russia and the Caspian to the west. Ultimately, supply is finite and the world is growing, and these two facts mean that demand will increase, along with prices.
So now is the time to look at how short-term and long-term plans may be conflicting, in light of current economic conditions. Contradictions abound in these uncertain times. Oil companies are reining in on financial commitments for new projects, so, even though queues at some pipe mills are currently three years long, contracts for future projects stand in jeopardy. Construction costs for current, ongoing projects may fall, which is helpful in the short-term, but small contractors and manufacturers will suffer anyway, as credit becomes harder to gain and project financing disappears. The majors must choose to either postpone key projects, or stick their neck out to keep in place multi-million dollar schedules, braving the uncertain market.
All of this leaves the industry unsure about how best to proceed. Poor market conditions serve to highlight the staggering risk of investing in a pipeline that costs millions, or billions, of dollars to build. Shortterm hardships all too quickly impede on long-term pipeline progress. This is a scenario in which those planning the TransCanada Alaska gasline, and those working on the competing Denali project, find themselves. And it is one from which they will both hope to extricate themselves, when the market plays ball.