"The era of expensive hydrocarbons is over," the independent energy experts have declared for the last three years, while observing the deep drop of oil prices. "The era of cheap hydrocarbons is over," the Russian experts triumphantly proclaimed accompanying the recent news that members of the Organization of petroleum exporting countries (OPEC) agreed to cut oil production by 1.2 million barrels a day, of which Russia pledged to reduce the share in 300 thousand barrels a day.
Ukraine has never been a powerful oil production state, but tracking of Brent price fluctuations has become a national practice since the beginning of the occupation. The high price of oil has contributed to Russia's wealth, and we associate its wealth with Russia's desire to pour blood on our land. So here we have such geo-energy policy.
THE PRICE OF OIL WILL BE IN THE RANGE OF $50-60
- OPEC and Russia, for the first time in 15 years, agreed to cut oil production. Will this Alliance endure through time, and what will be the price of oil?
- The parties went through difficult way to reach this arrangement. We know that it was announced six months ago, but at that time it all fell apart. Now it seems to be agreed. But I'm not sure that this agreement will be performed. Yes, all large and small oil producers are interested in a price raise. But times are rapidly changing. And what is now seems to be jump of oil prices following the agreements - this is just a speculative trend. Now, the period of the slowdown in business activity is approaching that is traditional in connection with the Christmas holidays. In fact, the Christian world, industrialized and developed world prepare for the Christmas holidays. Accordingly, it always results in some reduction of commodity prices, especially of oil. So I think the behavior of oil prices will be quite volatile. Right now, I am at a conference in Bratislava, devoted to the issues of the Energy Union, energy security of the European Union. Just today there was a report of the Executive Director of the International Energy Agency, Fatih Birol. Commenting on the OPEC agreements and future price fluctuations, he argues that some rise of oil prices will be to the level of 60 dollars per barrel. And the price will balance somewhere in the corridor from 50 to 60 dollars per barrel. It is a comfortable price for American producers of shale oil. It will heat up oil production in North America - in the United States and Canada.
- Will $60 re-activate all shale deposits?
- It will not re-activate deposits, but producers will resume drilling and production. It is wrong to say that they are conserved, and nobody does nothing there. No, some activities are going on. But, of course, the level of operations is not sufficient to implement, relatively speaking, Trump's programm, the essence of which is that the United States, which have become self-sufficient in natural gas, should become self-sufficient in oil. This is the task, and the International Energy Agency claims that this is absolutely real to be achieved by the United States. They will do it easily enough. Moreover, in the late 2000's - early 2010-ies it was said that in order to profitably extract shale oil it was necessary to have oil prices not below $80 per barrel, but preferably somewhere around $100-120. Yes, because then the cost of shale production was still high.
By now it has decreased. Summarizing, I would say. According to estimates of the International Energy Agency, if the price is balancing somewhere $50-60 per barrel, it would be not bad for major oil-producing countries such as Saudi Arabia and Iran. It's worse for Russia. It needs a higher price, at least somewhere $80+. And it is normal for the American revolution of shale oil.
Actually, this revolution has just started. But if the US increase oil production more seriously, and they will do it, then, and it is logical, they will reduce oil imports. Because they are now gross importers. Development of shale extraction and reducing of imports by the US will lead to what appears an excess of oil on the markets - it will be oil not sought by American economy. Accordingly, the price of oil will go down. The International Energy Agency believes it will be balanced in the corridor of $50-60.
TRANSPORT REVOLUTION HAS STARTED
In addition, a factor of changes in the structure of oil consumption has appeared - petroleum products are actively replaced by electric energy. In fact, revolution in transport has also started - the transition from internal combustion engine to electric motors, to massive emergence of electric vehicles. In Ukraine, of course, we have only a few thousand of such vehicles for the whole country. A few hundred of rich people bought them in the last year . In Norway, for example, the picture is completely different and there were created huge incentives for the owners of electric transport to encourage its use. They have both tax incentives and other benefits while using electric cars. There were created such incentives which would allow Norway as a first country to completely switch to electric vehicles for maybe by the end of this decade. Therefore, the scope of oil use will be diminished. In order to maintain the competitiveness of petroleum products - gasoline, diesel - oil producers would be forced anyway not to raise but to reduce oil prices. From another side, requirements of budgets and extractive industries dictate countries the need to increase prices. But there is a logic and regularities of development of segments of oil and oil products consumption, which dictates completely different approach because other types of fuel become more competitive. And it's one of the paradoxes. Despite the desire of the leading oil-producing countries to play again at oil price increasing, this can give only a situational effect, a short term, maybe medium term. But, actually, the general trend will be dawnward. The only exception will be the situation when a large-scale armed conflict would suddenly arise somewhere in the Persian Gulf or internal political upheavals would happen in Saudi Arabia. Then the situation could be quite different. In other cases there are no reasons to believe that the price of oil will now move somewhere higher, higher, and higher.
WE SAW A SHARP DROP IN OIL PRICES, BUT IT WAS SHORT-LIVED
- Will the Russian economy and the ruble be strengthened if the corridor of oil prices you mentioned is sustained?
- Of course, it will somewhat ease Russia's current stance. As I said, a minimum level of desired oil prices for Russia would be $80 plus per barrel. Of course, since the second half of 2014, when oil prices started plummeting, Russian economy has adapted to low oil prices, but 50+ dollars per barrel is not 110 as it was in 2013. For Russian economy oil price below $30 per barrel would be a killer price. We saw a sharp drop in oil prices, but it was short-lived. The oil market plunged and then played back, and now it has been stabilazing in this oil price corridor that is twice lower than before the steep drop had started. In any case, this confirms the forecast of our Center, which was made last year about the fact that oil sector was entering into a period of volatile but mostly low oil prices. In addition, we must understand that today's OPEC is hardly to compare with the OPEC of 70s or even 80s, when this cartel dictated the rules of the game for the whole world oil market. Now it is not so. Now it provides about one third of global oil production and can no longer affect the oil market so directly.
Moreover, the price of 60 dollars per barrel does not help to solve budget problems of some members of the cartel at all, in contrast to Russia, Iran, and Saudi Arabia. For example, Venezuela and Ecuador generally need oil price somewhere about a hundred dollars per barrel due to high cost of production. So this agreement is fragile. Well, seems like they reached agreements, well, it was necessary to give a positive signal to the market, well, they did it. But in my opinion, it will not last for long. Because every country will anyway act depending on its own interests. Iran gave some assurances despite it needs a higher oil price due to complex economic situation; however, I think, in order to avoid further negative phenomena in the economy, it will try anyway to boost oil sales. Moreover, the stance of the new administration of the United States on Iran may be totally different than toleration of Obama's administration. So Iran now have a certain window of opportunity to sell more oil and earn more until the United States come again to a tough line with Iran. Otherwise, Iran will again come on hard times if suddenly again there would be resumption of sanctions in one or another way. But at that times price of oil was high, and now it is low. So I think that Iran will conduct, despite all the agreements, an absolutely independent policy.
- One pro-Russian energy expert said that news on the OPEC-Russia agreement meant that gas price would rise significantly, and we would have no other way but buy Russian gas. How would you comment this?
- Yes, the price increase will happen. Although the coupling of gas prices to oil prices has weakened sligtly, but, nevertheless, there will be certain correlation and gas price wil increase. But that does not mean that the Russians will sell or try to sell us gas at any old price. Not at all. The Russians will also try to impose a different price, but by all equal terms, even if they propose a price that is competitive with gas prices in the European gas hubs, we still have to give preference to reverse that means to import gas from the European direction. Because Russia's war against us is not finished.
I LIKE THE WAY WE NEGOTIATE IN BRUSSELS
- Do you like how Naftogaz negotiates in Brussels or not?
Yes. You can argue with them for some reasons but the whole year without Russian gas - it speaks for itself. And the fact that a certain group of experts raises a "squeal" means that they work out the algorithm of creation of information noise, which then is also used by Gazprom. The talks of our delegation will be held next week in a trilateral format. It is clear that Gazprom had once done a good thing when shifted "Naftogaz" to system of advance payments. First, a hard condition should be and need also to be guaranteed by our European partners that the entry points of gas must be not on the Eastern border of Ukraine, no variations, so that this gas appears in the occupied territories. Second, advance payment may not be used as repayment of the so-called "debt", which de jure does not exist, and de facto too. I think that is why we need a third party in these gas negotiations - in order this party to act as a kind of guarantor of the agreements. If we go back to the themes of the European gas market, it is necessary to take into account: the European gas market is becoming tighter, competition is increasing . Despite the fact that more than one third of the EU gas imports come from Russia, gas supplies to Europe are diversified. Moreover, implementation over the past years of objectives of the programme for building of appropriate interconnections has increased the manoeuvrability of the European gas networks. And if somewhere gas shortage happens, it can be balanced by gas surplus in other regions. By the way, in the presentation of the International Energy Agency it was clearly indicated on the rapid increase of both production and supply of liquefied natural gas to the world and European markets. Liquefied natural gas... Actually, Fatih Birol used the term "the second wave of gas revolution". The first wave was shale gas revolution and the second wave of this revolution is a revolution of liquefied natural gas.
- It's so expensive.
- Just wait. Everything flows, everything changes. The technology has been improving. And liquefied natural gas offers have been increasing. And if offers increase, the players are forced to lower prices whether they want this or not. There will not be return to gas prices as they were when the price of oil reached over $100 per barrel. And there will not to be such a direct price correlation, when there was a tight coupling, directly proportional, of gas and oil prices. Now it is nothing more than a propaganda slogans from sympathizers of Gazprom. Besides, Gazprom lost six billion dollars in the first quarter of 2015 when it held pointless experiment with minimizing the supplies of gas to European customers in order they couldn't supply gas to us by reverse. So now Gazprom is trying to use another algorithm to maximize its gas sales without raising the price, but on the contrary, taking into account price situation on the European market. It ran down its ability to manipulate with gas, lost money and its share in gas market.
But threats are still there. Now "Gazprom" has the last window of opportunity to push the "Nord stream-2", because the European Commission, in spite of such amorphousness in making critical decisions, takes a negative stance against this project. Therefore Gazprom needs to somehow trigger the next gas crisis, in order to tell the Europeans that Ukraine disrupts transit and the EC doesn't want to build this project. We can again see calls: "Ukraine has accumulated not enough gas; does not want to purchase additional gas but we offered it to them". Despite the fact that the Ukrainian route is economically the most optimal to maximize the income of Gazprom, Russians can tell us that "Nord Stream" is better and cheaper, but it doesn't look so even from the point of view of the common sense. Just look at the route. Finally, in the winter period it is also possible that the gas transportation system (GTS) will consume more fuel gas in order to maintain regulatory pressure at the output of the GTS . And then, Gazprom would be ready very quickly to accuse us of stealing gas, respectively, to block transit supplies, accusing Ukraine of gas siphoning, as it was in 2009. Therefore, such scenario is not excluded. We should be prepared, and this should also be agreed in Brussels where it will again be gas negotiations in the trilateral format.
Lana Samokhvalova, Kyiv
From UKRINFORM
