Oil Futures – July 15, 2013

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The Financial Times has recently published an analysis of oil futures which will have a significant bearing on global politics and economics particularly after 2023.

This report has picked up some salient features about the future of the global oil industry in the next decade based on the Financial Times reportage and my own assessments of the same. The countries selected for analysis are the United States, Saudi Arabia, Iraq and Brazil.

The United States

The Permian basin, a geological formation stretching from West Texas into New Mexico has been a “heartland of the US oil industry for almost a century”. Together with the Bakken/Three Forks shale of North Dakota and the Eagle Ford shale of South Texas, the Permian is one of the centers of the onshore oil boom that has lifted US production almost 50 percent over the past five years. If this pace continues, the US will become an oil and gas exporter fairly soon, thereby saying finis to its addiction to Middle East oil. The combination of horizontal drilling-sending wells thousands of feet sideways from the rig-and hydraulic fracturing (“fracking”)-pumping water, sand and chemicals into wells at high pressure to crack the rock and let the oil and gas flow out-has made it possible to extract oil and gas from reservoirs in shale and other rocks that were not commercially viable. One note of caution is necessary here. Some environmental groups have raised the alarm that fracking contaminates the water supply, making it unfit for human consumption and productive uses. This debate could slow down the US oil and gas boom. However the country arguably has the potential to resolve the contamination issues through appropriate technology.

Saudi Arabia

According to some analysts, Saudi Arabia is more important to future oil market supplies than ever. There are “two reasons for this-the kingdom’s commitment to maintain spare capacity and the nature of its contracts with customers which allows them to ask for more oil when the market is tight”. Saudi Arabia will thus remain an important player in the oil sector. But it does have some storm clouds in its future. The legitimacy of the Saudi royal family to rule Saudi Arabia could come under strong censure. Currently the Saudi royals have seemingly neutralized the reverberations of the Arab Spring in Saudi Arabia by reportedly promising its restless population subsidies amounting to $ 60 billion. That promise, according to Vali Nasr, the acclaimed author of The Dispensable Nation is dependent on Saudi ability to sell oil at least at $80 a barrel (It is selling currently at around $ 100 a barrel).Oil prices are subject to fluctuations so whether this benchmark could be sustained indefinitely is open to question. Another interesting statistic mentioned by Nasr is that forty five per cent of the Kingdom’s GDP goes to supporting the royal family with its “battalion of princes (60,000 by last count).This inequitable imbalance could cause severe discord against the government by ordinary Saudis, who may have cause to look askance at this incongruity.

Iraq

Ravaged by decades of war, Iraq’s oil industry is making a remarkable recovery. Production has rebounded strongly owing to big investments by western majors in the country’s long neglected southern oil fields. Iraq’s oil production has increased by 1 million barrels per day since 2002, the year before the US invasion, to about 3 m b/d. Last year it hit a crucial milestone when it overtook Iran to become OPEC’s second-largest producer after Saudi Arabia. Constraints in investing in Iraqi oil include infrastructure challenges and the worsening security situation. The above notwithstanding, Iraq’s oil industry could still provide an attractive investment opportunity.

Brazil

Brazil’s national oil company Petrobas in undertaking the world’s largest corporate capital expenditure program worth $ 237 billion in the five years to 2017.The project is being actualized around Guanabara Bay in the Rio di Janeiro region. Petrobas is engaged in developing what are the biggest oilfields in the Americas in decades-the “pre-salt” discoveries so-called because they lie under a two kilometers thick layer of sodium chloride. As the graph on page 1 illustrates, Brazil is estimated to be capable in 2023 of producing 4.8 billion barrels of oil per day from its current 2 billion plus. One company heavily associated with Petrobas in tapping the vast pre-salt fields is the UK’s BG group. It may be worthwhile for the Caret group to do due diligence on this group in view of possible profitable opportunities in collaborating with them.

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