Oil industry at a crossroads

The oil industry is undergoing one of the biggest transitions in its history, requiring governments and private companies to make huge adjustments, the Minister of Energy Suhail Al Mazrouei said at the opening of this year’s Adipec conference in the capital.

“We are gathered at a very interesting time for the oil industry, a time of some hesitancy, of pain for some,” Mr Al Mazrouei said.

The overarching theme this year is the sharp drop in the oil price since last year and the attendant curbing of billions of US dollars of planned capital investment and cuts in operating spending, as well as anxiety that the prospects for a recovery any time soon are flat.

“These are turbulent times for world energy,” said Daniel Yergin, the author of The Prize, one of the most widely read histories of the oil industry, in a keynote speech.

Echoing Mr Al Mazrouei, Yergin said that the sharp price slide and the move from relative price stability over the previous four years to a period of volatility reflect a big overhaul in the world energy order.

“We’ve come to the end of the Bric era, from the emerging markets era, and moved into the shale era – from a time of scarcity of oil supply to one of abundance,” said Mr Yergin, who is also the vice chairman of IHS, a Washington-based consulting group.

Bric refers to the concept introduced in 2001 by the investment bank Goldman Sachs, which forecast that Brazil, Russia, India and China (Bric) would account for the bulk of the world’s economic growth in the following decades, including the bulk of oil demand growth.

China’s oil demand did grow four-fold from the start of the century to last year, when it accounted for more than a quarter of the world’s oil demand growth and it overtook the United States as the world’s largest oil importer at more than 6 million barrels per day.

However, the pace of China’s oil demand growth has fallen off sharply. Underlining the changed environment for economic growth generally, Goldman Sachs confirmed it would fold its Bric fund into its broader emerging markets funds after several years of poor performance.

“Strange things have resulted from this movement,” said Mr Yergin. “The US is now back in the role of swing producer, a role it last had six decades ago.”

There is likely to be a huge squeeze on the industry over the next few years – IHS predicts $1.5 trillion less spending over that period, with more than half coming from declining costs for things such as rig leasing and engineering spending, and the rest from less capital investment.

But that will not be spread evenly – IHS reckons 60 per cent of the reduction will be in North America.

Mr Al Mazrouei noted that the UAE’s investment plans are continuing, even if its national oil company is looking for costs savings on its projects.

He said the relative health of the industry in the region was reflected in the fact that the Adipec conference had surpassed this year’s OTC conference in Houston as the largest industry gathering in the world, with 2,050 exhibitors.

“Global crude oil prices have dropped by more than 50 per cent, but that does not change the vision of the UAE and of the region to continue as suppliers to the world,” he said. “We are not cancelling our projects.

“I am confident we will see in 2016 some improvement in the market,” he added. “Don’t ask me how big – the market will decide that. Don’t ask me who will play a role – it will not be Opec. Everybody has to play a role.”

Mr Mazrouei also said that the upheaval in the world oil market is an opportunity for countries to reform, as the UAE did by changing the way it calculates prices for transport fuel earlier this year – a move that saved Dh9 billion in subsidies compared to last year’s budget.

“I think there are lessons to be gained from that experience,” he said. “I hope it is the beginning of more reform.”