Varinia Radu, Partner at CMS Cameron McKenna
Brent oil price, referenced in the London exchange, has had a period of sharp decline, reaching, from USD 115/barrel in June, almost USD 82/barrel on October 16th and USD 77 in early November, the lowest level reached since the same month of 2010. For many large companies, this price represents the lowest limit of the profitability. The quotation hasn’t stabilized yet and, given the downward trend, it already creates reactions of concern.
If the price remains at this level, The Economist has calculated that the global bill of oil consumption will diminish by approximately USD 1 trillion per year. The light sweet crude (WTI) quotation, reference for the U.S. market, with delivery in November, has fallen even by USD 2 in a single day, reaching less than USD 80, for the first time since June 2012.
Futures contracts on commodity exchanges in New York and London have recorded declines of USD 3-4 per barrel, in only several days, for oil to be delivered in November. On the New York exchange, contracts for WTI oil fell in the past three months by approximately 25%. Overall, in the first 10 months of the year, this quotation plunged 18%.
Oil price – a tool for gaining market share
The unsettling evolution of oil quotations is the effect of several dominant factors. Saudi Arabia, together with other OPEC members, seeks to protect and increase its market share, especially for satisfying customers in Asia, and is willing to take short and medium-term losses against long-term gains. Nobody expects for OPEC countries to cut production, taking into account the approach of the cold season. The market is over-supplied and the demand estimated by the International Energy Agency (IEA) was reduced by one-fifth. The world economy, especially in Europe and Asia, is not progressing at a pace that absorbs all the available production off the market today.
For some expert observers, it became obvious that OPEC cannot coordinate its actions with refineries, in terms of production and transportation decisions. Experienced oil traders take advantage of the fact that prices are fixed by the arrangements made by some of the most powerful companies in the Middle East with those controlling the processing and refining of crude oil in the major terminals from Western Europe and the U.S.A. Arrangements are almost never based on operating costs, while competition authorities have no power to intervene.
The current circumstances pose a question on the pricing mechanisms and the appetite for new investments in the oil sector, along with the need to find solutions for cost control and management of projects already in progress. Hydrocarbon production from USA shale deposits has transformed the country from a net importer to a potential exporter. Oilmen, congressmen and industry associations carry out heated debates over the scenario of a more liberal regime for the exports of energy goods.
The potential threats to change the Saudi domination as “swing producer” are the deep offshore producers and the comeback of the “classic” producers on the global market. Libya alone pumped in late September by 40% more oil than in August, and Iraq and Iran, despite the domestic insecurity and trade restrictions, have growing productions. Moreover, one should also consider the refocus of the Russian companies on domestic deposits, with strong support from large Western players. A low or decreasing oil price restricts the room for maneuver from a technical-technological point of view and limits the ambitious plans of exploration, development and production.
Impact on oil investments in Romania
“A barrel of oil priced at $ 80 puts pressure on investment in exploration and production”, a recent statement of Gabriel Selischi, responsible with this sector at OMV Petrom, firmly announces. In terms of this sector’s development in our country, there have been declarations of opportunities which would bring in Romania at least several hundred million dollars in the coming years only from interested foreign companies, without taking into account the investments already committed and ongoing from current operators.
At this moment, the Romanian oil industry focuses on several directions: rehabilitation of “mature” fields already at the limit of profitability, investment in exploration (conventional and unconventional) to highlight new resources and to reduce the depletion rate (currently at 10%), as well as further exploration in the Black Sea, hoping that the previous results and the encouraging estimations will confirm commercial reserves.
In parallel, we are witnessing the efforts of the Romanian state, in bilateral partnerships, to complete several gas interconnectors in order to link Romania to the European gas transmission network, respectively to the Central European hubs, but also to bring to the market the natural gas from the Black Sea, within the minimum five years.
In this general context, some particular factors must be taken into account, which have recently raised practical problems for the petroleum title holders, such as: difficult access to land related to oil blocks for various reasons (e.g. local public opposition to shale gas, lack of centralized cadastral records, lack of unambiguous legal provisions on the exercise of the legal rights of the operators), the lack of an objective mechanism to compensate land owners for the crops temporarily affected by the execution of petroleum operations (aspect that generated in practice multiple law suits), uniform interpretation of the petroleum law in terms of the easement right of the petroleum concessions holders, the cumbersome and restrictive procedure for management and control of geological data related to resources and reserves that mostly affects foreign investors, the repeated changes in the tax regime applicable to the oil and gas industry in recent years.
All these issues are challenging the economic attractiveness of the petroleum exploration and production activity, which by definition implies high operational risk and requires significant upfront investment with long-term recovery rate. In addition, Romania is characterized by a mature and complex geological profile, which involves an additional risk, especially for “frontier” exploration, at very deep targets and with advanced and costly technology.
Not only the price of the oil barrel is the decisive factor for attracting investment, but also the local conditions, such as: the infrastructure, the main and secondary legislative framework, the predictability of the tax environment, the labor market, transparency of decisions, adaptation of legislation to the best international practices. However, oil price dynamics is taken into account in analyzing market outlets, through scenarios that are judged in terms of both the opportunities they bring and the risks they contain.
Romania is thus placed in a position to readjust to the context of global and regional markets, using its strategic position and the available energy mix, to shape up the energy strategy which, on the one hand, can ensure the maximization of opportunities with the aim to attract significant international capital and, on the other hand, can lead to concentration of such investments in strategic projects (e.g., development of new underground gas storage facilities, exploration in deep areas and for unconventional resources), in order to diversify energy sources, increase the security of supply and obtain a satisfactory energy balance.
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The full version of this article can be read in printed edition of energynomics.ro Magazine, issued this November.
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