Summary
The Rigzone Newsletter quoted Alexander Kolyandr of Dow Jones Newswires who reported that Alexei Miller, CEO of Gazprom believed that the price of crude oil would reach $85/bbl by the end of 2009. The current price level is not a technical correction but a return to an existing trend. Speaking in Porto Cervo, Italy Miller blamed “financial transactions” rather than physical markets as the reason for low oil prices. He added that the volatility of the market will reduce production capacities. At the same time reduced investments of the order of 20% will delay addition of new supply. Without capital expenditure, he expects crude oil prices to reach $150/bbl within two or three years. He admitted that the economic crisis had exerted a powerful impact on the global energy markets. By the year 2012, a major imbalance will exist between supply and demand unless capital expenditures returns. Miller also called for reform of the “existing system" of linking oil prices to only one currency.”
Analysis
The international major oil and gas companies have history to guide them in their making of investment decisions. In addition to that, they have reservoir engineers who monitor the natural decline rates of petroleum reservoirs all over the world. They know that these declines have to be replaced on a timely basis or the gap between supply and demand will quickly have both economic and political consequences. Therefore they keep capital and exploratory investments at levels which they know will keep their refineries supplied. All of the internationals are net buyers of crude oil. Thus they have a vested interest in keeping crude oil prices in line. Bought crude added to equity crude keeps the cost to the intake manifold of the refinery at a reasonable level thus avoiding high gasoline and lubricating oil prices. Gazprom has been around long enough to learn these same lessons. The great unknown in the oil and gas supply equation is how OPEC responds to crisis conditions. These national oil companies are not complete masters of their destiny. Their decisions can be modified or even controlled by some ministerial agency whose agenda is related to government projects not connected to the energy industry. This explains why various Middle Eastern politicians say that a price of $100/bbl is needed to keep their national budgets in working order. When OPEC members shut in, they always go for the high cost production. This oil comes from wells with high water cuts. Restoring production from these wells, particularly if they remain shut in for some extended period of time, becomes problematic. The reason is that the water column in the well bore seeps into the pay zone and restricts permeability to oil. Often, when such wells are restored to production, they produce only salt water or more likely, nothing at all. Thus OPEC has to include technical as well as economic considerations in their decisions to produce or shut in. The “existing system” of crude oil pricing in U.S.dollars is already showing signs of weariness. If the dollar could be relied upon as a durable unit of value, no need would exist to reform the system. CEO Miller is merely saying what the Chinese are saying; i.e., the dollar is losing value at a rate guaranteed to cause international concern. If the U.S. administration would adopt policies designed to strengthen the dollar and reduce its instability, talk of reforming the system would quickly vanish.
