Connect with us

News

Looking Beyond Oil Price Collapse Towards Post Recovery Savings (Part 2)

Published

on

By Austin Okere

I will attempt to share the justification for this projection from the insights expressed by experts at various fora, and my own informed postulations.

Depending on which expert you talk to, and the perceived direction of the Chinese economy, you get three different views; a school of thought holds that the price of oil may be far from the top but closer to the bottom, while others believe that oil price will bottom out at about $20 per barrel. Yet another group holds that Oil price has reached equilibrium and will oscillate between $40 and $45 per barrel.

The optimists believe that oil price will recover to between $70 and $80 per barrel towards the end of the year, and remain within that band, as a sustainable balance between demand and supply is reached.

According to the 2015 OPEC annual statistics bulletin, world crude production in 2014 was 73.4 million barrels per day (mbpd) while demand was 91.3mbpd.

With the significant scale back in shale production arising from the steep price drop from late 2014 to levels that make shale production unviable, it will be safe to assume that production has dropped considerably while demand has more or less remained steady.

The major issue for me is the question of the so called glut. If there is indeed a glut, what is the accurate size of the glut and therefore, how long will it take for supply and demand to balance out.

I listened to an expert at a recent forum argue very eloquently against the widely touted 850 million barrel excess crude inventory.

Based on the data he and his firm have meticulously collected, he believes that the excess supply cannot be more than a quarter of the touted figure.

This means that the glut is overstated by 600 million barrels. Meanwhile, Iran’s return to the market has been less dramatic than the Iranians said it will be, adding only 220,000 barrels per day (bpd) in February 2016 according to the International Energy Agency (IEA); only a fifth of their forecast of 1mbpd.

The IEA also believes that non-OPEC output will fall by 750,000 bpd in 2016, while US production alone will decline by 530,000 bpd this year.

The other possible disrupter to oil is the incentive to explore alternative forms of energy such as renewables, majorly solar and wind, in response to the impending carbon tax fuelled by fears of global warming and pollution.

According to Amy Jaffe and Jeroen van der Veer, leading experts on global energy policy, factors such as technological advancements, the falling price of batteries that power electric vehicles, and a post-COP21 (UN Climate change conference in Paris in 2015) push for cleaner energy could drive oil use below 80 million barrels a day by 2040.

These threats to oil do not seem practical on a meaningful scale in the near to medium term.

The example in Germany seems to buttress the fact that renewables may not make sense in Europe and other cold climes, and that they can only be achieved with very steep and unsustainable subsidies.

It is reported that Germany, the poster boy for renewables has so far invested about $500b on wind and solar energy. And yet renewables account for only 3.5% of global energy use, while oil and gas accounts for as much as 60% (this excludes shale, peat and coal, which account for 10%).

Electricity accounts for 18%, while biofuels and waste account for the balance 12%. In simple terms, the eight major oil companies, with a cumulative valuation of $1.4trillion generate as much as 20 million barrels per day versus the $2trillion invested so far to generate the equivalent of 7million barrels of oil per day in renewable energy. How sustainable is this huge subsidy?

For the switch to electric cars to happen, we would need to replace refineries producing petrol with power plants that will produce the additional electricity required to charge the electric cars. How quickly can this switch happen, even if it were practical?

My theory on the oil narrative is as follows: Saudi Arabia being the biggest reserve holder wanted to drive the shale producers, whom they saw as ‘squatters’ out of the market.

They opened their taps to drive prices down, knowing that shale needed an oil price of above $40 to produce at break even.

The high oil prices were driving cheap capital into shale and improving technology and yielding high returns and thus attracting more capital and repeating the cycle, thereby iteratively making shale a bigger threat.

I believe that the Saudi plan was hijacked by the Oil traders, who thrive on price arbitrage fuelled by uncertainty.

They rode on the back of increased Saudi production to shout ‘oil glut’! They increased the FUD (fear uncertainty and doubt) with news of huge inventories coming on stream following the lifting of sanctions against Iran, but the general view is that Iran’s oil was already finding its way into the market through the back door, resulting in an insignificant net increase in supply.

It then became a self-fulfilling prophesy which snowballed, with the producers pumping recklessly to maintain market share and preserve earnings, which drove prices further down, exacerbating a bad situation.

I believe that the oil traders and bankers are trying to make up for a lost bet on the back of overenthusiastic exposure to the oil market. This is captured by the screaming headline in the Financial Times of March 22, 2016 ‘$150b losses on energy company bonds spur default fears’.

 The article further states that the total debt among oil and gas companies including loans almost tripled from $1.1trillion in 2006 to $3 trillion in 2014 quoting the Bank for International Settlements.

Twenty of Europe’s biggest banks have energy loans totalling $200b, enough to wipe out a quarter of their common equity, while twenty of the leading US banks have loans totalling $115b or 11% of their equity.

With the desperation arising from a risky bet gone awry, one does not need to dig too deep to glean a motivation to drive prices down, buy on the cheap and subsequently sell on the high to cover the huge debts.

I believe that in the end, the market will wave its magic wand, and supply and demand will correct themselves and reach equilibrium with price. You cannot hide a pregnancy for too long.

It is not at all surprising that the heads of the world’s largest oil trading houses, six of which sell enough oil to meet almost a fifth of global demand were unanimous in calling for an end to the two year price slump at a Financial Times conference in Lausanne.

What should be more important to all of us, beyond these theories is whether Nigeria will finally learn from her past mistakes and institute a mechanism for saving when oil prices rebound, as I believe they eventually will. And what if the optimists are wrong, and prices do not rise. We would have lost nothing.

We would have learnt to diversify away enough from oil to live comfortably within the current price. If on the other hand the optimists are right, then we will save the equivalent of $36.5b per year (i.e. 2.5mbpd X extra $40per barrel X 365 days).

In any case we would have nothing to lose by preparing and having to wait a while longer than anticipated. Success only happens when opportunity meets preparation.

 

Austin Okere is the Founder CWG Plc and Entrepreneur in Residence, Columbia Business School, New York. He also serves on the World Economic Forum Business Council on Innovation and Intrapreneurship.

Continue Reading
Advertisement
Comments

News

Ex-Israeli Minister Who Lived in Nigeria Accused of Spying

Published

on

Gonen Segev, former Israeli cabinet minister with a checkered history of attempted drug smuggling and credit-card fraud has been charged with spying for Iran.

 

Segev reportedly lived in Nigeria, where he first made contact with the Iranian Embassy in 2012, the Shin Bet internal security service said Monday.

Gonen Segev

Segev, who served as energy and infrastructure minister more than two decades ago, was arrested in May and charged last Friday with espionage and aiding the enemy in wartime.

 

He’s accused of providing Iran with information on Israel’s energy industry and security sites, as well as political and defense officials.

 

Most details of the indictment are under a gag order, Segev’s attorneys, Eli Zohar and Moshe Mazor, said in response to the charges.

 

The Shin Bet announcement “assigns the matters extreme severity while the indictment itself, whose details are under gag order, paint a different picture,” they said.

 

In recent years Segev lived in Nigeria, where he first made contact with the Iranian Embassy in 2012, according to the Shin Bet.

 

The ex-minister met with his handlers twice in Iran and later in other countries, and they gave him a system for encrypting messages, the agency said.

 

Israel regards Iran as its bitterest enemy because of its nuclear work, its ballistic missile program and its support for other enemies of the Jewish state. Iranian officials have referred multiple times to Israel’s annihilation.

 

Segev, a native-born Israeli, was elected to parliament in 1992 and served as a minister from 1995 to 1996.

 

He practiced medicine before entering politics, but had his license revoked after being jailed for trying to smuggle 32,000 Ecstasy tablets into Israel from the Netherlands, Israeli media reported.

 

He was also convicted of credit card fraud for falsely claiming his card had gone missing, then using it to withdraw money, media reported.

Continue Reading

News

FG Agency too Broke, Orders Staff to Pay for ID Cards

Published

on

The Centre for Satellite Technology Development, one of the centres under the National Space Research and Development Agency (NASRDA) has reportedly directed members of staff to personally fund the production of identity cards due to “paucity of funds”.

 

In a circular with ref number: CSTD/ADM/41, dated May 21, 2018, signed by Shuaibu A.O, Deputy Director Admin and Finance, on behalf of Dr. Spencer Onuh, Director of the centre, reads: “I am directed to inform all staff of CSTD that the centre is no longer in a good financial position to fund the production of Staff Identity Cards.

 

“In view of the above, all staff are advised to personally fund the cost production of their staff identity cards through AP&D (Admin) till further notice.

“This is for your information and strict compliance please.

“Thank you.”

 

Centre for Satellite Technology Development, has less than 500 staff member.

 

According to Gbenga Omole, a printer at the Area 10 shopping complex in Abuja: “It costs N200 to produce a plastic identity card, but if you want to produce up to 500 cards, then we can give you a discount.”

 

A staff of the centre who pleaded anonymity told our correspondent that the practice of staff sponsoring their identity cards production had been in practice for over two years now.

 

The staff said: “This has been in practice for a long time.

 

“I have even made my ID Card myself.

 

“It is unbelievable because the centre does not have to produce ID cards for all staff but only for promoted staff.”

Continue Reading

News

Shell Tasks Contractors over Safety, Rewards Champions

Published

on

Peter Costello, vice president of Shell Companies in Nigeria (SCiN) and Gabon has charged contractors working for and with Shell Companies in Nigeria to prioritise safety and be relentless in discussing the challenges and dilemmas, noting that the international oil giant was poised to help improve safety performance throughout the energy industry.

 

“Safety is our top priority. Everyone who works for us, or with us, has an important part to play in making SCiN a safer place to work. We cannot succeed in isolation and we must share the challenges by building strong partnerships to further improve our safety culture,” Costello said at the 7th edition of annual SPDC JV Contractor CEO Safety Leadership Conference held in Lagos last week.

 

He added: “We expect our staff and contractors to comply with safety rules and regulations relevant to their work; to intervene to prevent unsafe conditions; and to respect fellow workers and the communities in which we work.”

 

In his remarks, Osagie Okunbor, managing director of The Shell Petroleum Development Company of Nigeria Limited (SPDC) and Country Chair, Shell Companies in Nigeria, described the annual event as an opportunity to share learnings and ensure alignment, common ground and shared commitments on Health, Safety and Environment (HSE) in Shell’s joint operations.

 

“We cannot be too careful with safety issues. Through engagement, we ensure that the right competence is in place and we create opportunities for our staff and contract staff to speak openly about dilemmas. The collaboration must be continually strengthened so as to make Shell a safety model in the Nigerian oil and gas industry.” Okunbor said, adding that SPDC “more than ever before, is committed to delivering energy responsibly and safely, with total prevention of harm to our employees, contractors, local communities and the environment.”

 

While setting the conference scene, Chidube Nnene-Anochie, general manager Safety and Environment of Shell Companies in Nigeria, said the two-day conference was informed by SCiN’s mission to constantly work in partnership with contractors, regulators, industry trade associations and professional bodies to share Shell’s global safety experience, standards and knowledge.

 

She said the conference had over the years helped to increase safety awareness among contractors working for SCiN particularly in the areas of safety hazards that are peculiar to oil exploration and production activities.

 

Highpoint of the conference was the presentation of the 2018 SCiN Safety Leadership Awards to contractors who have distinguished themselves as safety champions in the areas of personal, process and transport safety, among others.

 

The conference was attended by SCiN including the Managing Director, Shell Nigeria Exploration and Production Company (SNEPCo), Mr. Bayo Ojulari; Managing Director of Shell Nigeria Gas, Mr. Ed Ubong; and the CEOs and representatives of over 83 contractor companies.

Continue Reading

Trending

Copyright © 2017 Communication Week Media Limited.