(EnergyAsia, August 24 2012, Friday) — Barring new geo-political threats to supply, oil prices will stay flat for the rest of the year on increased production from Libya, Iraq and the US, predicts consultant Ernst & Young.
At the same time, smaller, independent oil and gas companies will struggle amid tightening credit conditions, resulting in increased transaction as well as merger-and-acquisition activities as smaller players sell equity or project stakes to partners to sustain development.
In its Quarterly Oil and Gas outlook, Dale Nijoka, Ernst & Young’s Global Oil & Gas Leader, said:
“There is a diverse range of international investment opportunities available for well-capitalised national oil companies (NOCs) and international oil companies (IOCs). Continued interest in unconventional resources is one of the areas we see driving a higher level of NOC M&A activity for the remainder of 2012.”
The first half of the year was marked by oil price volatility and shifting fundamentals.
In the first quarter, Brent crude prices surged close to US$130 per barrel on concerns over Iran’s reaction to tightened Western trade sanctions to try stop its nuclear programme, the worsening territorial dispute between Sudan and South Sudan and signs that the US economy could be recovering.
However, prices retreated in the second quarter as demand doubts grew with the rising international economic uncertainty and Iranian supply worries diminished.
Mr Nijoka said: “Early optimism over the health of the global economy proved to be short-lived. Higher oil prices and weaker than expected economic growth have translated into fears of a slowdown in demand for oil.”
Despite concerns over weakening oil demand, OPEC decided to leave production levels unchanged at its June meeting, causing Brent crude to fall to below US$100 per barrel for the first time since early 2011, and to below US$90 per barrel at the end of June.
Prices have since climbed back up to over US$110 per barrel following the escalation of the conflict in Syria and renewed worries about Iran.
Refiners would find it a relief if crude prices were to remain below US$100 per barrel for a prolonged period. However, over-capacity among European refineries, which are also facing competition from new, more complex refineries in Asia, continues to keep margins under pressure.
For the rest of the year, oil markets should remain well-supplied, said Mr Nijoka.
“We expect additional supplies will be made available to the market through the return of Libyan production to pre-conflict levels, increased production from Iraq and an increase in oil production from shale plays in the US, as producers switch their investment focus from natural gas to liquids,” he said.
“However, any new threat to supply emerges – whether perceived or real – has the potential to shock oil prices.”
Natural gas is the growth story
The shale gas dash in the US has resulted in a supply glut that could turn the country into a net exporter of natural gas, according to Ernst & Young.
Despite the weak gas price outlook in the region, NOCs’ appetite for access to unconventional projects in North America remains undiminished. The main driver of Asian NOCs’ pursuit of these unconventional assets is to gain knowledge of the underlying technology in order to apply that expertise to other areas of the globe, as well as to ensure the security of supply.
However, in Europe, early shale gas exploration results have been disappointing on the whole. Estimates of reserves have been revised down in Poland and the UK.
As a result, companies are re-evaluating and shifting their investment focus to other areas such as the Neuquen Basin in Argentina. The US Department of Energy estimates that Argentina has 774 trillion cubic feet of risked recoverable shale gas resources, of which the Neuquen Basin is home to over half. However the threat of resource nationalization remains a major risk for investors.
A new liquefied natural gas (LNG) frontier is emerging in East Africa after a string of recent gas discoveries in Mozambique and Tanzania. While only initial estimates of reserves have been announced, there could be sufficient gas in place to support several large-scale LNG projects.
East Africa is geographically well placed to meet the LNG demand in Asian markets. The discoveries have sparked investment interest from both IOCs and NOCs. While some LNG projects in these emerging regions will not proceed to final investment decisions immediately, there will be increased global competition for access to gas-hungry markets.
Mr Nijoka said: “Longer-term, LNG from East Africa could become more competitive than unsanctioned Australian LNG projects, causing them to be delayed, re-worked or possibly cancelled. In Australia, the pace of LNG development has resulted in mounting cost pressures for operators.
“There have been cost over-runs on a number of Australian LNG projects due to inflationary pressures in the local market and appreciation of the Australian dollar relative to the US dollar. Cost control on these capital projects is also likely to be a key focus area for oil executives in the next six months.”