Protectionism Vs Resource Nationalism

APS Review Oil Market Trends, Feb 23, 2009

The six-year oil price shock has caused things far worse than what the previous shocks had produced. Against the much-drummed up trend of resource nationalism from such short-sighted petroleum exporters as Iran and Venezuela, now there is protectionism. Apart from printing more money from the main players in the global economy - a trend which could turn into the worst money war the world has ever seen - the US under Barack Hussein Obama is leading the "project energy independence" fashion which will be among the main goals of the Group of Seven (G-7) powers. Energy independence will be the worst the fossil fuel exporting NOCs will ever face.

When oil prices were high in the past six years, NOCs were keen to ensure IOCs were not gaining more than what host states would dictate. As a result, the terms of EPSAs in countries such as Libya and Algeria became increasingly severe. The situation in Venezuela and other Latin American states was much worse: IOC assets were nationalised and the sanctity of contracts was violated. Russia had a fair share of such games, which frightened a number of IOCs away from that eighth member of the G-8.

Mow that oil prices are falling, IOCs are thinking twice before entering into EPSAs. Such was the discrepancy in the valuation of E&P contracts between the state and IOCs in Algeria's last exploration licencing round in December 2008 that only four of the 15 concessions on offer received bids. Sonatrach, a NOC seemingly oblivious of what was happening around the world despite the fact that Minister Khelil worked for the World Bank to wean Latin American states from resource nationalism, withdrew the most attractive prospects from the round, having established that any bids were likely to be well below initial expectations. In Libya, senior IOC executives say another EPSA round on terms similar to those offered in the previous one would not be viable.

In 2008 Khelil was OPEC president, an honourary position now held by his counterpart from Angola. At OPEC's last ministerial meeting in Oran, Western Algeria, on Dec. 17, Khelil said that, although "normally OPEC has no price target...the bottom cost below which we cannot step down is between $70 and $90 a barrel".

Even Jordan is opting for energy independence. To Jordan this means self-defence, rather than protectionism. In Jordan, development of oil shale - involving a technology not viable at a crude oil price of less than $70/b - remains a crucial part of the country's strategy to reduce its dependence on petroleum imports. The same is now being considered by Morocco, Syria and any other country with large oil shale deposits.

Maher Hijazin, head of Jordan's Natural Resources Authority (NRA), says low prices will not affect its shift to oil shale development, stressing: "Oil shale projects are 40-year projects; we are not working on the oil price of today".

Protectionism also means shifting to dirtier sources of energy, such as coal, in poor countries with large coal deposits. The rationale in such countries is that, when their economy improves, they could afford shifting to clean coal technology. There, too, protectionism means self-defence - since to them the current cycle is one of survival because it is a cycle of money wars between the rich and poor countries.

Yes, paper WTI and its counterparts such as paper Brent and paper Oman, will rise above $100/b again in the coming years because world oil demand recovery is inevitable. But protectionism, or self-defence through energy independence, seems to be a trend towards oil demand destruction - likely to affect the world's biggest producers of conventional crude oil led by Saudi Arabia. Iraq is most likely to over-take Saudi Arabia as its potential reserves of conventional oil now are said to exceed 350 billion barrels.

The contrast between the industry's uncertainty about the next year or two and its confidence about the longer term is explained by the fact that despite the unexpected scale of the global recession, the consensus among IOCs and NOCs is that the fundamentals of the market are unchanged as they believe this is a cyclical rather than a structural crisis. But it could well be a cycle of big structural changes in energy.

According to the IEA's latest annual report, published in November 2008, conventional crude oil production will peak in 2020, while overall crude oil output will peak in 2030. The IEA has revised its estimated rate of decline from existing oilfields to 6.7%, from 3.7% in 2007, meaning that additional crude oil supply will have to increase just to maintain current production.

OPEC's leading energy expert in early December 2008 said he expected world crude oil consumption to rise to 92.3m b/d by 2012, from 84.7m b/d in 2006. This may be true, but what about the 2020s, if Obama's energy independence plan succeeds and the trend spreads to other G-7 and emerging economies (EEs) such as Abu Dhabi, China, India, Saudi Arabia. South Korea, etc.?

In its Commodity Investor report, published on Dec. 11, 2008, Barclays Capital says a sustained period of low prices would prepare the ground for "potentially catastrophic supply problems in the next few years". Yes, paper WTI will shoot to the roof again; but what happens next?