Deutsche Bank AG has said that Oil prices may fall as low as $40 a barrel by April as demand collapses and production costs eases. In a report published on Bloomberg, Deutsche have said:
“Cash production cost ‘floors’ for the oil price are a shrinking target because of lower costs and a stronger U.S. dollar…This implies a `V' shaped downside to $40 a barrel crude around April 2009.”
Oil has dropped 63 percent from a record $147.27 in July. As on yesterday, crude futures hovered around $54 a barrel mark. In a separate item reported in the Financial Times, top executives from national oil company of China have predicted about $40 a barrel, thereby putting quiet a few new oil-exploration projects at risk of cancellation.
Oil that cheap is a major concern for big oil-producing countries like Iran, Iraq, and Venezuela. Any cut in production by OPEC, the cartel of oil exporting countries, is not likely to be as effectual as it was once thought to be. OPEC’s previous announcement of output reduction of 1.5m barrels a day failed to revive the falling crude oil price. The group's biggest producer, Saudi Arabia, will “move cautiously” amid the increase in the supply of non-conventional oils such as ethanol in the U.S.
However, this development has another implication. Cheaper oil could also take out some steam out of the push for clean energy in the US – which is much costlier.
Tuesday, November 25, 2008
Monday, November 24, 2008
Busting some myths
There has been a fair amount of discussion about energy policies in the recent past, aided in no small part by the interest generated in the recently concluded U.S. presidential election. Some facts that were thrown about has been taken as received wisdom. We examine some of these here.
1. Oil companies are extracting extra “economic rents” for the high price of gasoline/petrol
There are many factors that resulted in the run up of gasoline price. About 70-75% of the price is that of crude and refining/distribution/service station charges. The government taxes comprises of 10-15% depending on regulatory regimes. At the end of the day, Oil and Gas companies earn about 5-10% as profit.
There are also several additional factors that impact the price at the pump- cost of exploration and development, cost of extraction (the cost of human services as part of this is another story- more on this in another post), refining cost (no new refineries have been commissioned in the US in the past 17 years). I also think that the cost of speculation was a big factor- note the rapid decline in price in the last two months as many margin call positions were liquidated in the oil futures markets.
2. Oil companies are not investing in alternative energies.
The U.S. oil and natural gas industry invested almost $100 billion between 2000 and 2005 in emerging energy technologies, including $12 billion in non-hydrocarbons and $42 billion in greenhouse gas emission mitigation technologies from 2000 to 2006. This is not mere green PR, but real investments.
There have also been some advances in less intrusive technologies for exploration and production. However, the industry has successfully developed breakthrough technologies like 4D seismic imaging and multi-directional drilling, which have helped reduce the industry’s environmental footprint dramatically. Today it is possible to develop nearly 80 square miles of area below the surface from a single two-acre site on the surface.
1. Oil companies are extracting extra “economic rents” for the high price of gasoline/petrol
There are many factors that resulted in the run up of gasoline price. About 70-75% of the price is that of crude and refining/distribution/service station charges. The government taxes comprises of 10-15% depending on regulatory regimes. At the end of the day, Oil and Gas companies earn about 5-10% as profit.
There are also several additional factors that impact the price at the pump- cost of exploration and development, cost of extraction (the cost of human services as part of this is another story- more on this in another post), refining cost (no new refineries have been commissioned in the US in the past 17 years). I also think that the cost of speculation was a big factor- note the rapid decline in price in the last two months as many margin call positions were liquidated in the oil futures markets.
2. Oil companies are not investing in alternative energies.
The U.S. oil and natural gas industry invested almost $100 billion between 2000 and 2005 in emerging energy technologies, including $12 billion in non-hydrocarbons and $42 billion in greenhouse gas emission mitigation technologies from 2000 to 2006. This is not mere green PR, but real investments.
There have also been some advances in less intrusive technologies for exploration and production. However, the industry has successfully developed breakthrough technologies like 4D seismic imaging and multi-directional drilling, which have helped reduce the industry’s environmental footprint dramatically. Today it is possible to develop nearly 80 square miles of area below the surface from a single two-acre site on the surface.
Thursday, November 20, 2008
SPE Salary Survey
Society of Petroleum Engineer (SPE) recently released its annual salary survey for the Oil & Gas sector. I must say that I was delighted to find the result of the survey which is very promising and reassuring especially in this period of economic gloom! At a time when global giants are tumbling, people are being laid off in the thousands, the report findings are in stark contrast to the global economic slowdown. You can download the complete results here.
This survey was SPE’s second effort. Last year a similar survey was carried out among SPE members. This time around, the scale of respondents was higher and so was the diversity in their demography. Unlike last year, more than half of the respondents are working in countries other than the United States. In total, there were respondents representing 125 nations, working in 116 different countries around the world including a sizable number from North Sea/North Atlantic and Middle East regions.
A quick overview on the findings of the survey –
The average annual increase in base pay is reported as 8.1% overall. The work region with the highest increase is Australia/New Zealand, at 10.6%, while Canada is lowest with 7.3%.
This is great in comparison to other sectors where growth in the mid/high level is much less and in many cases, almost stagnant.
The United States, Australia/New Zealand, and North Sea/North Atlantic have the highest average pay in the industry while Southeast Asia being distinctly the lowest paid.
The average age of respondents is consistent around the globe – around 39 to 45 years.
If you’re looking to join this sector, here’s proof positive of the amount of money you can make. If you’re already in the business, you can do a quick benchmark against professionals in other geographies, disciplines and experience brackets.
This survey was SPE’s second effort. Last year a similar survey was carried out among SPE members. This time around, the scale of respondents was higher and so was the diversity in their demography. Unlike last year, more than half of the respondents are working in countries other than the United States. In total, there were respondents representing 125 nations, working in 116 different countries around the world including a sizable number from North Sea/North Atlantic and Middle East regions.
A quick overview on the findings of the survey –
The average annual increase in base pay is reported as 8.1% overall. The work region with the highest increase is Australia/New Zealand, at 10.6%, while Canada is lowest with 7.3%.
This is great in comparison to other sectors where growth in the mid/high level is much less and in many cases, almost stagnant.
The United States, Australia/New Zealand, and North Sea/North Atlantic have the highest average pay in the industry while Southeast Asia being distinctly the lowest paid.
The average age of respondents is consistent around the globe – around 39 to 45 years.
If you’re looking to join this sector, here’s proof positive of the amount of money you can make. If you’re already in the business, you can do a quick benchmark against professionals in other geographies, disciplines and experience brackets.
Thursday, November 13, 2008
Double trouble: deflationary oil prices & financial meltdown
Overlapping Crises
The current financial crisis has ballooned around the world economy and there are fears that this international recession could even trigger a global economic meltdown. Most economic analysts are predicting that it will get worse before it gets better. This is reflected in some of the recent downswings in stock markets worldwide as near term recessionary expectations are being priced in today. The channels of credit have dried up and businesses small and large have been plagued by a credit crunch.
The other key trend is in the sharp volatility of hydrocarbons prices. After a remarkable run up over the last two years, crude prices have plummeted over the past few months. We hit $58 for crude today; and will probably drop further as the global demand cycle weakens in the near term. While there are many factors driving the price of oil (demand- supply, speculation, political risk, etc), it is undeniable that there has been some demand destruction due to unsustainable high prices in the $150 range.
Effect on Projects
So how is this price deflation and the economic crisis at large going to effect the industry, and industry jobs in particular?
In the last few years, quite a few operators were able to leverage cheap credit and high commodity prices to finance large new exploration projects in some new areas. However with the squeeze in the credit markets, some of these projects are either being put on hold or delayed. Small cap companies are scaling back operations, seeking new partners or have become targets for acquisition. There are other companies are also restructuring their project plans to tide over the current period of economic uncertainty. Shell recently announced the delay of its oil sands project in Canada, Yemen has also delayed its gas production outlook. However, most large cap integrated oil companies are not cutting back as they did not factor in prices in the $140 range while making their investment decisions. This is also the case for most national oil companies.
In the long term, my sense is that the demand-supply equation will be unbalanced. The IEA predicted last week in its World Energy Outlook that by 2010 oil companies will have to commit to projects producing almost as 7m barrels a day – if the world is to avoid a supply crunch by the middle of the next decade. This is due to the steep rates of decline in existing fields to meet demand of growing economies like China and India. Further investments should stanch the natural rate of output decline of 9% down to 6.7%. As a result they have predicted a price range greater than $100 by 2015.
Outlook
So the question is how will the credit crunch and lower oil prices affect the labor market in the Oil and Gas industry? Will it stall the recruitment and talent acquisition process? Are we going to see a repeat of the layoffs of the 1980s?
It’s early to say right now; we may have more volatility coming down the pike. But over the medium term once key economies right themselves, demand should increase. China has taken a good step in that direction this week. Only time will tell, but I feel pretty optimistic.
What do you think?
The current financial crisis has ballooned around the world economy and there are fears that this international recession could even trigger a global economic meltdown. Most economic analysts are predicting that it will get worse before it gets better. This is reflected in some of the recent downswings in stock markets worldwide as near term recessionary expectations are being priced in today. The channels of credit have dried up and businesses small and large have been plagued by a credit crunch.
The other key trend is in the sharp volatility of hydrocarbons prices. After a remarkable run up over the last two years, crude prices have plummeted over the past few months. We hit $58 for crude today; and will probably drop further as the global demand cycle weakens in the near term. While there are many factors driving the price of oil (demand- supply, speculation, political risk, etc), it is undeniable that there has been some demand destruction due to unsustainable high prices in the $150 range.
Effect on Projects
So how is this price deflation and the economic crisis at large going to effect the industry, and industry jobs in particular?
In the last few years, quite a few operators were able to leverage cheap credit and high commodity prices to finance large new exploration projects in some new areas. However with the squeeze in the credit markets, some of these projects are either being put on hold or delayed. Small cap companies are scaling back operations, seeking new partners or have become targets for acquisition. There are other companies are also restructuring their project plans to tide over the current period of economic uncertainty. Shell recently announced the delay of its oil sands project in Canada, Yemen has also delayed its gas production outlook. However, most large cap integrated oil companies are not cutting back as they did not factor in prices in the $140 range while making their investment decisions. This is also the case for most national oil companies.
In the long term, my sense is that the demand-supply equation will be unbalanced. The IEA predicted last week in its World Energy Outlook that by 2010 oil companies will have to commit to projects producing almost as 7m barrels a day – if the world is to avoid a supply crunch by the middle of the next decade. This is due to the steep rates of decline in existing fields to meet demand of growing economies like China and India. Further investments should stanch the natural rate of output decline of 9% down to 6.7%. As a result they have predicted a price range greater than $100 by 2015.
Outlook
So the question is how will the credit crunch and lower oil prices affect the labor market in the Oil and Gas industry? Will it stall the recruitment and talent acquisition process? Are we going to see a repeat of the layoffs of the 1980s?
It’s early to say right now; we may have more volatility coming down the pike. But over the medium term once key economies right themselves, demand should increase. China has taken a good step in that direction this week. Only time will tell, but I feel pretty optimistic.
What do you think?
Friday, November 7, 2008
Life in Kazakhstan
Kazakhstan is among the most important geographies for the upstream sector. The country currently has the 11th largest proven reserves of both oil and natural gas. Estimate indicates that there is over 2.7 billion tons of petroleum scattered in about 160 deposits.
The 9th largest country in the world is bordered by Russia, Kyrgyzstan, Turkmenistan, Uzbekistan, China and a significant part of the Caspian Sea. It is widely believed that the Caspian shore is only a small part of a much larger deposit and that 3.5 billion tons of oil and 2.5 trillion cubic meters of gas could be found in that area.
However, I do not intended to give you the facts and figures of Kazakhstan’s natural resource nor an account of its diversity in terrain – flatlands, steppes, taigas, rock-canyons, hills, deltas, mountains, snow-capped mountains, and deserts. What I would like to dwell upon in this post is the country and its people which energy professionals might find useful in case they take up a project in the country.
Let me begin by saying that Kazakhstan is not at all like the way it was stereotyped in the movie Borat! The cities are clean, complete with ample civil amenities. There are many wide boulevards, lots of trees, and the roads are generally well kept. Though there are no published routes, it’s easy to find your way around. There are city buses, trolleys, and trams making it easy to move around. However, things are not as well kept as you progress farther from the mountains towards the outskirts. It would be a tad harsh to expect the same level of convenience in all parts of a country where the population density is less than 6 people per square kilometer.
History
Kazakhstan was part of the Russian Empire. Kazakhstan declared itself an independent country on December 16, 1991. Nursultan Nazarbayev – its communist-era leader, became the country's new president. While the country's economic outlook is improving, President Nazarbayev maintains strict control over the country's politics.
People and Religion
Kazakhstan has historically hosted a wide variety of ethnic groups with varying religions. Tolerance to other societies has become a part of the Kazakh culture. One of the major reasons of ethnic and cultural diversity is because of mass deportations of many ethnic groups to the country during Stalin's rule. Kazakhs are the largest group, followed by Russians. Kazakhstan allows freedom of religion, and many different beliefs are represented in the country. Islam is the primary religion, followed by Orthodox Christianity. The official language is Kazakh, though Russian is still commonly used for everyday communication.
Food Habits
One of the major concerns of people going abroad to stay for a longer period of time is the eating habits of the host country. Generally, diet consist of lots of vegetable and livestock meat cooked in many ways and served with traditional bread. People belonging to the Western countries might be surprised by the amount of fried food here! A Peace Corp volunteer writes in her blog that “Every soup has a little oil floating on the top”
Most of us like our tea, coffee or even a cup of hot chocolate in cold winters while during summers, we resort to juice, lemonade or even iced tea. But Kazaks drink lots of tea throughout the year. Tea breaks are common, and along with the tea breaks there is a variety of cookies and candy. Another peculiarity is that there aren’t any designated breakfast, lunch and dinner foods and it is common to have the same soup for dinner and then breakfast the following morning.
Culture
Traditional moral values of Kazakhs are respect of the elders and hospitality to strangers. This makes it easy for foreigners to ask around and find out places. An average Kazak goes out of his way to help a tourist with language barrier. The country has an impressive 99.5% adult literacy rate, thanks to a well-structured education system comprising of many reputed universities, academies, and institutes, conservatories, higher schools and higher colleges.
Because livestock was central to the Kazakhs' traditional lifestyle, most of their current practices and customs relate in some way to livestock. For example, it is considered as good manners for an average Kazak to ask first about the health of a man's livestock when greeting him and later inquire about the human aspects of his life.
The country’s largest city – Almaty is considered to be the musical capital of Central Asia. Well-known artists such as Deep Purple, Tokyo Hotel, Atomic Kitten, Dima Bilan, Loon, Craig David, The Black Eyed Peas, Eros, Ace of Base and others have recently toured the country.
Kazakhstan is a very pleasant country with picturesque landscape almost everywhere. Once your Russian is good enough, it is almost like working in a picnic spot.
The 9th largest country in the world is bordered by Russia, Kyrgyzstan, Turkmenistan, Uzbekistan, China and a significant part of the Caspian Sea. It is widely believed that the Caspian shore is only a small part of a much larger deposit and that 3.5 billion tons of oil and 2.5 trillion cubic meters of gas could be found in that area.
However, I do not intended to give you the facts and figures of Kazakhstan’s natural resource nor an account of its diversity in terrain – flatlands, steppes, taigas, rock-canyons, hills, deltas, mountains, snow-capped mountains, and deserts. What I would like to dwell upon in this post is the country and its people which energy professionals might find useful in case they take up a project in the country.
Let me begin by saying that Kazakhstan is not at all like the way it was stereotyped in the movie Borat! The cities are clean, complete with ample civil amenities. There are many wide boulevards, lots of trees, and the roads are generally well kept. Though there are no published routes, it’s easy to find your way around. There are city buses, trolleys, and trams making it easy to move around. However, things are not as well kept as you progress farther from the mountains towards the outskirts. It would be a tad harsh to expect the same level of convenience in all parts of a country where the population density is less than 6 people per square kilometer.History
Kazakhstan was part of the Russian Empire. Kazakhstan declared itself an independent country on December 16, 1991. Nursultan Nazarbayev – its communist-era leader, became the country's new president. While the country's economic outlook is improving, President Nazarbayev maintains strict control over the country's politics.
People and Religion
Kazakhstan has historically hosted a wide variety of ethnic groups with varying religions. Tolerance to other societies has become a part of the Kazakh culture. One of the major reasons of ethnic and cultural diversity is because of mass deportations of many ethnic groups to the country during Stalin's rule. Kazakhs are the largest group, followed by Russians. Kazakhstan allows freedom of religion, and many different beliefs are represented in the country. Islam is the primary religion, followed by Orthodox Christianity. The official language is Kazakh, though Russian is still commonly used for everyday communication.
Food Habits
One of the major concerns of people going abroad to stay for a longer period of time is the eating habits of the host country. Generally, diet consist of lots of vegetable and livestock meat cooked in many ways and served with traditional bread. People belonging to the Western countries might be surprised by the amount of fried food here! A Peace Corp volunteer writes in her blog that “Every soup has a little oil floating on the top”
Most of us like our tea, coffee or even a cup of hot chocolate in cold winters while during summers, we resort to juice, lemonade or even iced tea. But Kazaks drink lots of tea throughout the year. Tea breaks are common, and along with the tea breaks there is a variety of cookies and candy. Another peculiarity is that there aren’t any designated breakfast, lunch and dinner foods and it is common to have the same soup for dinner and then breakfast the following morning.
Culture
Traditional moral values of Kazakhs are respect of the elders and hospitality to strangers. This makes it easy for foreigners to ask around and find out places. An average Kazak goes out of his way to help a tourist with language barrier. The country has an impressive 99.5% adult literacy rate, thanks to a well-structured education system comprising of many reputed universities, academies, and institutes, conservatories, higher schools and higher colleges.
Because livestock was central to the Kazakhs' traditional lifestyle, most of their current practices and customs relate in some way to livestock. For example, it is considered as good manners for an average Kazak to ask first about the health of a man's livestock when greeting him and later inquire about the human aspects of his life.
The country’s largest city – Almaty is considered to be the musical capital of Central Asia. Well-known artists such as Deep Purple, Tokyo Hotel, Atomic Kitten, Dima Bilan, Loon, Craig David, The Black Eyed Peas, Eros, Ace of Base and others have recently toured the country.
Kazakhstan is a very pleasant country with picturesque landscape almost everywhere. Once your Russian is good enough, it is almost like working in a picnic spot.
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