Is every challenge really an opportunity?
On Saturday 30th of January 2016 we had the opportunity to learn about the Future of North Sea Oil at Heriot-Watt University’ Edinburgh Campus. This activity was the first of the 2016 Energy Talks made possible thanks to the collaboration between the European Centre for Energy and Resource Security (EUCERS), the Konrad Adenauer Foundation (KAS), and the Institute for Strategic Dialogue (ISD). The conference counted with the participation of four speakers: Hans-Hartwig Blomeier, Director of KAS’ London office; Dr Friedbert Pflüger, EUCERS Director; Dr Ian Duncan, Conservative MEP for Scotland; and Dr Frank Umbach, EUCERS Research Director. The following is a condensed version of the views expressed by the speakers.
Opening Statement | Hans-Hartwig Blomeier.
Mr. Blomeier opened the activity by thanking the speakers and participants and noting that this activity is the first of the 4-year-long partnership taking place outside of London. Mr. Blomeier praised the very enjoyable and varied weather in Edinburgh whilst stressing the importance of coming as close as possible to the North Sea. Mr. Blomeier thanked the Heriot-Watt University team for their hospitality and also noted that it was a privilege to have this activity as part of KAS’s seminar for scholarship recipients. Finally, Mr. Blomeier introduced the speakers and opened the floor for the discussion.
Setting the Grounds | Dr Friedbert Pflüger
Welcoming the continued cooperation between KAS, EUCERS, and ISD Dr Pflüger started by praising the fact that the activity is taking place out of London. Dr Pflüger started his keynote by touching on a number of issues that affect oil across the globe. For example, he mentioned that prices have dropped dramatically, 75% since 2014. Because of its impact to businesses and employment Dr Pflüger considered the situation to be a catastrophe for oil producers whilst noting also that, for consumers, the drop in prices acts as stimulus. He then entered a discussion about the different roles that some players have been thought to have. For example, how in the beginning some people thought that the drop in prices may have been orchestrated to hurt Iran, or how others argued that this was clearly in the benefit of Saudi Arabia. However, he also noted that, in his view, it has become clear that Saudi Arabia cannot afford the situation any longer and that the situation now means “even more” instability in the Middle East. Dr Pflüger then spoke about the main reason for the drop in prices, namely the balance between oil supply and demand. He reminded how in 2015 we had an average of 2.5 million barrels a day of oversupply. Dr Pflüger considers this imbalance to result mostly from the increased availability of local oil in the United States, which translated in less purchases from world markets. He also notes that other areas such as Iraq, Northern Iraq, Kurdish region, Brazil, Nigeria, and Angola added to the glut, whilst growth in countries like China failed to meet expectations. At this point, Dr Pflüger noted that it is hard to know how much the oil price will continue to be low as there are many factors that play a role. For example, we are yet to find out the impact that Iran will have once it re-incorporates into the market. We know that Iran claims that it will add 500,000 barrels to the market just this year but Dr Pflüger added that Iran’s new contracts, to be presented in February in London, may significantly attract foreign companies and further the glut. Dr Pflüger also mentioned that investment of up to $1.8 trillion are currently in hold or completely cancelled which he believes will ultimately create a yearning for oil that will balance the situation, even if world growth slows down. As such, the main question, as seen by Dr Pflüger, is the question of ‘when’. In this sense Dr Pflüger identifies some trends that he considers as ‘good signs’ if seen from the perspective of oil producers. For example, low oil prices have led US consumers to buy big cars again. Chinese middle class, despite of the overall development of the Chinese economy, is buying cars as it did before. These events, Dr Pflüger noted, seem to indicate that whilst Paris had nice aims for decarbonisation there will be a continued demand for oil. As such, he considers that if the North Sea oil industry can survive the months or years of crisis, profit may be available on the medium term. In Dr Pflüger’s words, oil will be back “perhaps not at 100% but at 60%, 70%”. Dr Pflüger then continued to warmly welcome the following speaker, Dr Ian Duncan.
The local view | Dr Ian Duncan
Dr Duncan started by thanking the audience and noting that it is worth to consider that he is the only geologist in European Parliament. As such, he sits on the Energy Committee and the Environment Committee, as well as having been in Paris and Lima climate talks as one of the European delegates, and being the Parliament’s chief negotiator on the Emissions Trading Scheme (ETS). Dr Duncan then began his statement by giving a brief historical reminder of the importance of the North Sea. He noted that west of the place where the conference was taking place there are some very unusual orange-flat-topped mountains that are remnants of the oil shale industry of the 1860s, which marks the start of the global oil industry. Indeed, he noted, although the boom had to wait until the North Sea became accessible, Scotland was the heart of the early stages of the oil industry. Dr Duncan noted that this historical-geographical consideration is important because the North Sea is not a pleasant place to extract anything. As the need to be safe in such an environment is paramount the technologies that are now in use are at the cutting edge, which has led to a significant improvement in the safety record of the North Sea over the last few years.
After setting the scene Dr Duncan moved into the question of the future of oil. He began by reminding the audience of the proverb that reads “the stone age didn’t end because we ran out of stones”. He used this proverb to bring attention to the dilemma we face with regard to hydrocarbons, as the reality continues to be that the economy is dependent on carbon. Whilst there is an effort to decarbonize, most houses in Scotland use gas for heating and there are very few electric cars in the road. As such, he noted, change is not something likely to emerge soon. He also noted the need to be responsible with policy prescriptions toward the developing countries, as many may need carbon to develop. Ultimately, Dr Duncan reminds the audience that the problems of climate change were created by us – he even noted that Scottish people have the highest per capita carbon usage if seen historically. In this context, Dr Duncan noted that the North Sea will continue to be important as another undeniable fact is that there is oil in the North Sea, albeit difficult to extract and thereby expensive. As such, he considers, competition in the region will continue to get tougher as long as prices stay low.
Dr Duncan further noted that many factors are beyond control, as is for example Iran’s capacity to pump oil into the markets. He sees such type of factors as de-stimulating new extraction in the North Sea region. As such, Dr Duncan noted that although prices will bounce back, the question is the point at which it will become sensible to pursue further reserves in the North Sea. Dr Duncan further brought attention to the impact that this may have to employment, thus far having costed more than 60,000 jobs and estimated to go past the 100,000 mark. He further noted his concern at the fact that this is a loss to an economy that is greatly based in two things, oil and fish. Dr Duncan further noted that this is a particularly important consideration because fracking is currently banned in Scotland, which prevents expertise from the sea to be brought unto land. In such manner, as noted Dr Duncan, the challenge of what to do with the North Sea oil industry is a concerning one.
Dr Duncan closed his remarks by returning the conversation to the issue of climate change and Paris Agreement’s “well below 2°C” target and its ambition to actually keep global warming under 1.5°C. He noted that we cannot meet these goals as it is, particularly if prices keep going down and people continue to buy more oil. In such manner, Dr Duncan noted, the world needs to start thinking about mitigating measures. In this regard, Dr Duncan noted that Carbon Capture and Storage (CCS) may work. He noted with concern that very little money has been put into it albeit of a need of about £40 billion. Dr Duncan considers that a solid ETS may help in this regard by raising the cost of emitting. However, he also noted that the current price of €7 per ton is extremely low as CCS would require a price of about €80 per ton but, at the same time, he estimated that his current ETS effort will only take us to about €30 per ton. Consequently, Dr Duncan noted, a CCS effort will require of the willingness of emitters to embrace costly technologies. However, Dr Duncan closed by noting that the problem with this is that consumers always pay for costly technologies and as such we should prepare to live in a future in which energy will be more expensive.
The academic view | Dr Frank Umbach
Dr Umbach started his presentation by noting the influence that Saudi Arabia has had to the fall in oil prices. He noted how Saudi Arabia had traditionally acted as stabilizer for the markets to behave in ways that considers Western interests. This capacity is greatly due to the fact that no other country in the world has the spare capacity to exert such an influence. He furthered reminded how Saudi Arabia’s unwillingness to cut production precipitated the fall and noted how it is questionable whether Saudi Arabia will return to mind Western interests. This is not only because it has not done so yet but also in the light of factors such as Saudi Arabia’s internal politics and geopolitical considerations like its relation with Iran. Moreover, Dr Umbach also noted how discussions between the US, Europe and Asia about burden sharing have been stimulated by Saudi Arabia’s position. In a nutshell, whilst in 2001 22-24% of US’ oil came from the Middle East, nowadays only 10% does. As Europe and Asia are much more dependent on the Middle East than the US, many in the US question the $50 billion per year budgeted for ensuring oil stability in the region. Dr Umbach then moved deeper into to the issue of oil prices. He noted that the World Bank recently revised its oil price forecasts for 2016 down from $52 to $37 per barrel, which some analysts think is still too high. Dr Umbach noted how this is due to a combination of factors. For example, Dr Umbach considers that there will be no short-term double-digit Gross Domestic Product (GDP) growth in China, which will further decrease demand from Asia. He also noted Iran’s re-entry into the markets, as well as the 20% wordwide drop in investment last year and an expected 16% drop this year. Dr Umbach noted that this ‘War of Attrition’ may have profound effect across the globe. For example, he noted, it will most certainly lead to the suffering and perishing of many companies but at the same time, other players may find new opportunities in the market. In this regard, he mentioned the fact that fracking technologies have made leaps of progress with regard to efficiency, lowering costs in an unprecedented 35% to 40% in the last year. Dr Umbach noted that this technological factor changes the nature of the markets themselves. In such manner, whilst Saudi Arabia’s focus in defending its market share may have success against inefficient players, it is doubtful whether it will be able to offset technological progress. In fact, he noted, hedge funds and private equity funds have $60 billion ready to take over bankrupted oil assets. As such, Dr Umbach argued, there will be losers but ‘deep-pocket’ groups are in a position to capitalize from Saudi Arabia’s strategy. Dr Umbach also noted that a concerning problem associated with low oil prices is the loss of experts to other industries throughout the period of under investment. Dr Umbach noted that such a loss of human capital hinders the industry’s hopes for a rapid recovery if the present low oil price will not recover in the short-term future. Acknowledging the contribution from Dr Duncan with regard to the British North Sea, Dr Umbach moved unto a brief overview of the Norwegian North Sea. He noted how there are many similarities, such as the prioritizing of short-term earnings, up to 15 fields to be closed by 2020, a 16% fall in investment in 2015, and further cuts in investments announced recently despite of several licenses being awarded.
Dr Umbach then moved back to consider the general situation. This started with a comparison of the ‘cut-even’ price for different regions. In it, Dr. Umbach highlighted that only Saudi Arabia, Iran, Iraq and Kuwait are currently producing at a lower cost than the current oil prices. He noted how this necessarily means that all other producers will continue to have a serious gap in their finances insofar oil continues at current prices. In addition and with the notable exception of the United States, Dr Umbach highlighted how most countries are becoming even more dependent on external energy imports.
In the final segment of his presentation Dr Umbach summarized his views to the following statements. Firstly, there is a developing ‘oil mantra’ in which experts have moved from thinking that oil will continue ‘lower for longer’ to thinking that oil will be ‘a lot lower for a lot longer’. Secondly, it is difficult to imagine production cuts in the short term as Saudi interests are against high cost producers and Iran emerging as major oil producer and exporter. Thirdly, it is not realistic to expect a price recovery before 2017 and, even then, oil may only come back to $50/$60 per barrel rather than to $70/80 as assumed last year. Likewise, it would not be a surprise if oil prices do continue at record lows past 2017 8decreasing temporarily even to just US$20 per barrel). Fourthly, on the medium term perspective the worldwide transportation sector is the defining feature, particularly the issue of the battery prices and performance – which Dr Umbach noted being optimistic about in the mid-term future.
Questions &Answers (Q&A)
The activity continued with a lively Q&A session that accounted for about an additional hour of discussions. The questions and answers provided insight into a number of issues such as the general sense of the situation within Scotland, the issue of subsidies, nuclear possibilities, technology, technology bans, decommissioning, sustainability and many others.
Report by KAS fellow at EUCERS 2016 Jose Bolanos