DISINVESTMENT $250 BLN
Rosneft Chairman of the Management Board made a report at "FT Commodities - The retreat" Conference in Singapore. In his speech, Igor Sechin said that the Asia-Pacific markets in 2015, including China, have a much greater margin of safety than in 1997- 1998. This is due to increase of importance of the Asian market in the world so the countries of other regions have to adapt to support their Asian trading partners.
"Before the end of the decade, we expect growth in oil demand in China by an average of 2% per year. On the backdrop of a slowdown in demand in China, the growth of the world's demand for liquid hydrocarbons in the first half of 2015 increased and continues to grow. In addition to China, they include both the new fast-growing economies (India, Vietnam, South America and the Middle East), and the developed countries - after a long break, the demand began to grow, for example, in the United States.
The fundamental reason for the low price of oil is the excess of oil production over end consumption. Prerequisites for this have been created over the years, in the context of high oil prices and intensive investment in oil production and new methods of resource development. This excess was essentially evident in 2014, mainly effected by the "explosive" growth of shale oil production in the US.
In general, this is the case in other crude markets. However, some factors, specific for the oil market, have interposed in the matter:
- Nervous response of a number of major OPEC members that refused to take part in balancing the market and then intentionally increased the supply. It became clear that the "golden age" of the organization was in the past; its stabilizing effect on the oil market is essentially lost; contradictions intensified within the OPEC member countries and their groups
- The special role of the financial players and the financial instruments in the oil market specifically; their increased and often inadequate response to what is happening in the market and in the economy of the consumer countries; at the same time, this influence is used by the United States, with their key role in the financial markets and financial institutions to communicate signals from their own oil market to global processes
- Volatility caused by a possible higher contribution to the supplies from such countries as Iran. These fears are exaggerated because, according to the experts, a significant increase in production in that country requires hundreds of billions of dollars of investments - and how can it be implemented if the return on these investments is problematic or profitability of these projects for the budget of the producer country is doubtful at current prices?
All this has led to the actual collapse of oil prices and bringing them to a level that can not be considered stable for a number of reasons, the key reason is the reduction in prices to the level of the operating costs, without coverage of the full cycle costs which became a barrier to investment. This outlook could be seen and even calculated in November 2014, and it could have been avoided if better decisions had been made.
Due to actual investments in production the volumes are still being added to the market, but the current cuts are starting to have an affect. In the next years the ongoing programs of investment shrinking - primarily from the transnational corporations - will certainly have their effect. As for now, the implementation of their long-term investment programs that started even before the current crisis has expressed in some production growth. But in 2014, the oil majors claimed to reduce the investment in production; in 2015, additional reductions by 10-20% and more were announced by such majors as BP, Shell, Chevron, Total. Overall cutback in global upstream investment was about $140 bln, and it is expected to reach $200-250 bln by 2016 year-end. Within 2-3 years, this will inevitably influence on the production and will have a long-term negative effect.
It should be noted that the average production costs in 2013 were 5 times higher than they had been 10 years before. As a result high revenues to shareholders were already in question before the recent drop in prices, therefore cutbacks in investments are being made quite actively. We should take into account that the status of the hydrocarbons resource base is permanently getting worse. The growth of world reserves of "conventional" oil and gas in 2014 was the lowest for the past 20 years; the negative trend remains for 4 years. Over 30% of new resources pertain to tight resources (deep water, heavy oil, super-tight reservoir, high content of acid gases).
A very limited set of countries have the ability to significantly build up oil and gas production now. While in the short to medium term they are mainly the Gulf countries, some African countries and possibly the United States, in the long term the main aspirations to meet the global demand for hydrocarbons are associated with Russia, Venezuela and Iran.
As a result, we can expect with a high probability that we are likely to witness the comeback of oil prices to a level that ensures a reasonable return on investment during the current investment cycle.
If compared to 1980s, the current share of the discovered conventional onshore fields reduced from 60% to less than 30% of all new discoveries. At the same time, the rate of more expensive deep-water and shallow-water fields, along with other sources of "high-tech" oil such as tight oil, has substantially grown. Such discoveries will prevail in the future. It is the deep-water oil that will define the full cycle costs and require higher prices for its efficient production.
Analysts got used to the fact that today Russia is not the absolute leader in the proven reserves of oil and gas being behind such countries as Venezuela, Saudi Arabia and Iran. However, according to a number of current estimates, the potential hydrocarbons resource base of the Russian Federation is the largest in the world.
Thus, the magnitude of potentially recoverable gas resources in Russia is estimated at 90 - 220 trillion cubic meters which is more than twice than the resource base of the United States (40-62 trillion cubic meters).
Though less recognized, the situation is similar with the oil resources. The potentially recoverable oil resources in Russia are estimated at 367-506 billion barrels which is significantly more than the capacity of not only the US but also Iraq, Iran and Saudi Arabia.
Take note that the major oil production projects in Russia are substantially below their main competitors on the cost curve, and are comparable with the projects the Gulf region. The oil production Opex per barrel in Russia in the recent years was 5-7 dollars, and in the current price environment, taking into account the weakening of the ruble, it went down to 2.8 dollars per barrel. This allows us to supply even at the lowest price scenarios, and the partners that have decided to join the Russian assets may count on a profitable return on investment.
Annual oil production in Russia in the long term may increase to 700 million tons and above. I have to say in this regard that Rosneft is planning to boost both oil and gas production in the long term.
As for natural gas, its total reserves in the continental East of Russia amount to 8.7 trillion cubic meters, with the resource potential of 33.2 trillion cubic meters. This means that the potential gas exports from Russia to the Asia-Pacific Region can be estimated at the minimum of 300 billion cubic meters per year.
We are confident that, despite the projected high rates of energy consumption in the Asia-Pacific Region, Russia is able not only to maintain but also to significantly increase its share in the energy markets of the Asia-Pacific Region.
I would like to emphasize that today Russia is especially open for cooperation in upstream with international partners. The tax regime implemented in the recent years for various fields improves the investment attractiveness for a whole range of projects.
In such a way, there are opportunities to jointly develop a diverse portfolio of fields: traditional onshore fields, offshore fields, Arctic fields. Through full-scale implementation of this potential, we will make a significant contribution to APR energy security!" - concluded the Chairman of Rosneft Management Board.
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U.S. FRB - Industrial production decreased 0.6 percent in January after rising 0.1 percent in December.