IF what former Petroliam Nasional Bhd (Petronas) president and chief executive officer Tan Sri Shamsul Azhar Abbas says is true, then the oil and gas (O&G) industry has to go through a perilous three or even four years of low price environment before it sees the heady days of hitting dizzy heights of US$100 or more per barrel.
The industry veteran expects the price of oil to trade in the range of between US$45 and US$55 per barrel in the next few years based on the current fundamentals and dynamics surrounding the industry.
“Prices may go up to US$60 per barrel this is based on the current fundamentals and dynamics surrounding the industry,” he says.
A seasoned hand in the industry, having chalked up 40 years in Petronas, Shamsul also discloses that the new technologies for shale O&G have brought down the break-even price level for production to be feasible at between US$12 and US$24.
“The new technologies are still being developed not put to commercialise use yet,” says Shamsul, who states clearly that he is merely expressing his views as a veteran in the industry.
The price of oil has been on a downtrend since the third quarter of last year due to the oversupply and drop in demand from large consumers including China. The oversupply situation came about after the United States became a major producer, following the advancement in the technology for the production of shale O&G.
Brent crude, which was at more than US$100 per barrel a year ago, is now trading at less than US$50 per barrel. The steep drop in the price came about in the last three months of last year, with the weakness continuing to persist this year.
Saudi Arabia, which is the world’s largest producer and leads the Organisation of the Petroleum Exporting Countries (Opec), has decided not to cut production to maintain its position as the market maker for the commodity.
The price of the commodity had shown some promise of revival in April, but it was short-lived.
Shamsul says the revival could not be sustained because the technology for shale today allows for the break-even cash level for production to be at US$41 per barrel.
“Whatever the break-even price that the shale oil can be produced at is also the price that Opec sets,” he says.
Shamsul says that even when the price drops to below US$40 per barrel, the producers of shale O&G can continue with their operations because they have sold forward.
“Only if the price stays below US$40 per barrel for a long period can there be some drop in production based on the current scenario,” he says.
Shamsul is not the only industry veteran who has a bearish outlook on oil.
Hedge fund manager, Pierre Andurand, who has a track record of making the right predictions on oil prices, was reported to have forecast oil to drop below US$30 per barrel, and that the over-supply situation would continue into 2016 and 2017.
Going forward, Shamsul points out to Iran coming into the global market when sanctions are lifted as one factor that would continue to dampen oil markets.
“The large vessels are already holding the oil waiting for the sanctions to be lifted,” he says.
Another factor is the advancement in shale technology that paves the way for the commercialisation of technologies that allows production cost of shale to be between US$12 and US$24 per barrel.
Due to the depressed prices, in the past year, the oil majors have cut down on their capital expenditure because many fields have become economically not viable. It is estimated that exploration, production and gas complex facilities to the tune of US$200bil have been cancelled or deferred.
Shamsul says that the deferment of the projects will cause a reduction in new supplies and it may take another three or four years before the industry sees some fundamental revival in prices.
However, he points out that even though shale O&G is being produced in large scales, there will always be demand for conventional oil such as fuel oil and diesel.
“Shale oil is mostly used to produce gasoline, while conventional oil has varied uses. So, there will always be demand for conventional oil,” he says.
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