Key predictions

In all, 2005 promises to see the continuation of many themes that emerged in 2004. 

A higher baseline oil price will feed through to pressure on international oil companies to increase capital expenditure outside existing holdings.

A relative lack of 'safe' investment options will encourage the shift towards more high-risk locations, forcing difficult choices between security and low growth versus risk-taking and more substantive returns.

OPEC will introduce a new price-band and likely defend it strongly. However, some of the quota squabbling may re-emerge if global growth slows down.

The liquefied natural gas (LNG) focus will shift from production developments to regasification. The development of an Atlantic basin LNG market is now taking place and the strategies will become clearer in 2005.

The Middle East will offer risks and rewards yet again. While it may still be too soon for any substantive Iraq opportunities to emerge, some of the groundwork should be laid. Libya will see the most interest.

Kyoto and European emissions restrictions come into force in 2005. This will see the start of the long-heralded emissions trading scheme at last. 

While the drama of 2004 seems unlikely to be repeated, 2005 promises to be yet another fascinating year for the energy sector.

2004 - The Year that Was

The year 2004 will largely be remembered for three things as far as the energy industry is concerned: record oil prices; Yukos; and Shell's misplaced oil and gas reserves. 

Oil Prices Defy Expectations and Change Perceptions

In December 2003 the expectation was that crude prices would fall back to the 'normal' level of US$20/b-US$25/b by the end of Q2. Although oil price forecasting can hardly be considered reliable at the best of times, rarely have so many analysts been quite so wide of the mark. As the price defied expectations throughout the year, so a number of fundamental principles came into question and perceptions altered. OPEC proved in February that it had a few tricks left up its sleeve when it announced an April quota cut with prices already over the US$30/b mark. At the time this seemed more aspirational than realistic - after all, OPEC, so the logic went, never complied with quota cuts when prices were relatively high - overproduction is always the way. As it transpired OPEC did show more commitment to the price than expected, but ultimately the oil price story in 2004 was one that had more to do with the demand side than the supply side. 

No-one expected oil demand to grow by 2.5 million bpd in 2004, the largest single-year surge in oil consumption for over two decades. Certainly the International Energy Agency (IEA) wasn't expecting it. In November 2003 the IEA expected 2004 oil demand growth to hit 1 million bpd. Twelve months later the 2004 demand growth forecast had increased by 170%. China was the big driver for growth, but by no means the only one. Indian, Asian and US oil consumption all rose strongly on the back of very robust economic growth. This unexpected surge in demand coincided with what proved to be an extremely ill-judged OPEC quota cut in Q2. With supply threats cropping up in Iraq, Nigeria and Russia on a daily basis the consequence was spiralling prices through the middle of the year. OPEC scrambled to ramp up output to keep the market supplied but the damage was done in H1. Inventories were low, demand was high and producers felt the strain. This raised questions over Saudi Arabia's status as the 'swing producer' and even provoked debate over whether OPEC was relevant. In addition to this, long-term under-investment in the global oil refining and transport industries became apparent as bottlenecks led to oil product shortages - petrol (gasoline) in the summer and distillates (heating oil) in the winter. US$50/b, when it came, was not a surprise, and there was speculation that prices could climb as high as US$70/b. 

By the end of the year the situation had settled down as demand finally showed signs of slowing. New production was also gradually brought onstream to help restore the balance and allow inventories to recover. However, going into 2005 perceptions have changed. US$35/b is no longer considered an unsustainable price, OPEC is given rather more respect (though there are still question marks over compliance long term), spare capacity is not taken as a given and it is not quite as certain as it was 12 months ago that oil will be traded in US dollars rather than euros in the future.

Oil Reserve Revisions Raise Questions

Oil shortages were in evidence outside of OPEC. For Shell the year started off badly when the company announced it was revising its proven oil and gas reserves downwards by 25%, and the spotlight rarely moved away. The reserve debacle eventually spelled the end for the chairmanship of Sir Philip Watts and the company's dual board structure. The US Securities and Exchange Commission (SEC) began an investigation into the entire process behind booking reserves in the wake of Shell's revision, and oil majors were quick to emphasise that the reserves they listed were accurate. However, not everyone escaped revision - El Paso announced a dramatic downward revision of gas reserves not long after the Shell announcement and the company's share price suffered all year. The suspicion that Shell might turn out to be the tip of the iceberg has thus far appeared to be misplaced, though it does seem likely that the industry will be doubly cautious when new reserves are added from this point on.

Industry Sees Strong Bottom-Line Growth

Although Shell investors questioned the management structure, they - along with countless other shareholders - did not question the revenues. It was a bumper year for most of the majors, as the high oil and gas prices contributed to record profits. The main question for most oil and gas companies was what to do with the revenue, given the lack of suitable opportunities for new investment in exploration. This has thus far manifested itself in share buybacks and big dividends, but there are signs that capital expenditure (capex) budgets will start to increase as confidence that the oil price rise of 2004 is structural begins to build.

In Russia the industry did not celebrate the high oil price quite so much, as Yukos was under constant attack from the government. By the end of 2004 the saga had still not drawn to a final close, but the writing is on the wall for Yukos. With the forced sale of its biggest asset (Yuganskneftegaz), the complete break-up of Yukos seems all but certain. The Yukos affair has done little to build faith in the Russian oil sector, undermining the investment climate and causing international oil companies (IOCs) to rethink their expansion strategies there as the government looks to increase its influence in the country's energy sector.

2005 - The Year Ahead

Looking forward to 2005 it does seem that fundamentals are now pointing towards a lower oil price. Oil demand growth should moderate, as there are signs that the Chinese government is applying the economic brakes to stop the country overheating and US economic growth also appears to be slowing. More production is also scheduled to come onstream next year from both OPEC and non-OPEC producers. With crude inventories looking far healthier at the end of 2004 compared to the same point in 2003, there is more room for adjustment on the production side by OPEC without such a big risk of large price hikes. Iraq and Nigeria will still present potential risks on the supply side, while Venezuela is also facing some uncertainty. The terrorist risk to Saudi and other Gulf producers remains, but security measures have been in place now for some time and oil installations and shipping seem well protected. A number of new developments are set to come onstream in 2005 in West Africa, the Middle East and South America. With reduced oil demand growth in 2005, the additional capacity will help to ease the tightness in the market and restore some spare capacity. 

However, there are also factors that should help to underpin a relatively high price floor in 2005 despite the expected supply response and reduced demand:

OPEC: OPEC is likely to move the price band target from the current US$22/b-US$28/b range upwards to approximately US$30/b-US$35/b. The adjustment will likely come in H1 and recent history suggests that OPEC will defend the new price target aggressively. The organisation is concerned about the fall in the value of the US dollar and now believes that a US$35/b is sustainable given the limited economic fallout from the price rises of 2004. 

Refining Capacity: Although the production problems of 2004 should be overcome with new output coming onstream, the tightness in the refining sector is less easy to address. Long-term under-investment in new refining facilities is chronic in the US and elsewhere and there is little prospect of this situation being turned around within the space of a year. Indeed it is quite possible that ageing facilities may experience more outages and down-time in 2005.

 

Transport: In addition to refining problems, the global transportation industry is also straining under the weight of growing demand, with tankers now regularly backed up in the Black Sea over the winter months as light restrictions limit the number of tankers permitted through the Bosphorus Straits. Tanker rates are consequently rising and there is little capacity available for additional oil shipments.

Rising Costs, Weakening Dollar: Adding to the upward price pressures are rising production costs and the weak US dollar. The dollar has lost over 30% of its value against the euro in the space of 18 months and the dollar price of oil has consequently been inflated. Producers will also be facing rising costs next year on the production side as China's boom has helped push up the cost of steel and other raw materials substantially. It is becoming more expensive to drill for oil as a consequence of this. 

 

The oil price will be a key issue in 2005, though the drama of 2004 is unlikely to be repeated given the likely slowdown in demand growth. The oil price hike of 2004 again led to debate over gas prices, given the knock-on effect. Gas prices are still some way off being cut loose from oil, but the evolution of the liquefied natural gas (LNG) industry seen in 2004 will help to create a differentiated gas mark over time. In 2004 the main focus for LNG players was gaining access to European and US markets. Several regasification terminals moved closer to completion in the US, UK and elsewhere in Europe. The Atlantic basin LNG market is taking shape and BG and BP have used the past year to position themselves well on both the supply and import side. In 2005 attention will fall increasingly on the US market as LNG developers hope the controversy over regasification siting can be overcome. Offshore LNG terminals are a possible alternative, but LNG regasification in next-door Canada and Mexico is also an option. The next year should see the strategies further develop, though a substantial Atlantic LNG market is still some years away.

Kyoto and Climate Change in 2005

On 16 February, more than seven years'-worth of lobbying will finally come to fruition when the Kyoto Protocol to the United Nations (UN) Framework Convention on Climate Change officially takes effect. The Russian government's decision in late 2004 to ratify the Protocol, which requires industrialised nations to cut back on their carbon emissions by an average of 5.2% below 1990 levels by 2008-2012, pushed the international treaty above the threshold of global C0² emissions and ratifying parties to bring the December 1997 Protocol into effect. As hard as it has been to convince laggard industrial nations to live up to their earlier signatory commitments by ratifying the Protocol (and two key countries, the United States and Australia, both continue to refuse to ratify it), it will be that much harder to actually achieve the objectives of the Protocol; namely, to mitigate climate change.

Without the support of the US or Australia, and with major polluters such as India and China not bound by the Protocol's requirements (since they are classified as developing nations under the Protocol's lexicon), environmentalists and Protocol supporters will certainly have their work cut out for them. The growth in C0² and greenhouse gas (GHG) emissions in the developing world over the past 15 years has been astounding enough, but emissions have increased in the industrialised world - the same countries that must cut back now - during that period as well. While the US, the world's biggest energy user and its biggest polluter, is relying on a number of voluntary emission-reduction programmes to take a stab at the problem of climate change, the European Union (EU) - which has been an enthusiastic supporter of the treaty, resuscitating the agreement after the US rejection in March 2001 - is set to implement a market-based, carbon emissions trading programme across the continent. The success - or failure - of the EU's emissions trading scheme will be a key element of any progress in reaching Kyoto emission reduction targets, even if the Protocol fails to adequately remediate climate change. 

The Oil Industry: Where to Invest?

After a year when oil shortages became a very real prospect, the industry needs to start boosting reserves and production again. Most companies have announced cautious increases in capex for 2005, but much of this investment is being ploughed into improving recovery rates and reserves from existing developments. There is no surge in investment in new exploration, though limited opportunities, rising costs and a lack of confidence in a sustainable higher oil price are all playing into this. 

IOCs will be looking to find the balance between caution and risk-taking in 2005, both financially and in terms of where to look for oil. Although prices have touched US$55/b, the industry is split over whether to increase its base price case for long-term investment. Currently oil investments are made on the basis of a US$20/b oil price, but in light of 2004 there is an argument for increasing this base price. Although one year is hardly a good sample, there are reasons, outlined above, for suggesting the price hike is structural. Shell and ChevronTexaco have already increased their oil price assumptions, and this underpins increased capex plans. ExxonMobil and BP are playing it more cautiously and maintain their current investment frameworks. Next year there is likely to be an ongoing debate within the industry over what the best long-term strategy is. 

Regional Trends

In Europe and North America the main themes for 2005 are likely to be the continuation of those seen in 2004. IOCs are adjusting their portfolios to concentrate on more profitable, larger-scale assets while divesting mature low-producing assets. The UK North Sea and onshore US have been the key areas affected by this strategic IOC shift in 2004 and will continue to be in 2005. Producers remain committed to Alaska, especially given anticipation over the opening of the Arctic National Wildlife Refuge (ANWR) to development. While there have been some questions raised in 2004 over the adequacy of ongoing investment in maintenance, the prospects of a natural gas pipeline are keeping the majors interested. In the Gulf there are still new opportunities to be had in deepwater exploration and the region will continue to attract IOC investment. Onshore in Canada and the US the picture is more mixed, with a number of high-profile divestment strategies enacted in 2004. This will continue, but may ultimately be a boom for smaller independents who can pick up mature assets and extract maximum value. The North Sea is seeing a similar change in the make-up of producers. While the big players are still committed to the larger projects, increasingly assets are being sold off to smaller players while the IOCs seek out tomorrow's big plays and focus on growth outside the Organisation for Economic Co-operation and Development (OECD) growth. 

Regions to Watch in 2005

Russia

The Russian energy picture for 2005 looks simultaneously clearer and more opaque in the aftermath of the forced break-up of Yukos with the sale of its top production subsidiary, Yuganskneftegaz. With the merger of Rosneft and Gazprom expected to be completed shortly, giving the Russian state a majority stake in the enlarged energy giant, the Kremlin will have successfully orchestrated the creation of a new national champion to allow the state to exercise greater influence in - and control over - the development of the country's bountiful natural resources. Despite the surprising result of the Yuganskneftegaz auction, the Yukos production unit's 1m bpd in oil production will almost certainly end up in Gazprom's portfolio, catapulting the monolithic 'state within a state' into one of Russia's top oil producers, as well as a major player on the global stage. The likelihood that the remaining production and refining assets of the 'rump Yukos' will end up on Gazprom's books - by forced sale or by government transfer - means that Gazprom will be poised to truly dominate the Russian energy sector.

At the same time, the fallout from the 'Yukos affair' is likely to resonate long after the sale of Yuganskneftegaz, and not all of this will be to Gazprom's benefit. Legal challenges to the break-up of Russia's top oil company will continue well into 2005, with Yukos' majority and minority shareholders launching legal action against the Russian government, Gazprom, and any and all parties that are seen to have benefited from or aided in what amounts to a state-supported expropriation of private property. Gazprom's efforts to launch itself into the US gas market by supplying liquefied natural gas (LNG) to American consumers could be derailed by a flurry of lawsuits and legal wrangling directed against the company as a result of the Yukos mess. Furthermore, foreign investors - already wary of the government's intentions in prosecuting Yukos and building up Gazprom - are likely to translate their circumspection into a hesitancy to commit investment dollars for new and existing Russian energy projects.

That may suit the Kremlin just fine, however, as the Russian government seems determined to wield state power over the energy sector via its control of Gazprom, doling out investment opportunities for IOCs only for specific projects of its choosing and only where it serves the government's strategic objectives. The brief period of investor confidence and unbridled enthusiasm to expand in Russia appears to be at an end. The Kremlin's blatant reassertion of state control over the hydrocarbon sector via its relentless and unprecedented efforts to topple Yukos will certainly undermine the business climate, causing IOCs to re-evaluate their perception of risk and to re-think their investment and expansion strategies in Russia.

Asia

China's rising demand for oil, gas and other resources will place further strains on relations with its neighbours during 2005. China's rivalry with Japan has been highlighted in the past two years by their competing proposals to access oil from Eastern Russia. China reached an agreement with Yukos in 2003 to build a major oil pipeline to the city of Daqing - but that was trumped by the Japanese government, which has offered up to US$5bn towards the construction of a more ambitious pipeline running to the eastern port of Nakhodka. The Russian government has yet to make a final decision, with a further delay expected in mid-2005 due to the uncertainty surrounding Yukos. The Russians are edging towards the Nakhodka option, as this would open up Russian oil to the international market; but the technical and financial aspects of the project will take some time to be resolved. China's political muscle and market potential may yet force a compromise in the proposals, with the possibility for an extension or trunk line to bring oil directly to northern China.

Relations between China and Japan are being tested by another energy-related dispute: in early 2005, the China National Offshore Oil Corp (CNOOC) and Sinopec will begin producing natural gas from the offshore Xihu Trough, in an area close to Japanese territorial waters. The East China Sea holds significant gas reserves, which Chinese companies are intending to supply to Shanghai and other major cities on the east coast. Japan suspects that the area's reserves may extend into their jurisdiction, but at present they lack the data or surveying capability to stake their claim more forcefully. Although the Chinese appear to hold the advantage, the Japanese government's recent offer of ¥23bn (US$218m) to fund exploration on their side of the disputed border is likely to raise the stakes, with the possibility for more direct political or military exchanges.

China has also angered its neighbours in South-East Asia with aggressive plays into the South China Sea; notably both Sinopec and PetroChina are seeking to improve their expertise in offshore production, to match that of CNOOC. China also faces growing competition from energy-hungry India, as the two countries' national oil companies jostle for influence in South-East Asia, Australia and even as far afield as Latin America. The rivalry among Asian countries, as they seek to acquire and protect their oil and gas resources, should make regional co-operation on energy less likely in the coming year, despite their common dilemma: namely, rising demand and ever-greater dependence on oil and gas imports from the Middle East.

The Middle East and North Africa

The high prices of 2004 have finally served to reawaken key oil producers to the need for further development. Among these producers is Saudi Arabia, which intends to nearly double its rig count in 2005 with a view to meeting higher production capacity targets and reasserting its influence over the oil market in the medium term, after a number of damaging attacks on its credibility as lead swing producer in 2004.

A number of other Middle East producers are also expected to increase exploration in 2005, buoyed by high prices and expectations of falling output from other regions in the years ahead. Of these, Iran, Egypt and Algeria will continue to offer exploration and development tenders as in previous years, while considerable new opportunities are set to emerge in Libya and potentially Kuwait, where the government will likely succeed in pushing enhanced technical service contracts past an obdurate parliament. Libya's first open-bid exploration tender in January 2005 is likely to provoke a stampede of US majors, who will then work to leverage one-on-one opportunities and integrated deals. The range of Libyan prospects is likely to force other regional players to raise their game or risk missing out on regional investment interest.

As in 2004, Iraq is expected to remain off the mainstream IOC radar, although there will be scope for smaller, less risk-averse companies to participate in technical service contracts and smaller development deals. The installation of an elected Iraqi government may bring further stability and regulatory certainty by the close of 2005, but evaluation studies and low-level co-operation efforts are likely to be the extent of mainstream investor involvement, with a view to increasing their knowledge of the Iraqi geological landscape and building goodwill for a time when that oil behemoth begins to awaken. 

Latin America

Domestic politics, increased government control and regulatory uncertainty will continue to act as deterrents to greater investment in boosting oil and gas production in many countries in the region. In Mexico, insufficient investment in gas exploration has already converted the country into a net gas importer and despite projected increases in non-associated gas production through multiple service gas contracts (MSCs) awarded to the private sector, Mexico's Energy Secretariat predicts that the country's net gas imports are expected to reach 40% of total projected national demand by 2013. There are now worries that the country's status as a net oil exporter is also at risk without sufficient new investments in exploration and production (E&P) in order to offset the anticipated decline in production from the huge Cantarell field in the coming years. Pemex's heavy fiscal burden and the constitution's bar on foreign companies holding oil E&P concessions, continue to act as deterrents to greater investment and despite larger annual E&P budgets approved since the Fox administration took power in 2000, there was a 42% decline in the country's proven hydrocarbon reserves between 2001 and 2004. Potential reserves in the deep waters of the Gulf of Mexico are seen as a ray of hope but their development could be frustrated by the difficulties that the government is likely to face in persuading a hostile Congress to support a proposal to allow Pemex to form alliances with foreign companies to explore for oil in deep waters.

The Argentine government also sees offshore exploration in new areas as a panacea to its long-term supply worries and forming joint ventures (JVs) in this sector with private companies will be one of the main objectives of the new state energy company. Energía Argentina SA (Enarsa), created in 2004. However, without a clear regulatory framework, the new company may find it difficult to encourage other firms to go into partnership with it in offshore areas where there has been little or no previous exploration. In contrast, pledges to invest in new pipelines and improvements in the operating environment for gas producers may help to encourage greater investment in the Austral Basin, off the southern coast of Argentina, where significant proven gas reserves have already been found. In the meantime, the possibility of further gas-supply shortages in the next southern hemisphere winter (Q2-Q3 2005) cannot be ruled out .

Venezuela's huge hydrocarbon reserves and geographical proximity to the US means that it will continue to attract investment, particularly in natural gas and extra-heavy oil, despite the country's ongoing political tensions. A number of companies have already expressed an interest in new opportunities for investment, such as an exploration round planned in 2005 offering 34 gas blocks in the Gulf of Venezuela, and a possible licensing round for extra-heavy blocks in the Orinoco Belt. All the same, frequent rule changes and the state's tight grip over PDVSA mean that many private investors will continue to be wary about increasing their exposure to Venezuela - putting limits to any future expansion in investment. Meanwhile, the government's increasing dependence on the state oil company's cash flow to fund its social projects has raised concerns about the company's ability to fund its US$37bn capex programme in a lower oil-price scenario and, ultimately, its ability to increase production levels. As with Argentina and Venezuela, Brazil has also seen increased state interference in the oil sector since the Worker's Party (PT) government took power in January 2003. This has been particularly evident in the state oil company Petrobras' fuel-pricing policy; attempts to boost local content in oil contracts; and new legislation that will reduce the influence of the oil regulator, the ANP, over energy policy. Nevertheless, the country's sixth licensing round, held in 2004, saw higher levels of foreign participation than previous rounds and a seventh round is already being planned for 2005 .

Sub-Saharan Africa

Sub-Saharan Africa will see increased spending in oil sectors as companies plough back earnings from record high oil prices in 2004 into the sub-continent, and oil supply will grow in 2005 as recent discoveries come onstream. Additionally, there will be more exploration opportunities with the planned licensing round in Nigeria and the gradual opening up of Chad. Some of the investment focus will also be turned to gas developments as increasing demand in Asia and the US creates new markets. Local companies will feature more in the upstream sector as they gain expertise and as African governments continue to push for increased local participation in the oil sectors, with Nigerian companies becoming the most prolific - mainly due to the earlier start they have had in this area. In the same vein, NOCs keen on local capacity building will continue to show an interest in forming new partnerships with other more capable national oil companies, particularly Asian NOCs. Security-related issues in the sub-continent are likely to intensify before they improve as the movement for better rent-sharing, which started in Nigeria, gains hold in other parts. However, government efforts to introduce transparency in revenue management may begin to bear fruit later on in the year as - it is hoped - gradual changes are made to the fundamentals that have come to define these systems.

The regional power co-operation arrangements entered into in the past year should begin to produce results as some projects are commissioned in 2005, and the market for new independent power producers (IPPs) in the sub-continent should also expand in line with general capacity-building efforts.

United States

The recent Senatorial backing of the US Federal Energy Regulatory Commission's (FERC) position on the citing of LNG terminals is expected to be replicated in the courts, easing somewhat the regulatory hurdles required for LNG projects in the country. Consequently, more approvals for LNG projects are expected to be handed out in 2005. With the progress already made on the Alaska Gas Pipeline, construction is expected to begin in 2005. The push for the opening up of the Arctic National Wildlife Refuge (ANWR) is expected to intensify in the first half of 2005 and the chances of this succeeding are greater than they have ever been in the past, following the victory of the Republican Party in the congressional elections this year. Despite environmental opposition, the power sector may see a few more proposals for coal-fired power generation as natural gas prices continue to increase in the face of declining domestic production and new clean-burning technologies are implemented.

Outlook and Implications

Looking forward, 2005 promises to see the continuation of many themes that emerged in 2004. IOCs will continue scouring the globe for new upstream investment opportunities, and a higher baseline oil price will give them every incentive to increase capex plans. A relative lack of 'safe' investment opportunities will force them to continue their shift into countries traditionally thought to present a higher risk factor, but they will have to strike the correct balance between caution and risk-taking.

A higher OPEC price band may provide IOCs with more confidence about the sustainability of a higher oil price, even if prices come down from the records posted in 2004. A higher price band - likely between US$30/b and US$35/b - is already emerging, if not formalised. If history is any indication, OPEC will aggressively defend the price floor, if not its ceiling. A slowdown in global growth, however, could see a return to in-fighting among OPEC members as countries lobby for higher production quotas.

The rise of LNG will continue, with a shift from production developments to regasification. As various countries and projects target the world's largest gas market in the US, an Atlantic basin LNG market will develop to complement the Asian LNG market. As Atlantic basin LNG projects progress, company strategies will become clearer in 2005, with suppliers orienting themselves to be able to deliver LNG to European markets as well as the US. The increased use of LNG will also be a plus for the Kyoto Protocol when it comes into effect in February 2005. However, boosting the world's consumption of cleaner-burning natural gas will do little to mitigate climate change unless it significantly displaces coal, which will remain the primary fuel for heating and electricity generation in much of the developing and industrialised world. Efforts by industrialised nations to cut back on carbon emissions under the terms of the Kyoto Protocol will be hampered by the fact that three of the world's largest polluters - the US China, and India - are not bound by the international treaty. Nonetheless, the EU's emissions trading scheme will finally come into force, instituting a market-based system to reduce carbon emissions.

On a regional basis, the Middle East will of course continue to dominate the petroleum sector, with a number of OPEC countries likely to step up their exploration efforts on the back of high 2004 prices. The region will continue to offer the highest risks and rewards, with Libya seeing intense IOC interest while Iraq remains largely off-limits, despite the progress in laying the groundwork for future IOC involvement. Russia's enforced break-up of Yukos and its build-up of Gazprom will see the presidential administration (the Kremlin) exercise greater power over the country's vast natural resources wealth, while both China and Japan - thirsty for new sources of oil to feed domestic demand - will continue to compete with each other for access to Russian oil.

Latin America will see domestic politics and regulatory uncertainty stifle greater foreign investment just as IOCs focus greater attention on the oil production potential of sub-Saharan Africa. In the US, the Republican sweep in November 2004 presidential and congressional elections will see a renewed effort to open up the Arctic National Wildlife Refuge in Alaska to drilling, with a gas pipeline linking Alaska to the continental US moving ahead. In summary, 2005 will see the continuation of much of what happened in 2004, but perhaps without the same degree of drama. Nevertheless, 2005 promises to be yet another fascinating year for the energy sector, and unexpected developments could make it another historic year.