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18/02/2005 | Head of ChevronTexaco Forecasts End of 'Cheap Oil'

WMRC Staff

The chief executive of ChevronTexaco, David O'Reilly, has forecast the end of 'cheap oil' and said that the world is now entering a new phase as a bidding war for Middle East oil and gas develops between East and West.

 

Significance

While there has been much talk in the media over the past year over whether the recent oil price rise is structural or temporary, O'Reilly is the first chief executive from any supermajor to state that the price rise is here to stay.

Implications

ChevronTexaco's main competitors continue to dismiss the idea of a structural oil price rise, stating that there is more than enough oil to meet rising demand. Just yesterday the chairman of BP, Peter Sutherland, said that he felt global oil supplies were 'safe' for the next 60 years. Sutherland's views reflect the consensus amongst senior oil executives, but O'Reilly's comments may now spark a wider debate over the prospects for future supply.

Outlook

The concept of global competition for Middle East energy reserves is one that is now gaining support. While it is wise to caution against a myopic view based on only the last two years, there are reasons to seriously consider the future of energy supply and the price implications.

First Supermajor to Consider Structural Price Rises

Speaking at an oil and gas conference in Houston (US), David O'Reilly, chief executive of ChevronTexaco, said that the time when the world could count on cheap oil and gas is now 'clearly ending'. His comments, while perfectly in tune with some industry analysts and growing media interest in the future of energy supply, is a break from the line being taken by most of the supermajors. The contrast was striking when compared with comments made by BP's chairman, Peter Sutherland, speaking on the same day on the other side of the Atlantic. Sutherland said that despite the increasing demand from China and Asia, he felt global energy security was assured for the next 60 years. So we have two supermajors now split, not only on geopolitical questions over supply security and international competition for resources, but also by implication on where oil prices will go in the coming years. If there is, as BP believes, ample supply available to meet growing demand, then we would expect to see a response to that growing demand with increased supply, and a return to equilibrium prices in the US$25/b range. If supplies will struggle to meet demand, a much higher price can be expected. This ultimately will translate into quite differing strategies as companies assess the profitability of various projects based on future price forecasts. 

When discussing the future of the oil industry BP has been one of the more bullish oil companies. Certainly, a look at BP's impressive results in 2004 and success in growing reserves and production over the past five years would indicate that the company has a right to be optimistic. However, BP's growth has to a large extent come from their far-sighted gamble to invest heavily in Russia via the TNK-BP joint venture. A move that raised eyebrows at the time is now envied by the company's main competitors. BP has other projects that will deliver growth, notably in West Africa and Central Asia, but must also compensate for falling production from US and UK fields. In line with other oil majors, BP has been pouring a good deal of the vast profits accumulated in 2004 into share buybacks and dividend payments. This strategy has attracted some criticism, but BP's chief executive, Lord Browne, has asked investors to look at the cash value of investments in exploration and production, not the percentage figure. This argument does have merit, and oil companies must be cautious not to overspend, but there is also a growing sense that exploration investment is not resulting in the same successes it has in the past. In recent times oil company growth has been more dependent upon M&A than E&P. This does not of course just apply to BP - all supermajors have been adopting a very similar financial strategy.

Outlook and Implications

What is interesting about O'Reilly's comments is that he is clearly breaking with the consensus. This could well have implications for how ChevronTexaco approaches future investment opportunities. If O'Reilly's view is correct, it will be from the Middle East that most production growth will come, and this raises particular problems for international oil companies given the history they have had there. The closed-door policies of Saudi Arabia, Kuwait and Iraq have limited any opportunities to invest, as have US sanctions on Iran and, until recently, Libya and Iraq. This lack of opportunity, combined with complex political questions, has let in a number of Asian companies and given rise to the concept of geopolitical competition for resources between East and West . If there is going to be greater competition, centred on a specific - and difficult - region, then the terms offered are going to change. For those that believe this is a temporary situation, those terms will be viewed as too high a price to pay, while for those expecting more limited opportunities, the higher costs will be seen as a necessary condition to grow. That could determine how the supermajors evolve in what increasingly appears to be a significant moment for the industry

Raul Dary
24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

www.globalinsight.com and www.wmrc.com

WMRC (Reino Unido)

 


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