Development of Shale Gas in the Algerian South-Western basins

Development of Shale Gas in the Algerian South-Western basins

In Algiers, the official press agency APS announced in a communiqué that the CEO of SONATRACH, the Algerian State oil company signed an agreement with British Petroleum and Equinor of Norway representatives on the exploration and development of Shale Gas in the Algerian South-Western basins.

Meanwhile, in the US where Shale Gas production has managed to reach unprecedented heights, INSIDE CLIMATE NEWS produced this article of Phil McKenna back on August 15, 2018 “as drillers compete for oil and natural gas, more fluids are going into and out of each fracking well. Researchers warn it’s headed for a tipping point.”

Water Use in Fracking Soars — Exceeding Rise in Fossil Fuels Produced, Study Says

By Phil McKenna

The amount of water used per well jumped as much as 770 percent between 2011 and 2016, researchers say. As fracking expands, its water and wastewater footprints are forecast to continue to balloon. Credit: Mladen Antonov/AFP/Getty Images

As the fracking boom matures, the drilling industry’s use of water and other fluids to produce oil and natural gas has grown dramatically in the past several years, outstripping the growth of the fossil fuels it produces.

A new study published Wednesday in the peer-reviewed journal Science Advances says the trend—a greater environmental toll than previously described—results from recent changes in drilling practices as drillers compete to make new wells more productive. For example, well operators have increased the length of the horizontal portion of wells drilled through shale rock where rich reserves of oil and gas are locked up.

They also have significantly increased the amount of water, sand and other materials they pump into the wells to hydraulically fracture the rock and thus release more hydrocarbons trapped within the shale.

The amount of water used per well in fracking jumped by as much as 770 percent, or nearly 9-fold, between 2011 and 2016, the study says. Even more dramatically, wastewater production in each well’s first year increased up to 15-fold over the same years.

“This is changing the paradigm in terms of what we thought about the water use,” Avner Vengosh, a geochemist at Duke University and a co-author of the study, said. “It’s a different ball game.”

Monika Freyman, a water specialist at the green business advocacy group Ceres, said that in many arid counties such as those in southern Texas, freshwater use for fracking is reaching or exceeding water use for people, agriculture and other industries combined.

“I think some regions are starting to reach those tipping points where they really have to make some pretty tough decisions on how they actually allocate these resources,” she said.

Rapid Water Expansion Started Around 2014

The study looked at six years of data on water use, as well as oil, gas and wastewater production, from more than 12,000 wells across the U.S.

According to Vengosh, the turning point toward a rapid expansion of water use and wastewater came around 2014 or 2015.

The paper’s authors calculated that as fracking expands, its water and wastewater footprints will grow much more.

Wastewater from fracking contains a mix of the water and chemicals initially injected underground and highly saline water from the shale formation deep underground that flows back out of the well. This “formation water” contains other toxics including naturally radioactive material making the wastewater a contamination risk.

The contaminated water is often disposed of by injecting it deep underground. The wastewater injections are believed to have caused thousands of relatively small-scale earthquakes in Oklahoma alone in recent years.

Projected Water Use ‘Not Sustainable’

Jean-Philippe Nicot, a senior research scientist in the Bureau of Economic Geology at the University of Texas at Austin, said the recent surge in water use reported in the study concurs with similar increases he has observed in the Permian Basin of West Texas and New Mexico, the largest shale oil-producing region in the country.

Nicot cautioned, however, against reading too much into estimates of future water use.

The projections used in the new study assume placing more and more wells in close proximity to each other, something that may not be sustainable, Nicot said. Other factors that may influence future water use are new developments in fracking technology that may reduce water requirements, like developing the capacity to use brackish water rather than fresh water. Increased freshwater use could also drive up local water costs in places like the Permian basin, making water a limiting factor in the future development of oil and gas production.

“The numbers that they project are not sustainable,” Nicot said. “Something will have to happen if we want to keep the oil and gas production at the level they assume will happen in 10 or 15 years.”

Phil McKenna, is a Boston-based reporter for InsideClimate News. Before joining ICN in 2016, he was a freelance writer covering energy and the environment for publications including The New York Times, Smithsonian, Audubon and WIRED. Uprising, a story he wrote about gas leaks under U.S. cities, won the AAAS Kavli Science Journalism Award and the 2014 NASW Science in Society Award. Phil has a master’s degree in science writing from the Massachusetts Institute of Technology and was an Environmental Journalism Fellow at Middlebury College.

 

Going for Shale Oil and Gas in Algeria

Going for Shale Oil and Gas in Algeria

The Prime Minister in a statement on October 1st, 2017 to the National Assembly has indicated that going for Shale Oil and Gas in Algeria is an option for the immediate future. 

Opportunities and Risks of fracking 

I remember that under my supervision, a study to which participated international experts with decades of experience in the field of energy, resulted in a report of 620 pages entitled “Oil and Shale Gas: Opportunities and Risks”.  It has been handed over to the Prime Minister of the time on February 25, 2015. It is a report meant to be as objective as practicable, measured with analyses and proposals of all the then on-going trends. In the opinion of most of the involved experts, energy being at the heart of national security, it is an opportunity for Algeria, which must first assess its potential, and analyze all risks and profitability at term; the strategic objective would be to move towards a well-balanced energy Mix. These experts, noting that this sensitive issue requires specialized knowledge and in any case poses a social problem that would require good communication with the whole society. To avoid disturbing the management of SONATRACH, the state oil company as a strategic commercial company, the experts wanted that its leaders avoid exposing themselves to debates, and leave it to the Department of Energy that is politically empowered to present its arguments. As such, the experts have called for a new independent institution, not from a Ministerial Department but rather to be under either the President of the Republic or the Prime Minister and to involve civil societies of all each region, independent experts and representatives of the Department of Energy and other government departments, working closely with the institutions. Dialogue with the affected populations is vital.

Nature of Shale Gas

Unconventional Oil and Gas is contained in very compact and very waterproof, clayey sedimentary underground rocks containing at least 5 to 10% of organic matter.

Why the move towards Shale Gas?

Oil and Gas are the backbone of the Algerian economy. They have allowed the State to build foreign exchange reserves although down from $194 billion, to less than $97 billion at the end of 2017, allowed a revenue to SONATRACH of $28 billion in 2016 for an outflow of $60 billion and between $55 / 60 billion by end of 2017. According to SONATRACH’s CEO by end of 2017 it could be $31 billion. This has allowed over the years 2000 through 2016, an unprecedented public spending estimated between $950 / 1000 billion for an average growth rate not exceeding 3%.

Our widely media published calculations as of Customs statistics therefore official, of a year-on-year basis, show that between 2000 and 2016 currencies outflows for goods imports have been about $520 billion ($560 billion to July 2017 according to some sources), and $120 to 140 for services often forgotten in official statements (10/11 billion Dollars a year between 2010 and 2016) to which legal capital transfer of more than $730 billion have to be added, for an inflow of foreign exchange of about $850 billion, the difference being the currency reserves that stood on December 12, 2016 at $114 billion. The Algerian economy being a rentier economy largely based on crude oil export and a diversified industry that is embryonic with 70 to 75% of all household and public and private companies (with an integration rate not exceeding 15%) needs are sourced from overseas.

All these statistics could, however, hide the reality on the ground. That of apparently controlled unemployment (10%), of the predominating unproductive administrative jobs in the real sphere and more than 50% of the active population in the informal sphere according to the Government report of the National Statistic Office (2012).

Also, the Government has recently ruled that Algeria would be a net importer of oil in less than 10 years and in 20 years for conventional gas with domestic consumption tripling by 2030 and quadrupling by 2040, according to the Energy Minister. In case of undiscovered substantial and above all profitable according to the international price vector, Algeria could start importing oil from 2025 and gas from 2030 to only meet local demand.

Could the solution therefore be in Shale Gas?

And, considering both exports and a strong domestic consumption due to the low price, as per the on-going policy of fuels and energy subsidies and with the gas for instance sold to SONELGAZ, a state power utility provider between the sixth and the tenth of the international price; this rate varying according to the fluctuations in international prices, largely influenced by the US Shale Gas, at currently between three and four Dollar a MBTU. Financing needs of SONELGAZ according to the CEO statements would by end of September 2017 be $30 billion per year or $150 billion for the next five years not counting the financing needs of SONATRACH itself as per the drop from $100 billion to $70 billion for the same period.

Where then to find this capital money of about $45 billion per year with 70% in hard currency, the Dinar part contributing just under 30%, and the share of payroll in Dinar in value added is relatively low, for these two companies and all their subcontractors are dependent of imports paid in large part in hard currency and revenues between 2017-2020 may not exceed $35 billion if the price of a barrel of oil is around $55. For SONELGAZ, this amount takes into account the newly decided upon additional capacity of electricity plants. Indeed, following the increasingly recurring power cuts, it was decided to plan to produce additional MW of electricity by 2017.

With this increase in domestic consumption, the fact of the decision would not change domestic prices and there is a risk to go to more than 70/75 billion cubic meters of gas by 2030 for   domestic consumption. Indeed, if one extrapolates for exports to be 85 billion cubic meters (m³) of gas and 70 billion cubic m³ of gas of for domestic consumption, there should be more than 155 to 160 billion m³ gas assuming significant investments in this area of business. Here costs must seriously be taken into account; market competition, substitutable energy and major global energy mutations are and will be there.

The interest of the Algerian authorities for non-conventional hydrocarbons would be to foresee the need to ensure the transition energy of the country but to also be guided always by increasing revenue so as to avoid any social turmoil. But is it not the focus for Algeria to go towards an energy Mix combining the traditional gas/oil, Shale oil/gas and renewable energy in which Algeria has significant potential.

What profitability for Algeria?

The Algerian group SONATRACH had already drilled its first Shale Gas wells in the basin of Ahnet, located south of In Salah, which was to be followed by others. To develop these reserves, it (SONATRACH) should form partnerships with international groups including Shell, Exxon Mobil, Total, Talisman, INIE etc. According to recent field exploration and studies undertaken by this group during the second quarter of 2012 in an area of 180,000 km², it was reported that a potential of Shale Gas exceeding 19,800 billion m³ with a recovery rate of 25% is there.

But did Algeria establish a reliable geological map confirming these findings?

As for conventional gas, thousands of deposits but not profitable financially can also be exploited. Economic and hence profitability calculation of the reserves, is function of the growth of the world economy and its model of consumption, domestic consumption, the costs of extraction and transport, competitors and substitutable energy.

According to recent estimates by the International Energy Agency (IEA), a new assessment holds that technically extractable gas reserves in the world would be up by 40% and would bring them to 640,000 billion m³, which is more triple of the world reserves of conventional gas of today.

Since the revolution of unconventional gas that will make of the USA the world’s largest exporter before Russia by 2020 knowing that Russia holds a third of the world’s reserves of conventional gas (more than 33%), and is the main competitor of SONATRACH despite the recent freezing of South Stream supplying 30% to the European market.

Other competitors like Iran (15 / 20% of the world reserves) potential competitor since the lifting of the embargo, and Qatar (10 / 15%), besides China which holds first global gas reserves of Shale, that combined with its investments in renewable energy will make it a global leader.  Mozambique that could become the second or third holder of gas reserves, the discovery of more than 20,000 billion cubic m³ in Eastern Mediterranean and the return of Iraq and Libya’s production, the competition is likely to be even tougher for Algeria. As this market is segmented like conventional gas where the pipes represent about 70% of the global gas marketing, competition in Asia of Russian and Qatari plans, arise the whole profitability of the Algerian LNG with its weak capacities in addition to the significant investments that are required in transportation. As it will need to amortize the Transmed, Medgaz, project Galsi via Sardinia and the Nigal (Nigeria – Europe via Algeria) including increasing costs of the delays by more than 50% compared to the initial cost, that are still in gestation.

What is in it for Algeria, knowing that gas accounts for about a third of the revenue of SONATRACH?

However, between 2017-2020-2025, beside the USA exporting to Europe, many contracts in the medium term would have expired and according to credible reports, the European partners will be requiring a revision to the price of conventional gas. This can influence the price of assignment of the unconventional gas.

One must also take account of the dispersion of the deposits whose life unlike conventional gas is limited, according to the intensity of extraction that rarely go beyond 5 years of fracking. The United States bore approximately 2000 wells a year in a relatively same geological area and 500 to 600 wells can give 28 billion m³ of gas. However, in Algeria, even in the traditional gas/oil extraction, it never went more than 200 wells. According to the head of Department of analysis of the basins of SONATRACH, during an international workshop on Shale Gas in 2014, the production costs of a drill in Algeria varied between $10 and 15 million, whereas in the USA the average cost it was between $5 million to 7 million. Also marketing for Algeria could only be undertaken, according to the former Minister of energy currently Minister of industry not earlier than until 2020/2025, assuming a perfect mastery of technology to reduce costs. Moreover, in addition to the mastery of technology, which should be included to the cost notably through the purchase of the required know-how, the advantage of some countries such as the USA is the availability of a network of transport of gas virtually throughout the country and more of the fact that the deposits are not deeply set.

What will all additional costs of all pipelining and related infrastructure be for Algeria?

Profitability depends on the future evolution of the transfer price of gas to the international market which is currently low on the open market by the unconventional gas revolution. Operations management is complex, drilling losing 80% of productivity at the end of 5 years, unless new technologies are brought to about. Besides the technological expertise, the issue of cost-effectiveness refers to the global energy, the energy consumption map of the world by 2030/2040 whilst taking account of the costs of renewable energy which can decrease if there is massive investment and the willingness to get out of nuclear power, the dynamics of the emerging big energy consumers, if they maintain the current model and this is not obvious, as well as China, France and the UK taking the initiative to reduce all vehicles running on diesel and petrol/gasoline as from 2020.

Will the reformulation of the hydrocarbons law be able to revive exploration on operational bases? Unless, and as it happens for most of public companies structurally to be loss-making, the Treasury bears additional costs of shale gas that 70% of the companies returned to the starting square. Thus, arises the opportunity to do away with the restrictive rule of 49 / 51% hence to amend the law on hydrocarbons including the taxation.

Social dialogue and new model of energy consumption

Algeria must think of a new model of energy consumption under the auspices of the National Council of Energy which must be reactivated, SONATRACH being a commercial enterprise (1). About Shale Oil and Gas, it must meet three criteria: protection of the environment, avoid any pollution of the water, the transfer of the exploitation of the Shale Oil and Gas price must cover the costs with a margin of reasonable profit.

For Algeria, it is however the protection of the environment that matters the most, hence the importance of the location of training centres and recruiting in priority those population from the South which must be involved for any possible operation of the kind in the first place.

We will get back for more on this vey aspect of the Shale Gas exploration in the near future.

Algeria: distinguishing economic time from political time

Algeria: distinguishing economic time from political time

The new Law of Hydrocarbons in Algeria: distinguishing economic time from political time was enacted despite concurrent street demonstrations against it. It was debated at length by Professor Abderrahmane MEBTOUL, International Expert, in interviews to Radio Algeria International – Paris France on 04/11/2019, to Algerian Radio Channel-3 and to Radio France International on 05/11/2019. Here are some excerpts of each.

Algeria: distinguishing economic time from political time

Question – 1. Will Algeria with high domestic consumption be able to meet its international commitments?

Indeed, if we take natural gas, domestic consumption is likely to exceed 60 billion cubic meters of gas by 2030 and 100 billion cubic meters of gas between 2035/2040, the Ministry of Energy has announced the depletion of reserves would be at about 60%. An urgent need to review the current energy policy and move towards a clean energy transition policy that revolves around four axes, to meet its international commitments.

-First: an energy efficiency policy (energy sobriety) that affects all sectors and households by reviewing construction methods, cars/trucks fleet consumption, energy-intensive industrial units; the simple referring to a policy of targeted subsidies, but which do not penalize the disadvantaged, existing new technologies that save about 30% of energy consumption.

-Secondly: the development of renewable energies whose cost has fallen by more than 50% for both thermal and photovoltaics, where Algeria has significant potential.

-Thirdly: to continue to invest in upstream, which can make discoveries as part of a win-win partnership, SONATRACH with lower prices and physical production, which has dropped significantly since 2008, technological or financial capabilities, but no longer have to be deluded by large deposits like Hassi-Messaoud or Hassi-Ramel.

-Fourthly: avoid precipitation whilst developing SHALE oil and gas, Algeria having the third world reservoir, only by 2025, as I recommended to the authorities of the country, through this study with experts pending new technologies that replace hydraulic fracturing, saving freshwater and injecting more than 90% of the chemicals into wells, thus protecting the environment, but requiring in-depth social dialogue.

To answer your question directly, I highlighted the points at the 5 + 5 Meeting of Algeria, Morocco, Tunisia, Mauritania, Libya with France, Italy, Spain, Portugal, Malta in Marseille in June 2019. I had the honour of chairing the Energy Transition’s workshop in which the subject of a clean energy transition policy, and the modification by Algeria, a major energy player in the Mediterranean basin, as it has always done, to meet its international commitments by 2030.

Question – 2. Will the amendment of this law attract foreign investors?

Depending on several factors, such as:

-First: the revision of this law as I have pointed out since its enactment at the beginning of 2013 is unsuited to the current situation, in particular the tax component and the nature of the contracts in which Sonatrach supports the majority of the financing, the world having evolved from where the importance of its revision to take account of new global energy changes.

-Secondly: however, a law is only a legal instrument, being a necessary but sufficient condition of the attractiveness of foreign investment, where any company attracted by direct profit rate, and also as long as the level of foreign exchange reserves is high. Depending on the business environment where Algeria was in the latest report of the World Bank of 2019 was very poorly classified because of its paralyzing bureaucracy, corruption, financial and unsuitable socio-educational systems.

-Thirdly: the political climate is decisive, and according to international observers no serious investor would engage in Algeria without the resolution of the political crisis, political stability especially in a country like Algeria, where politics and economics are intertwined, being a determining factor in the attractiveness of a foreign investment.

-Fourthly: as I have just pointed out recently, to your colleagues on France 24 television, and several Algerian websites and daily newspapers, it would be desirable to postpone the adoption of this law after the presidential election. Only a president and a legitimate government can secure the future of the country where this resource, directly and indirectly, provides about 98% of the country’s foreign exchange resources. Some company executives fear that a new president would challenge this law, which would be passed by a transitional government, responsible for current affairs, while legal stability is a golden rule for all investor.

-Fifth: to answer this second question directly, the positive impact of this law would depend on the future global energy map, the entry of new producers and the sale price on the world market both of oil and gas returning at the cost of production in Algeria therefore to a new strategic management of SONATRACH and the impacts would not be felt only in three to four years, subject to the lifting of environmental constraints. Why this haste, which risks further sharpening social tensions in the run-up to the presidential election, thus possibly harming the voting turnout?

ademmebtoul@gmail.com 

Re-activating Algeria’s National Energy Council

Re-activating Algeria’s National Energy Council

 Algeria has the institutions that it needs to energize if it wants a State with the rule of Law; a sine qua non condition for a sustainable development and above all for its credibility at both national and international levels. Could Re-activating Algeria’s National Energy Council for a robust energy strategy be an absolute necessity and at the earliest of times?
For starters, the National Energy Council (CNE) alone could set Algeria’s energy strategy but it is itself  in great need to be, as it were, re-energized.

This contribution looks in depth at the National Energy Council and the management of SONATRACH (SH).  

Legal texts are a necessity but an insufficient condition: the important thing is to act on the functioning of Algerian society, as a function of the power relations of the various political, economic and social components, themselves as linked to the world economy so that these laws are applicable.

The National Energy Council

The National Energy Council, as a supreme organization for the country’s energy strategy, set up by Presidential Decree on April 8th, 1995, in its Article 6, stipulates

·      “The Council shall meet periodically on the convening of its president”, the President of the Republic whose secretariat (article 5) is provided by the Minister of Energy and composed of the so-called sovereignty ministers (National Defence, Foreign Affairs, Energy and Finance), the Governor of the Bank of Algeria and the planning delegate.  This Article 6 states also that:

  • ·      The National Energy Council is responsible for monitoring and evaluating the long-term national energy policy, including the implementation of a long-term plan to ensure the energy future of the country.
  • ·      An energy consumption model to be based on all national energy resources, external commitments and the country’s long-term strategic objectives;
  • ·      The preservation of the country’s strategic reserves in the field of energy; Long-term strategies for the renewal and development of national oil reserves and their recovery;
  • ·      The introduction and development of renewable energies; strategic alliances with overseas partners involved in the energy sector and long-term trade commitments.

As far as prerogatives are concerned, it is no longer SH to grant the operating perimeters under the new Oil Act of April 28th, 2005 as amended on July 29th, 2006 together with January 2013 Law extending the rule of 49/51% ownership and Introducing the exploitation of Shale Gas and reconducting the same procedures but onto ALNAFT, a Ministry of Energy dependent agency, thus maintaining functional relations with this structure as well as with another agency, the Authority of Regulation to monitor prices mechanisms.

The new law established at least 51% of SONATRACH’s shares of the perimeters granted by ALNAFT and less than 49% to the various other oil companies.

Other SONATRACH’s organizations

The General Assembly Is composed of the Minister of Energy and Mines, the Minister of Finance, the Bank of Algeria’s Governor, the delegate from the Planning Department, a representative of the Presidency of the Republic.

Article 9.3 specifies that the General Assembly shall meet “at least twice a year in ordinary session” and in “special session on the initiative of its Chairman or at the request of at least three of its members, of the auditors or of the President and CEO of SH”. At the end of each session, the General Assembly is required to send its report to the President of the National Energy Council, who is the President of the Republic.

The Board of Directors is composed of the President and chief executive officer of SH, the CEO of SONELGAZ, the utility provider the vice-president of pipeline Transport, vice-president of marketing, the department’s director general of hydrocarbons, another departmental representative and of two representatives of the SH Union.

The Executive Committee is the real working ankle of SH and comprises the CEO of SH, the secretary general of SH, the Vice-Presidents of upstream, downstream, pipeline and marketing-of the executive director of Finances, the director Executive of Human Resources and of the executive director of all central activities (DAG), the Director of strategy, Planning and Economics-of the Executive Director Health, safety and environment. And not to mention the holdings that are annexed to the Vice-Presidents. Thus, upstream is attached to the holding oil and paratanker services; For downstream, holding refining, chemical hydrocarbons (example Naftec) ; For the commercialization of the holding Sonatrach, it is attached to it the holding Sonatrach/valuation of hydrocarbons (example Naftal). At the international level, the Sonatrach group has set up a system of reorganization of its activities through the grouping of subsidiaries abroad around an international holding company (S.I.H. C) created in July 1999 which operates in different countries.

For a new strategic management of SH

Transparency in the management of SH should be based on a scientific and operational approach, from the general to the particular, to seize the interactions and be able to carry out actions through successive steps. 

Making SH more efficient would imply several strategic actions: starting with repositioning it in the international and national context immediately followed by a system of real-time organization based on networks and no longer on the current hierarchical vision type of organization. Transparent cost centers including the management of any partnership; rational management of human resources, an essential element of strategic management, involving executives listening to the collective of workers through a permanent and constructive dialogue.

All these actions refer in fact to the establishment of the rule of law and the urgency of renewed governance. If we want to fight against overbilling, illegal transfers of capital, make more efficient control of SH (this concerns all sectors), there is an urgent need to revive the now completely collapsed information system, posing the problem of transparency of accounts and accounts. Having had in the past, lead a financial audit on SH with an important team of executives of SH and experts, it was impossible for us to accurately identify the structure of the costs of Hassi R’mel and Hassi Messaoud whether for the barrel of oil and the MBTU of gas as delivered to ports, because of all those consolidation and transfer accounts of SH distorting any visibility.

In any case, the business management is inseparable from global internal and global governance.  The growth or not of the world economy in the field of hydrocarbons, the geostrategic factors and the new model of global energy consumption play as an essential vector in the increase or decrease in revenue from SH, to avoid isolating the micro-governance of the national and global macro-governance that are inextricably linked. That is why it is necessary to revise the current ‘oil law’ which has not attracted potential foreign investment, for it is unsuitable for the new economic and to rethink the strategic management of SH in order to reduce costs by better management and hopefully position amongst the TOP global companies.  ademmebtoul@gmail.com

The Vienna agreement and the Oil & Gas 2017 – 2030 prospects

The Vienna agreement and the Oil & Gas 2017 – 2030 prospects

Trading of Brent oil as at October 28, 2017 closed at its highest level at $60.62 and at $54.17 for the WIT and for natural gas at $2.75 MMBtu, down 5.72%. Euphoria apart, this contribution would attempt to review the The Vienna agreement and the Oil & Gas 2017 – 2030 prospects.  Indeed, the listing of $55 to over $60 a barrel, could be explained by the approaching winter, tensions in Iraq, decline of the Dollar from $1.20 a Euro to $1.16 and most importantly a timid revival in the global economy. Reassuring statements of respect for the Vienna agreement as envisaged by Russia and Saudi Arabia together with the proposed sale of 5% of the oil giant Aramco did concur to the above as well. But before we dwell into the Vienna agreement and the Oil & Gas prospects up to 2030, let us have look at the following first.

The determinants of oil prices

Eight key factors are determinant in oil prices.

First, central to the determination of oil prices is the growth of the world economy and especially that of China’s and its energy structure for 2020/2030. Added to that would be the other geostrategic factors such as the impact of tensions in Iraq, (the Kurdish zone producing 500,000 barrels / day) and statements of US President mulling to review the Iran agreement and the still on-going tensions in Nigeria and Libya.

  1. On the supply side, more rapid increase than expected of oil production, though unconventional mainly from the US Shale sector that upset the entire world energy map.
  2. Rivalries within OPEC with some not respecting their quota; the rivalry between Iran and Saudi Arabia; this latter being the only producer in today’s world that could affect global supply and hence bear on prices, depending on an agreement between the US, (the latter is not affected by the OPEC / non-OPEC accord) and Saudi Arabia to determine the floor price.
  3. The Russian expansionist strategy whose giant Gazprom (45,000 billion cubic meters known gas reserves) through the North Stream and South Stream (the latter currently frozen) from a planned capacity of over 125 billion cubic meters gas to supply Europe, not including new pipelines to Asia. Russia needs funding, tensions in Ukraine have not affected its exports to Europe, where its market share was 30% in 2013/2016. All this contributes to a measured support from Russia at a price regulation agreement. Recently, Russia has increased its production and open new fields in Siberia or the Arctic, showing an aggressive strategy.
  4. The return on the market of Libya with an easy 2 million barrels / day, Iraq with 3.7 million barrels a day (with production costs of less than 20% if compared to competitors) totalling up to over 6/7 million barrel / day. Iran with reserves of 160 billion barrels allowing it to export between 5/6 million barrels a day on top of its having gas reserves with more than 34,000 billion cubic meters gas.
  5. The new discoveries in the world including offshore especially in the Eastern Mediterranean (20,000 billion cubic meters of gas partly explains the tensions in this region) and Africa including Mozambique could be the third black gold reservoir of Africa and the new technologies that allow the operation and cost reduction of marginal gas fields and Shale oil.
  6. The US and Europe currently account for over 40% of global GDP with a population of less than one billion. These are pushing for energy efficiency with a planned 30% reduction and an urgent move towards energy transition, to notably reduce global warming because if the Chinese, Indians and Africans had the same pattern of energy consumption as that of the US and Europe, the world would need five planets. The global strategy should be based on limiting the efforts of exploitation and use of fossil fuels, coal, etc. and gradually move towards an energy mix of all renewables.
  7. The evolution of the Dollar and the Euro like for instance any rise of the Dollar, although no linear correlation between the two exists, would lower oil prices and as an immediate reaction to that the US stocks and often forgotten Chinese stocks would start building up.

OPEC and the Vienna agreement

Saudi Arabia’s share is over 33% of OPEC’s output. The Gulf countries alone account for 60% of this production. For countries outside OPEC, the most important traditional producer remains Russia. The corresponding commitment to the effort envisaged in the Algiers meet in September 2016 did somehow help lift oil prices from a range fluctuating between 55/60 dollars a barrel. Following the work of the High-Level Committee, which helped to smooth tensions between Saudi Arabia and Iran, the last meeting in Vienna in December 2016, enabled the member countries of the OPEC and non-OPEC countries to reach an agreement to reduce and for the first time since 2008 by 1.8 million barrels / day for a period of six months with possible extensions each time additional 6 months according to market conditions. Production limits set by the agreement affecting 11 of the 14-member countries of OPEC. The essence of the agreement of November 30 is carried by the largest producer’s cartel: Saudi Arabia, Iraq, United Arab Emirates, Kuwait, with Iran, Nigeria and Libya being temporarily exempted. Nigeria announced in late February 2017 an increase in production of over 300,000 barrels a day between 2017/2018 besides the return of Libya which can export between 1.5 and 2 million barrels a day. But at the last OPEC meeting, Russia producing more than 10 million barrels / day requested that these countries participate in the reduction effort to stabilize the market. We must recall that Iran has benefited from the most favourable reference with a volume of 3.97 million barrels / day (Mb / d) retained (against a level of 3.69 Mb / d, although Iran wants its production back to 4.2 Mb / d. Iran and Iraq might be tempted to exceed their quotas if they have surpluses. Saudi Arabia as the world’s largest oil exporter, has agreed to bring its production to 10.06 Mb / d and thus reduce its production of 500,000 barrels. non-OPEC countries agreed to a reduction of 558,000 b / d in addition to the reduction of 1.2 Mb / d of OPEC countries almost 1.8 Mb / d. For non-OPEC, Russia is the most important of these contributors with a reduction of 300,000 b / d. the other countries to participate in the effort will be Mexico, Kazakhstan, Malaysia, Oman, Azerbaijan, Bahrain, Equatorial Guinea, South Sudan, Sudan and Brunei.

What are the prospects?

According to OPEC the drop in the price of a barrel of oil from $102 to $45 since June 2014 caused a loss of $1,000 billion in revenues and $1,000 billion in terms of investment losses. At a price of $55, the reduction causes a loss of 3780 million barrels / year and about $219 billion for the OPEC countries. A survey of OPEC shows that average profitability for many OPEC countries to balance their budgets, the price that covers costs and a reasonable profit margin should be 60 Dollars. For Algeria profitability of marginal fields is at a price above $60, average deposits between 40/50 Dollars and large deposits between 30-40 Dollars per barrel. But many experts question the temptation for producers to “make up” natural declines, related to the depletion of some deposits and already integrated with forecasts, to pass them for voluntary reductions. OPEC while representing the world’s largest reserves, no longer has the same impact on the market than in the 70, with only 33% of marketed worldwide production, the remaining 67% being made outside OPEC. A barrel at the recovery price of 55/60 Dollars will naturally depend on the growth of the global economy, without prejudging the risk of an increase in supply that would be due to the increased production of non-OPEC countries, the US whose marginal fields becoming profitable. As from their rising prices, the massive influx of American Shale oil production of which costs have fallen for three years by 40 to 50% thanks to new technologies being profitable for large deposits to 30 Dollars, for average deposits by $40 and for marginal fields between 50/60 Dollars. According to Bloomberg as of February 2017, the unconventional oil producers have made huge efforts to reduce their profitability thresholds, earning money with a barrel between about 40/50 Dollars, whereas it required at least 70 to 80 Dollars. There are still two years and $30 in some Texas counties where investments should thus increase by 30% in the sector in 2017. Saudi Arabia, a leader of the cartel, had long supported a policy of low prices, hoping to oust competitors of OPEC, including US Shale oil producers, but the fall in prices had finally affected its economy, prompting it to change strategy. Most US stocks reached a record level, with a growth of a soft global economy, which takes demand to a higher price of up to $60 that could make the American marginal fields profitable, thus allowing them to increase their supply that in turn may then lead to a lower price due to oversupply. Hence the proposal of Saudi Arabia to have an equilibrium price which is around 55/60 Dollars a barrel to balance the interests of producers and consumers and specially to cope with the American competition.

In summary, the supply / demand in the short term, the structuring of the growth of the world economy and the new global energy configuration looming in 2017/2030, with the increasingly competing alternative energy, will in the future be the determinants of the price of oil and natural gas. Whilst avoiding thinking in terms of linear energy model, we should see an energy transition based on energy efficiency and all renewables that should know a boom according to the latest IEA report of October 2017 with cost cuts planned for over 60%.

Dr Abdurrahman Mebtoul

 

 

 

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