Final Thoughts From the 157th OPEC Conference

Alongside Thursday’s decision by OPEC to hold its official oil production target at 24.84 million barrels a day, i.e. the level set following a production cut in December 2008; the cartel also noted that global oil demand had dipped in two concurrent years; a situation unseen since the 1980s.

It bemoaned the “rollercoaster” ride in crude prices, particularly between Q4 2007 and Q1 2009. As usual speculators were blamed, with OPEC noting that oil had increasingly emerged as an asset class, with “excessive speculation adding appreciably to market volatility.”

It also appears that the cartel is irked by renewable energy initiatives or at least the talk of renewable energy. OPEC believes that the ambiguity of a number of energy and environmental policies, often with “evidently over-ambitious targets”, particularly in developed regions, has led to uncertainty in regards to future oil demand requirements.

The 158th OPEC conference would be held in Quito, Ecuador on December 11th, where the cartel hopes to publish its Long Term Strategy, as discussed by its 12 member nations here in Vienna on Thursday. Following that, OPEC would meet again in June 2011 in Vienna.

In a surprise move, it was confirmed Iran would assume OPEC presidency in January 2011; it last held the post in 1975. And last but not the least, there is finally a lady at the OPEC table – Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke, who having been a Shell executive took a certain amount of delight in telling the assembled press scrum that she had been in male dominated industries before and pretty much held her own!

To summarise, OPEC – in line with prevailing sentiment – noted that the market remains well supplied and given the downside risk to the global economy, did not feel the need to raise production.

That’s it from Vienna – time to say Auf Wiedersehen!

© Gaurav Sharma 2010. Photo: Nigeria's petroleum minister Diezani Kogbeni Alison-Madueke (Centre), © Gaurav Sharma, OPEC 157th Conference, Vienna, Oct 14, 2010

UK Drilling Activity Down But Exploration is Rising

Offshore drilling in the UK Continental Shelf (UKCS) dipped 20% Q3 2010 on an annualised basis, according to the latest oil and gas industry figures obtained from Deloitte.

It’s Petroleum Services Group (PSG), revealed in a report published on Friday that a total of 24 exploration and appraisal wells were spudded in the UK sector between July 1 and September 30, compared with 30 exploration and appraisal wells during the corresponding period last year.

Concurrently, PSG also said a 4% quarter over quarter rise was noted in the number of wells spudded in the UKCS in the third quarter of this year, attributed to higher levels of exploration drilling in the UKCS, up 32% for the first three quarters of 2010 when compared to the same period of 2009.

Overall, international deal activity saw a marked increase during the third quarter of 2010, following a period of no activity at all in the previous quarter. Most notable were the corporate acquisitions announced following KNOC’s acquisition of Dana and EnQuest’s decision to buy Stratic Energy.

However, corporate level activity within the UK has decreased since the second quarter of 2010 with only one corporate asset sale announced compared to three announcements and one completion in the previous quarter.

Graham Sadler, managing director of Deloitte’s PSG, commented in a statement that seeing deal activity in the UK decreasing for a second consecutive quarter was not a major surprise.

“There is evidence of a shift in company strategy as organisations are opting for less costly and less risky policies as they look to adjust their portfolios. This is reflected in the fact that the number of farm-ins announced has almost tripled this quarter to 11, in comparison with just four announcements during the second quarter. Until more confidence in the recovery of the market becomes further evident, this may be a trend that continues in the future,” Sadler said.

Elsewhere in the UKCS, Norway saw seven exploration and appraisals wells spudded, which represents a 56% decrease when compared to the number of wells drilled in the second quarter of this year.

Netherlands, Denmark and Ireland also reported low levels of drilling activity according to the Deloitte report while the four wells spudded in the Cairn Energy drilling programme in Greenland marked the first activity in the region for a decade.

On the pricing front, despite the overall decreased activity, the price of Brent Crude oil has remained stable throughout the whole of the third quarter of 2010, achieving a quarterly average of US$76.47 per barrel.

Carrying on with the theme, I met several analysts here at OPEC who think Brent appears to be winning the battle of the indices. The sentiment is gaining traction. David Peniket, President and Chief Operating Officer of Intercontinental Exchange (ICE) Futures Europe remarked in May that WTI is an important US benchmark but that it does not reflect the fundamentals of the global oil market in the way that Brent reflects them.

© Gaurav Sharma 2010. Photo: Andrew Rig-North Sea © BP

Is Big Oil Really "Big" Any More?

A number of energy journalists have been asking this question at a pace which has gathered momentum over the past decade. Books have even been written about it. On Oct 7th, a week prior to Thursday’s OPEC conference, I had the pleasure of participating in a discussion under the auspices of S&P and Platt’s which touched on the subject in some detail, contextualising it with the Peak Oil hypothesis.

Here in Vienna, understandably, I find few takers for the hypothesis; at least not at OPEC HQ. But one statement has struck me. Celebrating the 50th anniversary of OPEC's foundation, in his opening address to the conference earlier on Thursday, Wilson Pástor-Morris, Minister of Non-Renewable Natural Resources of Ecuador and President of the Conference, noted:

“OPEC began as a group of five heavily exploited, oil-producing developing countries seeking to assert their sovereign rights in an oil market dominated by the established multinational oil companies. Today OPEC is a major player on the world energy stage. Our 12 Member Countries are masters of their own destiny in their domestic oil sectors and their influence reaches out into the energy world at large.”

Need one say more? OPEC feels NOCs are dominant; so does much of the rest of the market to a great extent. Pástor-Morris also said the issue production quota 'compliance' also featured in OPEC discussions, as the cartel reviews its production agreement.

“But we shall not lose sight of the bigger picture. Neither should anyone else. The achievement of market order and stability is the responsibility of all parties. It is not just a burden for OPEC alone. We all stand to gain from market stability, and so we must all contribute to achieving it and maintaining it,” he added.

© Gaurav Sharma 2010. Photo: Holly Rig, Santa Barbara, California, USA © James Forte / National Geographic Society

OPEC Leaves Production Levels Unchanged!

As widely expected, OPEC announced on Thursday that its members have agreed to keep its official oil production target at 24.84 million barrels a day. OPEC president Wilson Pastor-Morris said that the policy in place since December 2008, when it announced a record supply cut of 4.2 million barrels per day, is here to stay.

The cartel will next meet on December 11 in Quito, Ecuador to discuss the issue again. Despite being by pressed by journalists, OPEC Secretary General Abdalla Salem El-Badri insisted that individual members' quotas need not be published. “We know how each country behaves, the market should be happy with total quotas,” he said.

He added, the ever present issue of compliance with quotas, was an important one. By OPEC's own assement compliance was at 61% but a Reuters report puts the figure at 57%. In an interesting development - perhaps the only surprise of the day - OPEC announced that Iran will take over the rotating presidency of OPEC in 2011 for the first time in 36 years. Iranian petroleum minister Masoud Mir-Kazemi assumes the presidency from January 2011; watch this space!

© Gaurav Sharma 2010. Photo: © Gaurav Sharma, OPEC 157th Meeting, Vienna, Oct 14, 2010

OPEC’s Own Version of He Said, She Said…

Over each of last three years, in the run-up to the cartel's meeting, OPEC Secretary Secretary General Abdalla Salem El-Badri has tended not to give very much away. However, the 157th summit seems to be different; for over the last 6-12 months El-Badri has often stated that OPEC is comfortable with the crude oil price. In fact, he gave quite candid comments in June.

That said the price has remained in the circa of US$75 to US$85 per barrel and is heading higher as the US dollar has weakened in recent weeks. So El-Badri should indeed be comfortable with it.

But of course, no OPEC summit is complete with a bit of the old 'he said, she said'. The most important “he” in question is the Saudi oil minister Ali Al-Naimi who plainly told a media scrum here in Vienna on Wednesday that, and I quote, "Everyone" is happy with the market. To the market that reads like a coded signal he is against increasing output.

The only "she" on the table is of course Nigeria's petroleum minister - Diezani Kogbeni Alison-Madueke – who said OPEC (as always) will be looking at overproduction and non-adherence to quotas, at "this particular conference."

Sheikh Ahmed al-Abdullah al-Sabah of Kuwait when asked how the price of crude was at the moment, gave a short and sweet reply. Quite simply, he noted that, “It’s good.” Concurrently, Venezuelan Energy and Oil Minister Rafael Ramirez told a local TV network that "all" his colleagues agree they should leave the level of production stable.

Since arriving in Vienna, based on the 'he said, she said' rounds, I have had a jolly good natter with eight analysts here and a further three in London. All 11, as well as those at Société Générale expect a rollover in OPEC quotas and no change to actual output.

Finally as the forward month ICE Brent crude contract bounced to the stop-loss at US$84.55, analysts at Société Générale also believe a further range bound market is possible. "According to OPEC, the recent price rally does not reflect oil fundamentals (and we agree)," they wrote in an investment note.

© Gaurav Sharma 2010. Photo: © Shell