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Sat 12 Sep 2009 04:00 AM

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Is less more?

OPEC cuts have bolstered the oil price to $70 – unthinkable in January. Daniel Canty, editor of Oil & Gas Middle East, asks is there is still a case for further cuts?

Is less more?
Deepwater projects have been hit much harder than local developments, as many need an $80+ price to stay viable.
Is less more?
OPEC Secretary General Abdallah El-Badri said $70 - $80 was reasonable.

OPEC cuts have bolstered the oil price to $70 – unthinkable in January. Daniel Canty, editor of
Oil & Gas Middle East, asks is there is still a case for further cuts?

It was just over a year ago that oil was trading at a record US$147 a barrel, but since then the rollercoaster ride, at least for the time being, appears to have stabilised.

We may not be out of the woods yet, but a hugely volatile period for upstream oil and gas players (and the global economy at large) may at least now become more predictable.

Oil tanked 70% in a matter of months on the back of the economic fallout triggered by the infamous sub-prime crisis Stateside. The impact on the exploration and production sector – always the hardest and swiftest hit in the cyclical downswing – was quick and hard – but arguably not as devastating as other major downturns.

Certain hydrocarbon hubs have been hit harder than others, specifically those with high project, execution and lifting costs, such as West Africa, Brazil and Canada. However, the mega-projects in these regions are simply too big to stop, and the wider expectation that prices will recover is keeping the spend on, even if the momentum and sense of urgency has dropped off somewhat.

In amongst all of this, the Middle East has fared fairly well. Companies have been hit, and margins have certainly been squeezed. It’s tough times, but still far from the crunch of the early 1990s.

OPEC quotas have played a hugely significant role in bringing about the current stability. Carefully chosen words from the Secretary General, and a combination of moderation and decisive action can be thanked for where we are today. The big question that is hanging in the air is what OPEC members will decide on September 9th. The cartel made a record cut back in December 2008, slashing 2.2 million bpd from supply. This followed two previous cuts since September, so the cut since last summer represented a total of 4.2 million barrels per day coming offline in just four months. That’s the equivalent of all UAE and Nigeria production coming off the market completely.

Skip forward six months, and the price had indeed recovered, bouncing back from sub $40 territory to the $60+ region. In an interview with
Oil & Gas Middle East, Secretary General Abdallah El-Badri said stability was his mission, and a fair production price to ensure future projects can be funded his priority. “I think that a price of up to $80 will not harm world growth. $70 to $80 would not harm or destabilise the global economy.”

With that price window now successfully achieved, the burning issue is whether the member states, which naturally want to push the price up to what the world will tolerate, see more production cuts, or rather, less oil is in fact the road to higher prices and more revenue.

Oil & Gas Middle Easthas no crystal ball, but a combination of macro factors suggest further cuts are unlikely, and if there are any, they will be of the fine-tuning variety as opposed to the scythe which sliced through output in 2008.

First up is market sentiment. Few think the recession is over, but the dust seems to be settling. Bullish reports of corporate earnings and moderation in EU and US economic contraction throughout the summer triggered the crude price through $70, albeit briefly. Secondly, OPEC and World Bank assumptions are that the world economy will contract by 1.4% this year – less than many feared, and that for 2010, the forecast has been revised upwards, from 2.3% to 2.4% growth.

Whether or not OPEC decides to make further cuts, the coral of OPEC ministers speaking out in the first half of 2009 all seemed to be of the school of thought that $65 - $80 was an acceptable price range. Effectively this is a very public admission of what works for them. Well, we’re here now.

For national oil companies in the Middle East, the combination of easily achievable production figures, and coffers still awash with cash from the peak last year (traded oil averaged around $100 for 2008, quadruple the historical average of $25 - $30 over the last three decades), the issue is where and how to invest.

In an energy constrained world, the next economic boom will see demand considerably up on last year’s figures, and sure as anyone can be, the price is very likely to be above $100 again fairly soon. Maybe even 2010. The surprising consensus is that the national oil companies, and the major players that work with them, should take this opportunity to spread their wings a little beyond the oil well, and get behind green energy projects. Staying relevant in a carbon conscious world was the strategic mantra that came up time and again.

2009 has had its victims, and by no means are we out of the tunnel yet. However, from here on out, opportunity is the watchword. These are indeed exciting and challenging times for the region’s upstream companies, but never before have the rewards for getting it right been so great.

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