Natural Gas a Solution to Pending Oil Price Rebound, says Ex Oil Exec

Where oil prices are headed in 2015 might be anybody’s guess in the current capricious market, but some voices are saying it is only a matter of time, perhaps later this year, that the barrel price hits the floor and begins the upward climb, possibly in a vigorous way. John Hofmeister, former president of Shell Oil, agrees and points to natural gas as a viable solution for the transportation sector.

Speaking at the World Economic Forum in Davos, Switzerland, OPEC says it has adhered to its December 2011 agreement of 30m b/d ceiling, while non-OPEC producers are contributing to price instability as new fields come into production and supply continues to exceed demand. In other words, OPEC is presenting itself as a stabilizing influence. Italian oil firm Eni doesn’t agree, responding at Davos with a warning that oil could jump to $200 per barrel within the next decade if OPEC fails to cut production.

Claudio Descalzi, Eni’s chief executive, says slumping oil prices are leading to under-investment in the oil industry. His voice is echoed by Total chief executive Patrick Pouyanné, who spoke of the 5% per annum decline from existing fields around the world. “That means by 2030 more than half of the existing global oil production will disappear. There is an enormous amount of money that needs to be invested to get another 50 million barrels per day of new production,” Pouyanne said in Davos (Reuters).

Total chief executive Patrick Pouyanné says the French group will “weather the storm” sweeping through the oil and gas industry by accelerating and deepening a group-wide cost-cutting plan (Financial Times). Malayasia’s Petronas will make capital expenditure deferments and reductions in operational expenditure in response to the recent 60% decline in oil prices. BP has announced around 300 job cuts in its North Sea operations in the latest sign of falling oil prices hitting Britain’s petroleum industry. Smaller producers will not have the same capacity or resilience.

In Kuwait this week, Iraqi Oil Minister Adel Abdul Mahdi explained there is no justification for oil prices to drop lower and that upward corrections are pending. Ryan Lance, CEO of ConocoPhillips, concurs. “Most of us in the industry are surprised that it’s fallen as hard and fast as it has,” he said at the Center for Strategic and International Studies.

John Hofmeister, who retired from Shell in 2008, thinks the end-users joy ride on low-priced fuel is about to fizzle out. “The next round of high prices is likely to start later this year, as crude rebounds to the $80s and $90s, perhaps pushing to the $100 level by late in the year or early next,” Hofmeister told USA TODAY‘s Bill Loveless after a trip to Calgary, where he was promoting natural gas as a transportation fuel.

A December 2014 Reuter’s survey of 30 economists and analysts is not quite so bullish but nevertheless projects Brent to average $74.00 a barrel next year and $80.30 in 2016.

Hofmeister is closely watching the dynamics of continued global demand versus capital constraint, seeing growth of 2% leading to capacity constraints during 2016. “Whether we reach $4 a gallon or push past, it’s too early to tell,” he added. He believes $5 gasoline will be inevitable before the end of the decade.

According to Loveless, Hoffmeister said: “I believe that with the right focus and development of the natural gas fuels market, we could begin to reduce global demand for oil from the 100-million-barrels-a-day level around 2020 to lower demand levels by substituting natural gas fuels. We could pull it back to 90, 80, even 70 million barrels a day over the next two to three decades, taking enormous pressure off chronic high oil prices.”

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