2012 - What we may be about to receive

em>It is here, the dreaded by some, 2012. Hopefully, the doom predictions are going to be wrong and it will be just another year. Making predictions can turn out to be disastrously wrong for the journalists that attempt them. However, from an oil and gas perspective Ian McInnes gives it a go on some of the issues.

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The price of oil is rising again into the US$100-US$110 per barrel mark, which is probably higher than most governments would like to see it for the good of their struggling economies, but just within the band that we have grown used to of late. I think that there will be pressures to push the price of oil higher but that these will be compensated, and perhaps eventually exceeded, by downward influences. Speculation will not help matters.

Applying upward price pressure will be the continued unrest in the Middle East. The troubles in Syria will most likely continue until there is a regime change. How long that will take is anyone’s guess but I truly do not believe that Bashar al-Assad will be able to come out the other side of the Syrian troubles, which may spark off more sectarian violence across the region. Indeed, there already seems to be an acceleration of that in Iraq. Nevertheless, aside from the age-old, seemingly unsolvable dispute with Israel and its neighbours, the biggest threat to stability right now is Iran. The nation, despite its abundance of natural gas, seems to be hell bent on nuclear power, in more ways than one, as a good deal of the world believes that Iran is developing a nuclear weapon. Western-imposed sanctions on Iran are beginning to bite hard now and we seem to be in a period of very dangerous mutual brinkmanship when events can get out of hand. If Iran went ahead with its threat to close, even temporarily, or attempt to close the Straits of Hormuz, which is the route for around 20% of the world’s oil, then this would cross a line in the sand from which there could be no return and where the negative permutations for the rest of the world could be extreme. Saudi Arabia has said it can make up any shortfall of an oil sanction imposed on Iran, which puts Iran somewhat between a rock and a hard place. Hopefully, sensible, meaningful discussions leading to settlement can now take place. My gut feeling though is that events may escalate beyond a point of no return.

Nigeria too, Africa’s largest oil exporter, could apply upward pressure to oil prices if the nation descends into conflict. Also, in Russia, where oil production has set a post-Soviet record in 2011 of an average of 10.27mbpd, there are presidential elections in 2012. Ordinarily this would not be seen as a possible oil price game changer. However, recent mass demonstrations over the results of elections, which demonstrators have reportedly claimed were fraudulent, could mean Vladimir Putin’s return to the Russian presidency may not be an easy ride. There could be domestic trouble for him ahead. Finally, admittedly a wildcard, but oil and gas production in Canada in 2011 was so severely dented by unprecedented wildfires in Alberta that the nation’s GDP was affected. There will be wildfires again in the spring and summer and it would not be a surprise to me to see the phenomenon repeated.

There are a good number of media reports around that say that emerging economies such as China and India will keep oil demand high in 2012. I am not so sure. The world economy threat that is the euro is not fixed and will rumble on until the European Central Bank (ECB) and EU leaders actually do something beyond the rhetoric. That the Eurozone allows the euro to fail is unthinkable. However, I would not be surprised to see countries such as Greece or Italy exiting the euro and making the problem worse or even unfixable. Europewide-applied austerity is knocking on into the economies and many will slip back into recession. Banks that have been lambasted for not lending enough may and probably are already experiencing the economics of good customers actually not wanting to borrow. With many banks exposed to significant economic risk already, a drop in business may be the last straw for some.

For China and India’s export-driven economies to thrive there must be healthy markets. With the US barely out of recession and Europe seemingly heading back in, the drop in demand is certain to have a continued effect on major exporter’s economies and may even apply enough downward pressure on oil prices to even out the upward pressure. Nonetheless, should the price of oil push or even approach the US$150+/bbl mark I expect to see consumer resistance and behaviour change and another shift towards alternatives and renewables. Also, perhaps not for 2012 but sometime soon, I think, China will need an awful lot less imported energy than markets think it does as it pursues its own shale and coal bed methane gas exploitation.

Natural gas seems to be the new oil. We seem to have so much of the stuff with more being discovered every day that the sky may be the limit. Russia, so long the dominant natural gas player in Europe, must be eyeing the development of shale gas in Poland especially with some discomfort. Other nations in Europe are taking things much more slowly but the writing is on the wall that Russia may be selling less natural gas to Europe and prices will be under downward pressure. In the US, shale gas has changed the game, storage is high, prices are low and the shift towards creating more demand and/or exporting has not made much difference, yet. Shale gas economics in the US leave me feeling somewhat uneasy. A feeling I last had during the dotcom boom of the 1990s as I puzzled over the economics. Where is the money in the business model? With natural gas prices so low in the US that surely they cannot be viable yet exploration and production continues. Are some companies simply getting by on cash flow here? If so it is only going to be matter of time before the rubber band breaks with some and there could be a seismic shift in the North American natural gas industry.

Now, we have the wildcards. Significant events in 2011 included the ongoing Arab Spring and the earthquake and tsunami in Japan of which the effects of the latter has seriously dented, perhaps for good, the nuclear industry and brought about a LNG boom that could be good for a few years. There is no knowing what natural or off-the-radar man-made wildcards could affect the game in 2012. Hopefully, the year will not live up to its negative billing.