BLACK DAYS FOR "BLACK GOLD"

Last week's technical conference of OPEC states with oil producing countries outside the cartel brought no results. More than that, Azerbaijan, Kazakhstan and Norway, which were invited to the meeting, did not find it necessary to go to Vienna. 

"The issues being discussed at the OPEC meeting are not so important to us. This is why I took the decision that there was no need for us to take part in that meeting, although we received an invitation," said Azerbaijani Energy Minister Natiq Aliyev. 

He explained his stance saying that oil is produced in Azerbaijan not only by the state but also by an international consortium (meaning AMOC headed by British Petroleum which is developing the Azeri-Chirag-Guneshli [Azari-Ciraq-Gunasli] block) and, in this context, it is not so easy to take a decision coordinated with OPEC on reducing its production. On the one hand, in N.Aliyev's opinion, the OPEC states themselves, and Saudi Arabia in the first place, are not too much interested in reducing the output. 

Russia also made a statement in advance that it was impossible to reduce production. 

"Periodically, we are approached by Venezuela, Algeria and Ecuador. Our stance is unchanged. We believe that artificial reduction will be of no use but only aggravate the situation in the future. This can have an effect only in the short-term future," said Russian Energy Minister Aleksandr Novik. Russian oil companies are also against reducing production, pointing out the technological complexity of this process. 

"We have complex oilfields and most of them are marginal. It is impossible to stop wells because it takes much more funds to re-launch them than to halt them. In some cases, it will be absolutely impossible to launch the wells," said LUKOIL head Vagit Alekperov.

Venezuela insisted more than others on holding this conference. Given the high cost of its own production, this country suffers from low prices most of all. Venezuelan President Nicolas Maduro even found it necessary to address the heads of oil producing countries both in and outside OPEC to hold a summit to discuss measures to control "black gold" prices. 

According to Maduro's plan, such a summit would make it possible to establish a technical coordinating committee to regulate the situation with output volumes and prices for this product which would put an end to speculations in the oil market. Such measures would make it possible to get back to an equilibrium price of oil at 70-80 dollars per barrel. 

Iran suggests increasing prices to the same level. According to Iranian Oil Minister Bijan Namdar Zangeneh, OPEC could launch a programme for stepwise output reduction in order to get prices at 70-80 dollars. Meanwhile, Iran itself is set to build up its production as soon as sanctions have been lifted on it. "We don't need permission from anyone to export our oil, so our production will enter the market," the Iranian minister said, adding that if the cartel is rational, it will give room for Iran's gradual return to the market. 

The IRI is planning to build up its oil production in three stages: first by 0.5m barrels after the lifting of sanctions, then up to 4.2m barrels per day, that is the level reached before the sanctions were imposed. The third stage will increase the output by another 2m barrels to 6m barrels of oil per day. 

Still, most experts do not expect the next OPEC meeting scheduled for December to reduce oil production quotas. Moreover, Saudi Arabia has begun to apply discounts to its oil supplied to Europe. Experts attribute this primarily to expected growth in Iranian products. Riyadh strives to secure a share in Europe, albeit to the detriment of its own budget. The International Monetary Fund is also warning the Gulf states about the danger of budget-related problems. Speaking in an interview to Bloomberg, Director of the IMF Middle East and Central Asia Department Masood Ahmed said that, pursuing its current economic policy, Saudi Arabia may run out of money in five years. Similar warnings have been sent to Oman and Bahrain. The situation in Kuwait, Qatar and the United Arab Emirates is somewhat better - the outcome for them is expected 20 years from now. 

It is important not only for Saudi Arabia but for all of the oil exporting countries in the region to recognize the situation and adjust their spending plans, Masood Ahmed said. First, the expenditure side can be reduced by "putting back some capital projects" or looking at "other ways in which to spend money on the side of the public wage bill". The second and preferable way is to increase the revenue side, for example, by "raising money outside the energy sector" or by adjusting taxes, M. Ahmed said.

According to the US Department of Finance, the drop in oil prices from an average of 105 dollars in the first half of 2014 to 55 dollars one year later led to a decline in export receipts by 150bn dollars in Saudi Arabia, a total of 130bn dollars in the Gulf states, by 100bn dollars in Russia, by 30bn dollars in Norway and as much in Venezuela and Canada. Asian countries saved 340bn dollars in the first half of 2015 thanks to cheap oil including 120bn saved by China. The USA and Europe saved 110bn dollars and 140bn dollars respectively. This in turn fuels economic growth in countries consuming energy resources. 

Meanwhile the market is promising no price growth to producers. 

The World Bank has lowered its oil price outlook for the current and next years. According to the bank's data, the average price of oil will be 52 dollars per barrels in 2015, compared to 57 dollars in earlier forecasts. Meanwhile the outlook for 2016 dropped even lower: from 61 dollars to 51 dollars per barrels. The revision is attributed to a slow-down in the world economy, large fuel reserves and Iran expected to enter the international market after the lifting of sanctions against this country. 

According to Vladimir Dre-bentsov, BP's chief economist for CIS countries, the main factors behind the oil price decline is the slowing down growth rates in China's economy and the shale revolution in the USA. On the one hand, the USA has increased its output by 1.6m barrels per day over the past year and the trend to increase the output by more than 1m barrels has been there for three years running now. "History has never seen such a figure," the BP expert said. As a result, last year's increase in oil consumption worldwide re-mained at the level of 1.3m barrels like in the previous 10 years. Meanwhile, the output increased by 2.6m barrels in 2014 compared to the annual growth of 0.9m barrels over the past decade. It should be admitted that the decrease in oil prices is failing to have the expected effect on the production of shale oil in the USA. 

"The constant introduction of new technologies has made it possible to significantly reduce the cost of shale oil production and simultaneously increase the capacity of wells. While in 2007, let us say, one borehole yielded 50 barrels of oil equivalent per day, the current figure is 350 barrels. Despite the diminishing number of drilling rigs on shale fields in the USA (from 1,610 in October 2014 to 614 in October 2015), the average level of oil production kept growing," the BP economist said. 

This is the reason why, according to Drebentsov, Saudi Arabia's refusal to lower its oil production quotas is the right step, because the first reduction would have been followed by new ones. By the way, Igor Sechin, the head of Rosneft, the world's number one oil producer, also believes the OPEC has already lost its role as a regulator of the oil market. 

For his part, Drebentsov is sure that it is not so simple to "kill" the development of shale resources in the USA. Technologically, it would take a few weeks to restore production on shale fields. If companies have mothballed their shale oil boreholes because of low prices, they can increase production during a short period, in case the prices go up. Oil prices will keep going through this rise-and-fall period for one year at the shortest, the BP expert believes. At the same time, in his opinion, one should not expect a shale revolution in Europe. "In the USA, the land owner is also the proprietor of all the mineral resources in it, so striking shale oil or gas will open up new earning opportunities. In Europe, all natural resources belong to the state, irrespective of where they are found. So land owners are not interested in any oil and gas production work being held on their lands," Drebentsov said. 

On the other hand, one should not expect Russia and Iraq to reduce their output because of some peculiarities of their tax regime. In both countries, companies receive a fixed income per barrel irrespective of prices. "In Russia, for instance, an oil company gets 30 dollars per barrel whether it sells it for 100 dollars or for 50 dollars. The rest goes to the state," Drebentsov said. 

To have a steady price growth, a significant increase in consumption is needed or a drastic and steady decline in oil production. The current low price period is making big companies curtail investments in future projects; the implementation of projects worth 250bn dollars has been deferred around the world. The market will feel a lack of resources caused by this reduction as early as five years from now. 

For the time being, the world will be living in a situation of relatively low oil prices aggravated by high volatility: within a short period, the prices may both soar to 60 dollars per barrel and drop to 40 dollars.