Cheaper oil, but not cheap


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In November, Torbjørn Kjus (photo below) talked about the future of the oil prices during a breakfast seminar in Rio de Janeiro. He has been called one of the more pessimistic oil analysts in Norway, and believes that the oil will become somewhat cheaper in the years to come.

Mr. Torbjorn KjusWhile the average Brent price in the first half of 2013 was US$ 108, Mr. Kjus expects an oil price of US$ 102/bbl for 2014 and US$ 100/bbl for 2015, and then a gradual decrease in prices to US$ 90/bbl during 2015 – 2020.

Show little concern
Mr. Kjus visited Brazil for the first time this November, and what surprised him the most, was how little Brazilians seem to care about the future of oil price.

“In Norway, everybody accompanies the development of the oil price, and this is also of great importance to the future of the Brazilian economy. Brazil is one of the world´s biggest oil producers and Petrobras is planning to double the oil production by 2020. Few other countries can compete with these volumes”, Mr. Kjus says.

The management of important Brazilian companies like Odebrecht and Queiroz-Galvao was present at the breakfast seminar on November 12, 2013. Norwegian ambassador Aud-Marit Wiig and representatives from several NBCC companies were also present. During a Q&A session after the presentation, the audience were more preoccupied with biofuel than petroleum. Not surprising considering that Brazil is the second largest producer of biofuel in the world.

The shale revolution in the US is however of far greater importance, Mr. Kjus says.

“You can call it the big surprise of the last few years. They are producing 2.6 million b/d of shale crude right now and 1,8 million barrels of US oil per day more is set to reach the market in 2012-2014 than what the IEA originally expected just 2.5 years ago. In other words we have seen a new Brazil enter the market in just 2-3 years and it was not expected. The increase in the US production the last two years equals the total Brazilian oil production. If Brazilian authorities want to stimulate the use of biofuel, they have to allow the price of the gasoline to increase. Currently, Petrobras, under political control, is forced to lose money to keep the price low.”

The future development of the US production of shale gas is among the factors that will have great influence on the future of the oil price. But the stone age did not end due to a lack of stones and the oil age will end long before the world runs out of oil, Mr. Kjus says.

Solar power and wind power is increasing fast, creating new possibilities for power generation in private homes. In China alone, the increase in installed wind capacity in 2013 has been on 30 percent.

Technology break-through is the key word.

“The shale oil revolution would never had happened with an oil price of US$ 50/bbl. When the price rises, the market seeks other sources of energy. Increasing prices gives the incentive for developing new technologies, and we see structural changes to oil demand through substitution and efficiency improvements.”

This is why Mr. Kjus believes that oil’s share of the global energy mix will continue to decrease in coming years.

Paradigm shift
The North American shale revolution has changed the market dramatically, and Mr. Kjus points to the importance of the NGV paradigm shift underway in the US, with vehicles and infrastructure shifting to natural gas. NGV is also gaining traction globally and has reached 15 million vehicles. Iran, Pakistan, Argentina and Brazil are the countries in the world with more NGV cars. A huge increase is expected in the US.

Americans are also driving less than before, and the focus on efficiency is increasing. Even luxury cars are being manufactured with smaller engines, to reduce fuel consumption.

According to Mr. Kjus´presentation, the world does not need to find any new resources to develop in order to balance supply and demand during the next 5 years. The gap by 2020 will be covered by existing, known projects.

Torbjørn Kjus is not a big fan of nationalization, and uses Mexico as an example to illustrate how nationalization haven´t given positive results. In Brazil, there are forces arguing that “the petroleum is ours”, showing fierce resistance to the ANP auctions of Brazilian oil reserves.

“Mexico is currently trying to open up its oil industry and striving to attract the oil majors. Rather than nationalizing, a better option is to tax the industry heavily, like Norway has done, and stimulate competition”, he says.

While Mr. Kjus has been labelled a pessimist, Brazilians are known as optimists. But are they too optimistic as to the future of pre-salt? The CEO of Petrobras, Graca Foster talked about the Brent prices during a luncheon during OTC Brasil in October. She also believes the oil prices will fall, but later recuperate to current level aorund 2030.

“Sometimes I meet companies with estimates off the chart, and if you make investments in a project that needs a price of US$ 110 a barrel, you´re making a mistake. If the oil price falls dramatically and reaches US$ 60-70, I believe that we will see a rebound, like Graca Foster is foreseeing.”

Mr. Kjus predicts that the price will fall to about US$ 90 a barrel, depending on how the Chinese economy will develop, as well as the growth in the shale gas production.

With falling oil prices what are the consequences? According to Mr. Kjus, the most expensive barrels risk being pushed out. The best example of this in real life is the Shtokman in the Barents Sea. It is also the case for the Brazilian pre-salt resources.

“Oil exploration and production below salt layers in ultradeep waters and the oil sand fields in Canada are among the more complex and expensive projects, and these projects are vulnerable in case of a dramatic price fall.”

According to the magazine Brasil Energia, US$ 35-40 a barrel is the breakeven price for the presalt projects. Others say US$ 50-70.

“The question is, if the price falls below US$ 50, will Brazil still invest in presalt?”


By Runa Hestmann Tierno, NBCC journalist