Baku, Azerbaijan, Nov. 24
By Vagif Sharifov - Trend:
Last year the world spent $1.6 trillion to provide end-users with energy - an amount which is equal to the total market capitalization of such companies as Exxon, Total, BP, Chevron, Conoco, Statoil, Eni, Gazprom, Sinopec and Schlumberger, or the combined GDP of Austria and The Netherlands.
The costs of energy production and delivery have doubled in the past 15 years, and they will only go up along with the cost of drilling, as it will require drilling at deeper depths. The increase of the natural production at coal mines and oil fields is also expected.
The International Energy Agency believes that between 2014 and 2020 the oil industry alone will need some $637 billion annually on a global scale for investment into production, transportation and processing. These figures are half as much again as those in the period between 2000-2013.
A colossal amount of money - $40 trillion - will be needed in the next 20 years to compensate for falling oil production at the existing fields and to develop new ones, to meet the growing demand.
For the managers of oil companies the main significance of these fantastic figures is the fact that they will make every effort to comply with the terms of returning investments.
And it will be possible only if high prices for oil are assured. IEA experts believe that such investments will maintain the prices at over $120 per barrel in real terms.
In fact, the rules of the game with oil prices have imperceptibly changed, but not in favor of those who change these rules.
The average price for Brent oil neared $33 and $19 per barrel in H1 and H2 of 1980s, respectively. And if previously it was possible to force the Soviet Union to sell its oil half the price, today this balancing tool can still be used, however it is much more difficult.
The rules of the game are losing their relevance primarily because the prices are impossible to be kept on a needed lower level for too long. And that is the most important aspect of economic pressure.
Global investors, who also should repay their global loans, which taken out for the development of global oil and gas fields, wonder whether the global money is too costly.
Of course, there are also other - large - importers, who are more than happy for such situation. For example, China can save nearly $2 billion on each dropping dollar in the oil prices, while car production in India will be even cheaper.
The sharp decline of world oil prices in 2H2014, which is very similar to the methods from the 1980s, namely, an artificially created complex of measures to put economic pressure on Venezuela, Russia, Iran, and yet a couple of countries in the Middle East. Such outcome will cost more and more for the oil companies.
It is caused by the fact that large oil companies have invested huge amounts of money at higher prices and do not want to get that money back much later than the scheduled term. How about stopping the work of the wells, anticipating for better prices? The specialists are well aware that it would cost a lot more than producing and selling at current prices.
The problems do not end there. Natural production of fields automatically leads to even more investments, and the lower oil lies, the more severe are natural or technical conditions of its production, and the more money is required for its extraction. Practically, it means that every barrel of produced oil will cost more and more. But at the same time the demand for oil continues to grow, and prices are artificially low, while they should have reflected the reality of the market and be high.
Unlike oil, on a global scale, there is no other resource in the same amount that could replace it. At least not fast, but in the medium term.
Of course, alternative energy is not being developed easily. But it gives only electricity in its pure form, without offering the raw materials for manufacturing of such products as rubber or plastic.
On the one hand, the profitability of biofuel production from plants and waste is greatly exaggerated, on the other hand - the industrial world is not ready for change of raw materials.
According to BP, taking into account the current consumption, the oil reserves in the world are sufficient only for 53 years.
Without a doubt, there will be a few fields found with large recoverable reserves, even in remote regions. But they will be unable to provide the entire world with oil, given that the demand will only grow.
Such dynamics is caused by the fact that according to OPEC, the world population will reach nine billion people by 2040. More than five billion people will live in cities. The oil consumption in the world by this time will be 111 million barrels per day. It will become more and more difficult, and most importantly - more expensive to extract it.
Edited by SI, CS
Vagif Sharifov, is an oil markets expert, development director at Trend Agency. Follow him on Twitter:@VagifSharifov