Bob Tippee, Editor
Energy security involves more than the supply assurance on which oil-consuming countries, especially the US, rivet their attention. To oil exporters, it also means assurance of markets, speakers emphasized May 10 at the Middle East Petroleum & Gas Conference (MPGC) in Bahrain.
"Will the Middle East believe in demand security and invest?" asked Edgard Habib, ChevronTexaco Corp. chief economist. "It's a good issue for the industry to ponder."
In discussions of energy security, said Nader H. Sultan, deputy chairman and CEO of Kuwait Petroleum Corp., it's important to distinguish between strategic and commercial suppliers.
Unlike their commercial counterparts, strategic suppliers maintain the spare production capacity essential to market stability, Sultan said, adding that depending on them for supply doesn't have to compromise security.
"Dependence is not the same as being vulnerable," he said. "Dependence [of buyers and sellers on one another] can be a source of stability."
Illustrating the supplier's perspective on security, Sultan noted that Kuwait plans to raise its production capacity to 4-5 million b/d by 2020 from what the International Energy Agency estimates at 2.3 million b/d now.
The risk Kuwait faces with the $30-45 billion investment needed to do so, Sultan said, is, "Will it be required?"
Security 'beyond barrels'
Samir Al-Tubayyeb, manager of corporate planning of Saudi Aramco, pointed to Saudi Arabia's huge reserves—260 billion bbl proved out of an estimated 700 billion bbl indicated with perhaps 200 billion bbl yet to be discovered—and declared that notions of supply security are "obsolete in the 21st Century."
William Hauschildt, vice-president of global refining operations for ChevronTexaco, offered three factors of security that go "beyond barrels":
- Economic development in the Middle East. "The Middle East needs to become as strong economically as it is geologically," Hauschildt said, noting that the region needs economic growth of at least 5%/year to create jobs. It also needs "more investors."
- Full realization of the global potential of natural gas. Citing the recent surge in announced LNG and gas-to-liquids projects, he said, "Gas deposits once considered stranded are now part of the energy mix—and just in time."
- Optimizing the downstream industry. Refiners face the difficult challenge of producing ever-cleaner fuels in growing quantities at low cost while reducing pollution from their facilities even as future consumption patterns remain unclear. Hauschildt called on them to "get the most out of existing assets before adding capacity."
Mohammed Saleh Shaikh Ali, president and managing director of Bahrain Petroleum Co., similarly added refining issues to questions about future supply from a finite resource.
Pointing out that refiners must make large investments that offer no direct returns to satisfy changing environmental regulations, he said: "Will the industry continue to do this, or will it give up? Nobody knows."
Demand growth will necessitate additions to refining capacity, Ali said. "Who is going to undertake this huge investment requirement, and where?" he asked. Plenty of capital is available, he added, "but refining is a weak entity to compete for it."
Other security issues
Questions of security arise in a market that appears stronger than it really is, said Fereidun Fesharaki, president of FACTS Inc., Honolulu, and cochairman of MPGC.
Except in the US and China, demand growth is negligible. And China's growth rate won't last, Fesharaki said.
Much of the country's 451,000 b/d spurt in consumption last year came from an unusual jump in vehicle sales that occurred as people shunned public transportation because of fears about the Severe Acute Respiratory Syndrome virus. He projected growth in Chinese oil consumption this year at 386,000 b/d.
Fesharaki also noted:
- The market climate has changed due to doubts about supply outside the Organization of Petroleum Exporting Countries, "excellent" coordination of production by OPEC even when quotas are violated, general acceptance of a crude price floor of $16-17/bbl, and expectations that demand will remain robust in the US and China.
- By 2010, condensate production by Abu Dhabi, Qatar, Saudi Arabia, Iran, and Oman will have increased by 1.3 million b/d. "Marketing of these condensates"—generally exempt from OPEC quotas—"is a serious challenge and if not handled properly can result in a substantial drop in price."
- Middle East refineries need to be upgraded. They can't meet new product standards in the US and Europe and soon will have trouble meeting standards in Asia. The main recent capacity additions have been condensate splitters, which if integrated with refineries can improve product quality.
- Rising output from GTL plants will upset diesel balances in the East-of-Suez market.
- Despite recent improvement of East-of-Suez refining margins, "the fundamentals have not changed," Fesharaki said. "While there have been improvements and special reasons, the margins will remain weak for several more years." New refineries in India and China and rising diesel supplies from GTL plants will suppress margin growth.
