Oil and Gas Sector: a Global Perspective

Deloitte’s Global Energy & Resources published its next report on oil and gas issues in a geopolitical context. The paper titled “Oil and Gas Reality Check 2014” discusses the impact from the US shale revolution on international oil and gas markets, as well as on the geopolitical system and relations, also in the context of China – USA – OPEC – Russia relationships.

The report contains a brief mention on Poland with regard to shale gas aspects. By placing shale gas in a global perspective, the document is particularly relevant to the European (and Polish) reader.

According to the report, natural gas market will tend to globalize, while that of crude, conversely, will become increasingly regional, i.e. formed at a regional scale.

An increasing supply of both natural gas and crude oil, including that from unconventional accumulations, will contribute to geopolitical changes. According to the Report, economically the United States will benefit most from these changes, not only due to competitiveness enhancements from lower gas prices, but also thanks to foreign policy flexibility opportunities. As the USA will no longer rely on oil and gas imports, they will be able to respond more flexibly to the policies of oil and gas exporting countries. From a short-term perspective, the US capabilities to respond in the Middle East countries, including Iran, will be of particular importance.

China's energy security policy is an equally important geopolitical aspect. The Report emphasizes that China wants to follow the US path and lessen its reliance on oil and gas imports. This is testified by recent reports to the effect that shale gas production has already started in China. Additional domestic production is supplemented by support to Chinese upstream projects in North America, where Chinese companies gain access to new technology and know-how. China's very strong reliance on imported energy resources adds to the attractiveness of that alternative approach.

A strong growth of the economy and the lack of domestic production makes China reliant on external players. In the 1990's China made the decision to enhance its international presence in the upstream sector and oil and gas imports. These efforts failed to ensure an effective security of deliveries. Moreover, they necessitate a stronger international  engagement of China.

The authors of the Report believe that due to its reliance on imports China is interested in ensuring political stability of the Middle East. At the same time, however, China follows its own policy which is different from that of USA, for example in the context of sanctions against Iran, so that tensions emerge. The second hot point in terms of oil and gas deliveries to China is the control over Malacca Strait, an area of potential clash of disparate US, Chinese, Japanese and South Korean interests. The Report clearly states that there is no alternative option for China other than development of its domestic resources.
As far as Europe (including Poland) is concerned, the Report focuses mainly on oil and gas suppliers. According to the Report, Europe may benefit from increasing competition between suppliers, including OPEC member countries. This is also true for the gas market  where Russia's role will not necessarily increase, even despite a higher demand for gas in Europe.

In the case of Poland and East Europe the Report is fairly superficial with vague mentions of LNG terminals being built in Europe and pricing policies of supplier countries. The Report does not address the issue of high prices paid for the Russian gas by natural gas recipients in Middle and East Europe. In the shale gas context, the Report unequivocally states that the shale project will be continued in Europe regardless of the challenges faced. Poland, Ukraine, China and Mexico are mentioned as potential natural gas exporters in the future.

Considering a growing importance of Asian markets (as evidenced by the fact that Asia is to account for 72% of the additional oil and gas demand), Europe is a secondary thread of the Report. In addition to European actions and omissions, this continent will be also (or primarily) affected by developments created out of Europe.

These events, as mentioned in the Report, may include, for example, Japan's move back to nuclear energy or a higher natural gas share in energy mix of the existing gas suppliers and of the largest Asian economies – China and India (albeit the two countries will continue to rely heavily on coal). The Report makes no mention of a growing reliance of Europe on imported gas under the climate change policy. Similarly, the issue of a potential stronger engagement of Europe in the Middle East at decreasing importance of that Region for the USA, has not been addressed.

The issues of energy nationalism are discussed in the final part of the Report. The changes that have occurred since the 1970's and the OPEC crisis of 1973 are highlighted. Whilst at that time International Oil Companies (IOC) controlled production, now it is the domain of governments which strictly control access to resources with regulations or licensing policies. Furthermore, some countries (as China, South Korea and Taiwan mentioned in the Report) have established National Oil Companies (NOC). In addition to NOC's, the role of IOC's is further reduced by Oilfield Services (OFS) that possess their own know-how and business strategies. A falling importance of IOC, the emergence of new players (including non-OPEC countries and their national oil companies) and gas market development made the map of trading in energy resources much more complex.

Typical subdivisions into exporters and importers are now blurred. Some countries are crude importers but export natural gas (e.g. Australia, New Zealand), other are gas importers but export crude oil (Mexico, Venezuela). At the same time some former exporter countries cease to export (Indonesia, Malaysia), while some former importers begin to export hydrocarbons (Brazil, the USA). All of these changes require a new approach to the upstream industry.
According to the Report, technology will be a crucial factor in the new environment. Companies holding the new technology and countries willing to boost domestic production will benefit from joint cooperation. The Report invokes joint venture agreements made by  Shell and PetroChina in China, projects of Chevron in China and of Shell and Chevron in Ukraine.

Finally, the Report emphasizes benefits from the opening up of countries and national champions (NOC) to cooperation with and competition of foreign companies (quoting the cases of Mexico, Russia and China). According to the Report, regardless of specific national interests and decisions made by particular governments (such as the Canadian ban on the transfer of production assets to companies controlled by foreign nationals), the process of cooperation between governments and joint ventures in the upstream sector will continue on hitherto restricted markets.

15.07.2014

author: afal