Eni CEO was one of the speakers, along with the Secretary General of OPEC, HE Abdalla Salem El-Badri, at the opening session of the "Middle East and North Africa Energy" 2016 conference, held at Chatham House in London, on 25 and 26 January 2016.
Eni is a gold sponsor of the conference that offers, in the context of one of the world’s most prestigious institutions for international relations, a significant opportunity for leading figures from the world of politics, the arts and business to meet and exchange ideas about the energy market in countries of the Middle East and North Africa, in particular in the framework of the complex political, economic and social dynamics currently affecting the area.
Claudio Descalzi, CEO, Eni
Good morning ladies and gentlemen, it is an honour and a privilege to address you today about the Middle East and North Africa and the crucial role they are playing in this transformational period for the energy market.
Looking at the current situation, we can remark that oil prices are being strongly dominated by volatile short-term views and driven by financial markets, while the long-term fundamentals should lead to a more realistic price range for oil and gas.
The lack of a regulator - the role played before by OPEC - which balanced oil prices and gave a long-term perspective, has resulted in the market being handed over to short-term positions, which accentuate the impact of the existing physical imbalance.
An example of this short term view is the strong correlation between public data on US stocks and the oil price trend, although nowadays these only account for around 5 days of global demand.
These dynamics have also contributed to the fact that the oil price has dropped by 70%, and gas prices, which in many cases are still oil-linked, have followed a similar trend.
In the last two years, gas prices have come down in the US and Europe by 50%, and in Asia, by 70%, reaching the minimum levels recorded since the end of the ”90s.
Market fundamentals are not aligned with this level of oil price:
- World spare capacity is at its lowest value in decades (around 2%)
- Upstream Capex are being reduced to dangerous levels: in 2015 ( -20% and the expectation for 2016 is -15%)
In fact, 2016 upstream capex are forecast to be around 450 b$ while the International Energy Agency estimates 600 b$ only to compensate for worldwide production depletion, which is around 5% per year
- IOCs are postponing or cancelling more complex projects with higher break-even costs and reducing improved oil recovery investments
- Demand growth in 2015 is at its maximum level since 2010, 1.8 Mb/d, against an expectation of 1.2 Mb/d.
- US tight oil production is decreasing (450 kb/d since March 2015) and US Department of Energy estimates a further 100 kb/d reduction each month, starting from January 2016
- Geopolitical risks are spreading in different production areas
- Supply still exceeds demand by 1.5 Mb/d, mainly due to Saudi Arabian and Iraqi production increases, whereas non-OPEC production fell by 600 kb/d from Nov 15 to Dec 15
If this situation persists, the energy sector will be severely damaged and we could end up with the difficult situation where the world is not producing enough energy.
We cannot control and limit short term reactivity, but we can work on one of the main distortions of today’s energy market - the lack of alignment between oil & gas prices and the cost structure. This is indeed one of the main issues to be tackled to restart investments and guarantee a diversified global energy supply.
While prices have dropped by around 70%, costs have fallen by only 15%-20% and we can assume that they are still based on a price level of around 80 $/bl.
Only those who succeed in quickly aligning their cost structures to prices will be able to maintain a reasonable level of investments and, consequently, market share.
Otherwise, diversification of global supply will be reduced, because only few countries with low breakevens will continue to produce and develop resources, and these countries are mainly concentrated in the Middle East and North Africa.
In this context, where a gradual transition will be necessary to align costs and prices, the Middle East and North Africa, which now account for 36% of global liquid production, have the potential to be even more at the centre of the energy scenario, even expanding their market share, regardless of geopolitical tensions and the current political turmoil.
In fact, they can leverage:
- competitive production costs, thanks to the abundance of onshore conventional assets with low breakevens
- low operating costs, in the range of 1$/bl, while in other areas we see up to 10-15 $/bl
- a huge amount of oil and gas reserves, which account for 50% of the global oil reserves and 40% of the world gas reserves
- monetary reserves that are capable of sustaining production and investments during this period of a depressed scenario and low revenues, and
- almost all the global spare capacity, which may allow them to play the role of swing producers.
In fact, Saudi Arabia and Iraq have been the main contributors to increased supply, around 900kbb/d between them, in this price environment
All these elements highlight the strong and strategic position of the Middle East and North Africa in the energy scenario.
Passing from the oil to the gas market, the Middle East has a huge potential to be developed and, in particular, I am referring to the additional gas resources in the East Med gas hub.
In fact, the Egyptian giant gas field of Zohr is only the latest in a series of discoveries that has led to the identification of significant volumes of gas in the offshore area of the Eastern Mediterranean, over the past few years.
In addition to the reserves already discovered, we expect that the deep-water areas of the Nile Delta and Levantine Basin still have great potential, which we can add to the rich resources still to be exploited in Libya.
Furthermore, these resources can rely on already existing gas infrastructures in Egypt, both for production, such as flowlines and treatment plants, and for export, such as liquefaction terminals and pipelines, for an overall export capacity of 35 BCM.
If these countries are able to define common strategies and share these existing infrastructures, they will manage to lower the necessary investment levels, reduce costs and speed-up the exploitation of available resources, helping them to grow faster.
This will lead to the creation of a new gas hub, which could boost development and contribute to the stability of the entire region.
To sum up, the Middle East and North African countries are facing a difficult scenario, due to geopolitical tensions, but have all the favourable conditions to revert this situation in the medium/long term, leveraging a huge amount of O&G reserves with low break-even and operating costs.
It is true to say that, unlike other countries, low energy prices can give them a competitive advantage, as they will be the only players to produce and invest, increasing their market share, reducing energy source diversification and, consequently, becoming even more crucial and critical in the future energy scenario.
Thank you for your attention.