Monday 12 January 2015

Brent Oil Price Stuffed - In More Ways Than One?

CU was right to remind all us oil consumers, merrily watching the price cratering, that there is UK industry at stake in all this: and as 'Suffragent' said in the comments (previous post), there is an accelerator-factor at work.  The development of small fields depends heavily on their being able to blister onto the infrastructure already built for (and paid for by) much larger, older fields.  If the latter fall off the perch sooner, the former rapidy become uneconomic at any price.

It just occurred to me, as price and UK production fall, there may be another sector at risk.

That 70% of the world's crude (and maybe an even higher proportion of oil forward and futures) is denominated relative to 'Brent' is one of those miracles of the City of London that are easily forgotten.  As 'price marker' for so much global oil, the Brent field in the North Sea is way, way past its prime, and 'Brent' oil has been a blend from several fields for decades now.  When that blend started to decline in volume, output from the mighty Forties complex was included in nominal 'Brent'; and when that in turn started waning beyond the point where physical delivery could readily be made available to any forward-market punter who actually wanted some (a tiny minority, to be sure, but the principle is important), two major Norwegian blend were enlisted.  And still it declines.

It so happens that Brent's one-time deadly rival, WTI of the USA, has been in dreadful trouble for several years, and has completely lost it as regards being of global significance.  (We looked at this ages ago; and at Alphaville they once talked of little else.)  But there are other would-be rivals: it has always irked the Arabs and the Russians that Brent dominates their vast output: and there are plenty of trading folk in the Far East who reckon they merit a crack at the lucrative oil sector.

So the vast and valuable Brent-based London oil market needs to have a care.  Last time we worried about this, it was market integrity that exercised us.  It has to be said, however, that a never-to-be reversed collapse in North Sea production (UK, and in due course Norway + Denmark) couldn't help the cause one bit.

The chaps in the City don't need me to tell the all this.  Given that further decline in output was inevitable, they will have contingency plans.  Hopefully, they are good enough to cater for a rather unexpected acceleration in the process.



Sebastian Weetabix said...

Well, we don't mine much metal these days, but the LME remains the benchmark for tin, lead, etc. Why shouldn't crude be the same?

Suffragent said...

Thanks for the Nod
With eye watering fixed costs an old platform is lucky to get 50% of the oil out of the field until costs get too high (due to pressure losses and fluid quality, the costs increase as a field ages). At lower barrel prices you get less volume out of the field. Serious question, how does this affect the effect the reserve calculations. At what price are they set?
It would have been interesting watching the all new singing and dancing Scottish parliament trying to borrow money on a 40$ a barrel price when it’s reserves were also decreasing.
The same goes for the UKs borrowing.

Suffragent said...

I think it’s small potatoes, in that none of the boys at the Big table are going to be toppled by a reduction in tin or lead prices. Better to have a stable environment under established law . Everybody needs oil immediately and it’s a political pawn.
When I was working in Norway, they were always trying to diversify their industry to be less oil dependent. When gold and silver prices went skyward there were screams to develop the silver mining industry as Norway sits on large reserves. The government response was “look we have enough money in the bank (oil fund) we have a regular income from the fields and if we dig it up, how much will it cost to protect it? Norway seriously needs a nuclear deterrent.

James Higham said...

Commentator at our place, in the financial world, wrote:

I don’t think the elite or our new arrivals quite realise how fragile the economy, energy and food supply is on this cold wet rock in the North Sea without the engine of endeavour supplied by its native people.

Interesting angle on where we are, methought.

Nick Drew said...

SW - yes, LME a cause for optimism

(also competence of the rest of the services, am doing a complex multi-national energy transaction right now and London lawyers are de rigueur)

but these things can slip, or even collapse, if eye taken off ball

Suff - we've written about these dynamics before, see this hoary tale of NWHutton which you may enjoy

it's a long time since I did a 10K reserves calculation but "SEC requires companies to report an estimate of the present value of their 'proven’ oil reserves, with estimated production profiles, a 10 per cent discount rate, and the prices, taxes and costs prevailing at the close of business on 31 December of the year for which the company reports results".

So, some big downward revisions to come!

Norway's need to diversify is rather like Russia's (as I bang on about all the time), with a bit less of a squeaky bum (sorry Volodya, didn't mean to offend).

BTW, Norway would say it does enjoy a nuclear umbrella, courtesy of NATO (with one or two practical caveats, no doubt ...)

James - on the money as usual

Timbo614 said...

JH: spot on! I don't think 99% of the populace realise how close to hunger, cold and homelessness we all are all the time. It's one of the downsides of complexity plus overburdening the capacity of the land.

I also think most could not cope with even a "blip" in our food or energy supply. Googling for "survival techniques" would be out because google would be, and mass communication, mobiles too, without continuous power. I have noticed as probably have others that digital TV and radio is pretty useless during big storms, No "fuzzy, snowy picture" but with some sound, just random coloured silent squares. Just one example of non-resilient technology.

I believe we are painting ourselves into a technological corner by ignoring basic practicalities and basic coping/make do and mend skills. Things will get messy when we all try to get out of that corner together.

Sebastian Weetabix said...

Funny how we are not hearing anything about Milliband's famous energy proce freeze, isn't it? Perhaps the attack ads are being saved up for May.

Sebastian Weetabix said...

Or even price freeze. I'm not sure what a "proce" is.

DJK said...

JH: It is something that's been bothering away at the back of my mind. We grow about 70% of our food requirements, and that's been the case for well over a century. Once we had an empire and the world's biggest navy to ensure our food supplies; now...

Since 1997, politicians have been growing the economy by growing the population, through mass immigration. It doesn't seem like a good idea to me. Population collapse through starvation (Google St. Matthew Island reindeer) could come very suddenly. It doesn't entirely reassure me that some other countries, like South Korea, have even less food security.

Anonymous said...

Bragging rights aside, does it really matter what nationality of crude streams are used to obtain a marker price which, as we all know, is not immune from manipulation anyway?

Besides, it's hardly a "British" benchmark if the currency used is other than the Pound.

Steven_L said...

I also think most could not cope with even a "blip" in our food or energy supply. Googling for "survival techniques" would be out ...

Thanks Nick, I'll print this out and show my gf next time she complains I don't need 20 different fishing rods.