Energy Industry Trends Review

October 2011 was also the first month of
the new “60-66” taxation regime for the
Russian oil industry, which has cut duties
on crude oil and some refined products to
stimulate output of high-grade oil products
and crude. As a result, there was a
marked increase in Russian oil production in
October, with oil production reaching 10.3
million b/d (production levels not seen since
pre-Soviet days in Russia). 34
Oil price
Key trend—Concerns around the Eurozone
debt crisis and return of Libyan crude
exports has led to some softening of crude
prices. However, this quarter also saw
crude oil prices being supported by supply
constraints, which led to some contraseasonal
inventory draws. There has been a
continued disconnect between Brent crude
prices and the US WTI oil price in response
to the situation at Cushing, with landlocked
supplies of WTI still not finding an export
market outlet and depressing the WTI oil
price as a result.
As of November 21, 2011, WTI crude oil
futures for January delivery were trading at
around $99/barrel, with Brent futures trading
at around $109/barrel. Crude oil futures
prices were rising as markets focused on
the possibility of greater involvement by the
IMF in bailing out Eurozone governments.
Short-term futures oil prices are expected
to continue to be supported by financial
market effects, causing volatility and a
strong correlation of oil prices with stock
market movements. 35
In the short term, there appears to be
more downward pressure on the oil price,
as Libyan oil begins to return to the world
market and as global economic growth
overall is slowing. Downward pressure on
oil prices generally is also coming from a
rising dollar, although the market is seeing
prices rise and fall according to financial
market effects on any given day.
8
Some analysts are maintaining or raising
their 2012 oil price projections. For example,
J.P. Morgan has maintained its price
projection of $115/barrel for Brent, and increased
its price projection for WTI to $110/
barrel in 2012 (from $97.50/barrel forecast
in October). J.P. Morgan said it sees the
Brent-WTI spread narrowing to $5 and $3
per barrel in 2012 and 2013, respectively,
due to the planned reversal of the Seaway
pipeline. 36
The OPEC Reference Basket price decreased
in October, moving below the significant
$100/barrel level in the first week for the
first time since mid-February. The downward
movement in the OPEC Reference
Basket in early October was attributed to
the weak performance of the global crude
oil market on the back of the debt crisis in
Europe.
Observation
The crude oil price outlook is softening slightly
for the remainder of 2011, but has continued
to be volatile throughout the quarter as
it reacts to financial market effects. Some
analysts have noted a 95 percent correlation
between futures crude oil prices movements
and the S&P 500 since July 2011. 37
In early November, the WTI oil price started
to make up some ground on Brent oil prices,
but generally the prices have seen a $10
to $20/barrel divergence throughout 2011
due to the supply situation at Cushing.
If this happens, we are now likely to see
much more of a recovery in WTI prices as
crude is released from the hub at Cushing
to export markets, and this is expected
to result in a significant narrowing of the
WTI-Brent spread. The impact on WTI might
be greater (depending on the volumes it
might carry) as the US government has
announced that a decision on TransCanada
Pipelines’ 600,000 b/d Keystone XL pipeline
would be postponed until 2013. This makes
the Seaway pipeline the only short-term
option to alleviate the situation at Cushing
(according to some analysts, by the second
quarter of 2012 the reversed Seaway could
have a throughput of around 150,000 b/d,
eventually rising to a maximum of 400,000
b/d by early 2013, all flowing toward US
Gulf Coast refineries). 38
Gas supply
Key trend—Global gas production is expected
to continue to increase and meet
future demand with further exploration
and development of unconventional gas,
notably in the United States, which is
now progressing its plans to export LNG.
The short-term gas supply situation looks
robust, but LNG capacity has tightened
considerably, largely due to the situation
in Japan. Longer term, the IEA is forecasting
that global gas production of between
3.9 tcm and 5.1 tcm is required to meet
projected levels of consumption by 2035.
Conventional gas will still account for the
bulk of global gas production by 2035, but
the share of unconventional gas will rise
from 13 percent in 2009 to 22 percent in
2035 and it provides 3 percent of incremental
production to 2035. 39
This quarter has seen Europe’s largest
exporter, Gazprom, challenged by price
disputes and falling exports, with preliminary
Russian Energy Ministry data showing
Russian gas exports for October 2011 falling
by 9.2 percent from October 2010 (with
some analysts noting that this was the
lowest October production in the history of
Gazprom). This is largely due to the effects
of early stockpiling of gas by European
countries ahead of fourth-quarter 2011
price increases as well as Gazprom disputes
with EU countries like Poland. Gazprom
gas sales to Europe alone in October were
almost flat year-on-year at 9.536 bcm. 40
In the United States, the Energy Information
Administration (EIA) expects US
marketed natural gas production to average
65.6 billion cubic feet (bcf)/d in 2011, a 3.8
bcf/d (6.1 percent) increase over 2010. This
growth comes from higher onshore production
in the Lower 48 states, which more
than offsets a year-over-year decline of 1
bcf/d (17 percent) in the Gulf of Mexico.
The EIA expects that total marketed production
will continue to grow in 2012, but
at a slower pace, increasing 1.3 bcf/d (2
percent). Growing domestic natural gas
production has reduced reliance on natural
gas imports to the United States and the
EIA now expects that pipeline gross imports
of natural gas will fall by 6.7 percent to
8.5 bcf/d during 2011, and by another 1.4