The Guardian Newspaper featured an insightful interview with the MD of Seplat Austin Avuru where he talked about Seplat upstream business in relation to crude oil and gas exports. He also discussed the proposed acquisition of Afren as well as their debts and cash hoard. He also talks about refineries in Nigeria and why he supports subsidy removal. I also enjoyed his take on the current slide in oil prices and why OPEC is not ready to let go. It’s interesting hearing him defend OPEC and lower prices considering what that will do to his margins. This is an excerpt from his response to the current OPEC vs Shale debacle.
It’s strange that OPEC is not cutting oil production yet; isn’t it?
No, they are not cutting production now because we cut production today to secure high prices for people producing at high cost. This is a long-term war. Shale oil producers in the United States, who have been responsible for an increase of overall output of about five or six million barrels per day in the last three years, are producing at the cost of $45 to $50 a barrel. When the prices are at $90 and above, it keeps them in business. Then, they flood the market and you withdraw your production and keep the prices high.
OPEC is saying that they are not going to pull back volumes to create a market for high cost producers in the US. You won’t see the effects immediately. At $45 per barrel, in the next six months, half of all the shale producers will have a shocker because they can’t be in business. When that happens, in the long-term, it will become clear that, at a price below $60, certain people cannot do business.
From that price, OPEC can then determine at what volume to pull out if they want a $70 or $80 price. The first thing is to throw out those who cannot compete out of the market before stabilising prices. That is what OPEC is trying to do.
The US has a huge stockpile from shale, how long do you think it will take before they budge?
The US has shale oil or not, as part of their stabilisation policy, they will have a large stock-pile, whether they are importing or not. And that impacts on pricing. They will have a large supply, no matter the emergency, even without a barrel entering the US.
Let us not forget that this is not the first time this has happened. In 1987, the US was producing 12.5 million barrels a day, before it declined to five million barrels a day; while their demand is 15million.
Shale oil is just another source of crude oil, just as we have had other sources in the past. In 1972, we suddenly found oil in the North Sea. It attracted over 10 million barrels of additional production into the market. There will always be old sources drying up, and new sources. What is important is that, globally, there is still a demand and supply balance for the next 40 years.
Within the context of that demand-supply balance, what kind of price do you expect? That pricing will be determined by a mixture of cost of production, difference in geography and so on. So at $110, there will be some production that will enter into the market that would not have been in the market at $40. That is the dynamics we are looking at.
Are you saying the discovery of shale oil and other sources of renewable energy may not be real threat after all?
Let me put it in context. First, renewable energy and all energy sources — except natural gas, coal and crude oil — still account for a little more than 20 percent of the total energy used by 2040. Fossil fuel will still account for little more than 80 percent of total energy by 2040. Renewable energy has its limitation in terms of volume, cost of production and others. When you come down to fossil energy, coal will reduce, crude oil will remain largely flat and gas will increase. That is the trend between now and 2040.
Overall, you want to ask, looking up to 2040, are we likely to see supply that can meet the projected demand? The answer is yes. This is thanks to these additional sources like shale oil, and shale gas. Shale gas will account for 17 percent of total gas production by 2035, from zero ten years ago. It will account for 13 percent of total crude oil by that same date. If that did not exist, we would have had a supply demand imbalance that would have tilted the price more towards the $200-$250 per barrel. So, it is not something to be afraid of. It is another source of natural gas just like crude oil. Over all, there is reason to be happy that there is enough secured supply of fossil fuel over the next 30 years.
You can read the rest of the interview by following this link