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May 19, 2013 7:16 pm
Oil prices are likely to fall over the next few years, the chief executive of one of Europe’s largest energy companies has said, suggesting a tough time ahead for oil producers.
Paolo Scaroni, chief executive of Eni, the Italian oil and gas group, said that unless there was another boom in the world economy, sluggish demand and new supply coming on to the market meant the price of crude was “more likely to go down than up” over the next two to five years.
However, he suggested his company could survive at much lower prices, and identified Asia as the main target in its plans for future growth.
Mr Scaroni’s expectation of lower oil prices is based on his view that there are two glaring “anomalies” in world energy markets resulting from the US shale revolution, which has caused a surge in gas and oil production.
Benchmark US gas at Henry Hub in Louisiana is about $4 per million British thermal units, which compares with about $15 per mBTU for liquefied natural gas imported to Asia, and about $16 per mBTU for the energy content of US crude oil.
Over time, Mr Scaroni believes, market forces will narrow both of those gaps.
“These two anomalies, once corrected, move us towards a world in which gas prices are higher and oil prices are lower,” he says.
The low cost of gas in the US has prompted a surge of interest in the use of gas for transport, including LNG for trucks, trains and ships, and compressed natural gas for delivery trucks, local buses and passenger cars.
Even if current US gas prices turn out to be unsustainable – Mr Scaroni believes producers will need higher prices in the long term to be financially viable – switching from oil-based fuels could still be attractive.
“Suppose you believed US natural gas would stay at about $5 to $6 per mBTU, and oil would stay at about $90 per barrel. That would inevitably shift a lot of transport in the US to using gas,” he says.
“And that would have repercussions for the price of oil.”
With US oil production rising, meanwhile, cutting its imports and freeing up more oil for other consumers, the downward pressure on the price of crude will be reinforced.
Stagnant demand in developed countries and rising North American production are already having an impact on world oil markets. Internationally traded Brent crude has slipped from about $125 per barrel in the first half of 2012 to about $105 at the end of last week.
That decline is already putting pressure on oil companies’ earnings, which have been hit by increasing costs, but until last year were supported by the rising price of crude.
Eni reported a 39 per cent drop in adjusted net profit for the first quarter of 2013, although that was hit by one-off problems in Nigeria, Libya, and the UK.
Mr Scaroni argues, though, that the company “can live with” oil at much lower levels, down to $45 per barrel.
Its record in finding new resources, including the recent huge gas discoveries off the coast of Mozambique, gives him confidence in the outlook, he says.
“Exploration success is the key to our future. That is the best way to protect profits in the event of lower oil prices.”
The main targets Mr Scaroni identifies for future exploration are in Asia. Eni is the largest international oil company in Africa, by production, and it intends to remain there, including in countries such as Egypt, Libya and Algeria that have been hit by the instability and violence that followed the Arab Spring.
However, the countries where Eni is now most interested in expanding include Vietnam, Indonesia, Myanmar and Pakistan, Mr Scaroni said.
Many of those present challenges of their own, but throughout its history Eni has made a speciality of operating in countries that some other European and US companies would find too difficult.
“Every time we make an investment decision, I always think ‘why [Eni]’,” Mr Scaroni says.
“Where we can add most value is in countries that are complex and not easy to work in. Those are the investments that we are highly skilled in. They are also often more profitable.”
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