Ranvir Nayar May 2016
Executive Vice President Strategy and Regions, BP Global
Technology: A Great Influencer for Oil Production
Oil companies are the vanguards of technology. Though they need to work within the frameworks of the governments, their role cannot be overlooked, says Sanyal.
Where will the oil settle down finally?
That is the big question. It’s fair to say that the cure for low prices is low prices. There has been much recalibration happening within the industry. If we take a big step back, we will see that two potent factors have been influencing the oil market.
To begin with, fundamentals are being fully priced in– the good old fashioned demand and supply. The second factor in the price of oil is that world peace is being priced in. There is no geopolitical premium.
If you look at the prognosis today, we do see a demand trajectory that last year was at a ten-year-high, double the ten year average, which was at 1.8 million barrels a day (b/d). We forecast that this year the demand will rise by 1.5 million b/d.
One has to look at the excess amount of supply. The question really is would could have happen within OPEC (Organisation of the Petroleum Exporting Companies) that is taking a rational decision by saying that why they should shutter in the production, when they are the cheapest cost supplier. They are of the view that suppliers with higher cost should shutter in the production instead. I assume they will continue their strategy. The other big factor is the North American shale revolution that stimulated the production of oil and natural gas in the United States and there we are witnessing a slowdown of activities. Rig Counts (service issued by the global oilfield service company –Baker Hughes) have gone down from 1600 to slightly north of 500 in the recent past. Geopolitics and politics are intimately linked with oil. Fundamental analysis shows a potential inflection in the second half of the year, now what that exactly is, is a multibillion dollar question. But one has to be moderate in one’s expectations because currently there is a dampening effect of high inventory levels and OECD (Organisation for Economic Co-operation and Development) inventory levels are the highest. So while there may be an inflection point, there is a dampener of inventory levels that will act as a moderating force.
What do you have to say about the two factors that will influence the price this year – one is the entry of Iran in the market and second is the Chinese slowdown, which seems to be getting more serious?
When I am talking about the inflection point in the second half of the year, I am factoring in both these issues. China has slowed down from the heady heights. Its economic growth was 6.9 pc last year, this year it’s going to grow north of 6 pc. As far as the supply situation is concerned, one can’t look at the shuttering in of some North American production without assuming that Iranian production will come to the market soon. I am factoring that into the equation as well. Yet, fundamentally the 1.5 million b/d demand increase is a reflection of the essentially price elasticity in our sector. For example last year, because of the decrease in prices, the sales of SUV in North America rose back to a decade high.
Are we seeing a throwback to the late 1990s in the Middle East when the price was down to USD 10? Is the region prepared for such a shock this time?
One needs to look at countries individually because the whole region is quite heterogeneous.
For example, I am on the executive board for BP responsible for Europe and Asia and when people ask me about Asia, I cannot just talk about Asia as a whole because India is so dramatically different from China – it is hard to aggregate that way. However, fundamentally what we have seen is a shift of rent from producers to consumers. We reckon that a shift of USD 50 is as good now as it was last year. However, a shift of USD 50 in price resolves in a shift of approximately USD 2-2.3 trillion in rent from producers to consumers, which undoubtedly has an impact.
But some countries go into this with a strong balance sheet just like companies do and some don’t. In such a scenario, capital structure that is important for both the countries and companies need to be relied upon. What do you do around recalibrating in terms of cost – for companies it is the capital expenditure and revenue expenditure, whereas for countries it is their spending patterns.
Was COP 21 an opportunity for companies like you?
Absolutely, COP 21 reiterated some important policy dimensions. There is clearly a narrative on gas, which is incredibly potent. We see gas as the fastest growing fossil in the next 20 years. We see renewables growing much faster than gas. Right now, gas is growing at 1.8 pc and renewables at 6.6 pc, though from a small base. I think gas economy will play a very crucial role. Common pricing was one factor that we support. When you price in externalities you create certainty and certainty is good for business. Once you tell us the rules, we go and figure out how to go about it, and a common price would help in that scenario. There was an intelligent and thoughtful outcome around R&D and innovative technology – that could play a big role.
Companies like ours welcome the move by governments as we believe they have a lead role. Although, we believe we also have a role to play but we need to operate within the frameworks set by the governments.
The theme this year is the fourth industrial revolution, how does that apply to the oil and energy industry?
Most people don’t think of us as technology companies. If I told you that BP has the world’s largest private supercomputing centre, you probably would be surprised. This supercomputing centre processes four petaflops of data, which means it has the capability to process a thousand billion calculations per second. It allows us to do studies in the areas of seismic and exploration which earlier would take a year and now take a couple of minutes. When my career began 27 years ago, we talked about deep quarters at 300 metres and today it is 3000 metres. Technology changes everything. Our companies are the vanguards of technology. The idea North Americans had around hydrofracking in which they didn’t have to go to the source rock and could drill horizontally – is not an idea from science fiction. It is actually great technologists, scientists and engineers coming together to create this extraordinary revolution in North America. Not surprisingly, in 2014 America became the largest producer doubling their production in the course of last decade.