CERAWeek: Managing through the cycle

Currently, the energy industry is focused on finding ways to master the challenges of the low oil-price cycle. To meet those challenges, first, operators must re-evaluate the future of global oil development, said OAO LUKOIL President Vagit Alekperov, speaking to attendees at this week's IHS CERAWeek conference in Houston. Secondly, they must find ways to better predict economic cycles caused by supply and demand.

“In recent years, we have been overly sensitive about this issue, but now is the time for more sober approaches and assessments,” he said. “The dynamics of the oil markets during the recent months show that serious and almost unnoticed problems are related to the quality of the forecasting and analysts. The prediction ability is the basis upon which the leaders of all of the global companies are building their strategies.”

Yet, the forecast upon which the petroleum industry’s decisions were based last year were faulty, he said. The analysts could not predict this tremendous growth in shale oil and the subsequent excessive supply in the market. These systemic changes were not expected, Alekperov said.

“I am deeply confident that the oil industry right now requires authentic forecasting of the changes in supply and demand, of the market, and of the oil price dynamics. Right now, the quality of long-term forecasting doesn’t enable companies to manage risks in the projects, from initial investment decisions through to the launching of production,” Alekperov said.

Meanwhile, in the mid-term, one should not expect dramatic growth of the demand for energy to resolve the crisis, Alekperov warns. For example, the growth of the industrial sectors in Europe and China are, for all practices and purposes, in a stable mode. In fact, those regions are switching to less energy-intense industrial processes.

“Also, the leading Asian countries are reducing subsidization of motor fuels. We will become witnesses of a gradual decline of the pace of production as well as the stabilization of the markets at the level of not more than US$75/bbl during the mid-term.” Yet, this price will be problematic for projects in the offshore deepwater projects, he said.

The new price point will bring tremendous change in the oil industry, he said, adding, “I believe the position of the transnational companies that have mastered their skills of survival in the highly competitive environment during the past few years will become even stronger.”

The national and public companies are responsible for meeting the needs of their contemporary civilizations with energy resources, he said. However, their roles of national and public companies are principally different. The national oil companies are systemic in their approach to their national economies. National oil companies have very serious social commitments. “Profitability is not their only criteria for efficiency.”

Meanwhile, Alekperov said transnational companies are targeting to achieve the maximum economic efficiency. In this highly competitive environment, they are creating new advanced technologies, both in the manufacturing and production sectors, as well as in the project-management areas. “Fighting for survival, they essentially keep moving forward. The whole of the energy industry is producing its evolution through the natural selection process,” Alekperov said.