 "Martin Fraenkel")
Low investment in petroleum and coal, already facing a challenge from renewables, could impact their future production, says Martin Fraenkel, president, S&P Global Platts, an independent provider of information and benchmark prices for the commodities and energy markets. In an interview with Jyoti Mukul, he talks about the crude oil price trend and the global hype around electric vehicles, among other issues. Edited excerpts:
Global commodity prices have been moderate for some time now, except for some blips. How long do you see this trend continuing?
Most commodities are in the reasonable supply situation. One of the things that happened during the commodities boom in 2009 and 2010 was, people tended to look at commodities as an asset class, and everything went up. But we have moved out of that environment now. We are in a scenario where different commodities are in a different supply scenario. If investors come back to the commodity market, then the weight of capital can be significant.
What kind of price trend do you see in crude oil?
Stocks of crude oil continue to be high but are gradually being drawn down, though it is taking longer than anticipated. We are going to be in the $50-60 a barrel price range till the end of 2019.
How important will be shale oil prices for crude oil?
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According to our company Rig Data, the number of operating rigs has gone up significantly in the US. Shale production, too, has gone up. Over the past 18 months, the surprise has been that production went off when prices fell, but it has come on quite quickly and at a lower price than people anticipated. Following two years of declining drilling and completion costs and improved production rates, breakeven prices have landed below $40 a barrel for many of the leading players in the US. Producers continue to target drilling activity in Texas and the Midcontinent where rates of return are still above 20 per cent, according to Platts Well Economics Analyzer. The relentless rise in oil production in the US, Nigeria and Libya is piling pressure on the market. It is certainly possible that shale oil production costs will continue to fall, but it is by no means a certainty.
Indian companies that had invested in shale don’t find it viable any more. Will there be price pressures on shale production?
Productivity growth has been strong, and there are new technological and operational advances coming that will continue to drive costs down. However, over the past several years, productivity growth has combined with reduced industry activity and associated reductions in drilling and completion costs to drive breakeven costs down. As activity picks up cyclically, and service company costs and margins rise, this will now be a source of upward pressure. Whether continued productivity improvement is able to fully offset these upward cyclical pressures is an open issue that we are following closely. Even at the current level of crude oil prices, some of the shale areas are producing very respectable returns on investment. The whole shale story is very complex because production levels vary in different places. There isn’t one breakeven price for shale. Some of the lesser skill sets that have been learned in the US will be transferred to other parts of the world. One of the places which is looking deeply into shale is Argentina.
Besides shale, what will be the other factors that will play on oil price?
We have seen Nigeria and Libya produce at more-than-the-expected rate. There is a strange situation where Opec (Organisation of the Petroleum Exporting Countries) is being successful in implementing cuts. You think about the amount of political tension among Opec and the Middle East, Saudi involvement in Yemen, Saudi-led action on Qatar, and then the Saudi-Iran situation. Yet, we do not see much supply disruption. One of the factors we see that prices sustained lower for longer was that some of the investment projects are being delayed. In order to stay at the same level of oil production, you need replacement rate of 3 per cent. Those investment are getting delayed. The global oil demand will go up by 30 million barrels a day for the next decade. If we look at what could take oil prices higher, it is a combination of factors like big investment getting postponed, the economics of shale which will continue to be produced, a lot of geopolitical instability in the Middle East, and the continuing rise in oil demand.
How important will be Saudi Arabia and other Opec countries for countries like India since supply from the US and Russia will rise?
The Opec agreement was an agreement with Russia, and not just among Opec countries, to get a control around supply. India is importing from the US where the economics is same as the Middle East. The present government is keen to shed dependence on the Middle East for supply. There is no question that Russia and the US are extraordinarily important for the global energy supply, and are major exporters in the hydrocarbon complex. It is hard to estimate the impact of change in oil and gas supply. We have US LNG being exported. Gas markets around the world converge in price range. We are increasingly moving to a world where markets are interconnected and there is more flexibility in the trade flows. India is well situated to get LNG from the US, Qatar and Australia. At the same time, we are seeing fuel switching across sectors. You can’t look at oil or gas market in isolation. You cannot look at the North American market or the Indian gas market without looking at the global market.
When oil industry comes out of low price and low investment phase, do you see it facing another challenge from renewables and electric vehicles?
We are anticipating that components for oil demand will change over time. The peak oil demand will not be before 2035-2040. The peak demand will be 20-25 per cent higher than the current consumption. The composition of demand growth might change. Electric vehicles are currently very small percentage of demand for cars. Even if you make an aggressive assumption of growth of electric vehicles, you still have decades to reach gasoline car levels. At the moment, electric cars are heavily subsidised. It is not clear whether around the world, governments will like to subsidise electric vehicles in the long-term in substantial number. It remains to be seen whether the cost of electric vehicles will come down. If electric vehicle demand grows, the demand for batteries will grow, leading to a significant demand in minerals like cadmium and lithium, which have small availability. About one-third of cadmium comes from the Republic of Zaire, which is not one of the most stable countries in the world. Besides, is there enough capability to extract these minerals? Even if the new fleet of electric vehicles grows rapidly, you will still have the existing fleet of gasoline vehicles that have long life. It will take decades for them to be displaced unless governments take drastic action and for that the cost structure of electric vehicles need to change significantly otherwise subsidy involved will be very high. We think the peak in gasoline demand will come earlier than oil, maybe 10 years from now. Oil demand will continue to be driven by growth in other transportation fuel like the jet fuel, marine fuel where at the moment there is no alternative to combustible fuel. Very importantly, oil will be the feedstock for petrochemical sector.
With the Chinese and the Indian markets not likely to see high imported coal demand, how do you see the global prices panning out?
There is a drive to slow down demand for coal. Peak coal demand will be there in the next two to three years. But it is a mistake to assume that since demand is static, the price will be in a lull. Commodity prices are driven by margin of demand and supply meeting. If you look at commodities like silver and lead which had significant changes in their uses, they did not go down in price. They are often volatile especially if you get disruption in supply side. It is difficult to derive price trend from demand forecast. It will be extremely hard to get finance for coal project. If you don’t get investment in big projects, demand still exist, but it will impact price.
How far investment in infrastructure will create demand for metals?
Metals demand is a function of global GDP growth. Global GDP growth is stable at the moment but not stellar. As in India, infrastructure continues to be a topic in China, though there is a slowdown. Infrastructure is a potential topic in the US because one of the planks of President Trump is infrastructure, which is presently creaky in the US. All the three growing economies are talking about infrastructure.
Platts has made acquisitions in previous years. What will be the focus going forward?
Our approach to acquisitions is to support our strategy - to deliver news, pricing and analytics to deliver greater transparency and efficiency to markets and help customers make better informed trading and business decisions. Over the past year or so, we have boosted our global analytics capabilities with the acquisitions of PIRA, the leading provider of energy market analysis; RigData, a provider of daily information on rig activity for the natural gas and oil markets across North America; and Commodity Flow, a specialist technology and business intelligence service for the global waterborne commodity and energy markets. We also recently acquired the Kingsman Sugar analytics business – and will once again be hosting the Kingsman India event in September. We also acquired the famous Asia APPEC oil conference business in Singapore with plans to preserve the brand and spirit of this conference but strengthen the insights and content to make it more relevant for participants in Asian markets.
