Slumping oil prices lead to new area for the BRIC countries

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Kazakhstan’s energy sector needs to adapt to the demands of the new era.

Shale gas, then shale oil, and tight oil meant rapid growth in US oil production


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ASTANA – The current situation in the world’s energy represents a transition from the era if the BRICs to the era of shale where the high demand market is replaced with lower price energy market, a leading energy analyst has said.

IHS Vice Chairman Daniel Yergin presented the National Energy Report 2015 discussing in detail the reasons for the current collapse of the oil prices, but also providing concrete recommendations and proposed solutions for the energy industry of Kazakhstan to get through the difficult times and to preserve its competitiveness.

“Today we really are in a new era, Yergin said opening his presentation at the Kazenergy forum, adding that this new era has come just as the oil prices have come crashing down, and that requires fresh perspectives.

According to him, the current situation in the world’s energy represents a transition from the BRICs era to the shale era where the high demand market is replaced with a lower price energy market.

He mentioned that the phrase of BRICs had only been invented in 2001 to be Brazil, Russia, India and China, whose economic development has been very rapid in the last decades, with the dominance of China among the four. For reference, during the BRICs era, the Celestial’s economy doubled so did the Indian economy, while Russia’s economic growth was only 40%.

It is with the development of these four countries, with a rapid urbanization there that the epoch of high demand for oil had begun. Just imagine that in China alone 20 million people moved from the countryside to the cities each year.

Over the period from 2003 to 2013, 45% of world oil demand occurred in China. It was during that period that the prices for the “black gold” peaked at $125 per barrel.

“Fear of energy shortage was everywhere. Companies were very concerned about finding new reserves…that was a big incentive for the development of a shale revolution, leading to the shale era. This means that the demand for oil will not be growing so fast. As I have said, the reason is in the slowing down of the economic growth of the BRIC countries” Yergin said.

According to him, it was the slowing down of the Chinese economy that has caused the transition from the BRICs era to the shale era. The slowing down of the economy growth in China and in the other three countries had an overall dramatic effect on the oil prices.

As far the shale revolution is concerned, two years ago, there was much talk about peak oil, about running out of oil, and the need to look for alternative energy resources.

“While all that talk was happening around the world, a significant technological breakthrough was occurring in the United States. First it was shale gas, then shale oil, and tight oil. And this breakthrough meant rapid growth in US oil production. In a period of about half a decade, US oil production almost doubled, and the United States added almost five million barrels daily,” Yergin said.

At the same time there was also a significant growth in Canadian oil sands. As it happened, a fear of shortage of oil faded away. The result was an oversupplied market at a time of weakening demand growth.

Then there was a change of policy in the Organization of Petroleum Exporting Countries (OPEC) where they decided not to cut production to maintain oil prices. The result was the price collapse of 50%. As a matter of fact, the prices for other commodities had begun to decline even earlier, in 2011.

In this connection, the question is “What should the oil producing countries, whose budgets have become accustomed to depending upon higher oil prices, do in these new conditions?” he asked.

The National Energy Report 2015 clearly states that Kazakhstan is no exception. Half of its budget comes from oil, and about 20% of its GDP is driven by oil. “Obviously, there is great concern about the impact of price collapse, what it means for the economy, what it means for the future of this country but I think there is reason to be optimistic, an important reason to be optimistic, because Kazakhstan is in a much better position than most other resource countries. It’s because of its prudent financial management and its savings, its wise fiscal policy, its very wise monetary policy, its commitment to engagement with the world economy and regional leadership,” Yergin said.

He especially noted the role of the National Fund of Kazakhstan. “Oil revenues have been sterilized in the national fund and this demonstrates a great wisdom of Kazakh policy which many countries forgotten that lesson that you need to save for the rainy day. There is almost 70 billion dollars now in the National Fund. In comparison, Nigeria’s National Fund is 4 billion dollars, and the population is 10 times higher. This demonstrates that Kazakhstan is much more insulated to the changes than the other,” Yergin said.

And Kazakhstan’s position is also bolstered by the process of general economic reforms that are now going on, and by a deepening engagement with the world economy. The republic recognizes the need to be more competitive in this new reality. This policy should be also applied to Kazakhstan’s energy sector in order for it to adapt to the demands of the new era.

The Report talks about the energy world getting even more competitive. To protect their positions, the oil companies must cut costs and become more efficient. This will require time, and the leaders of the oil producing countries must recognise that.

Yergin sited six key requirements and provided recommendations for the energy sector of Kazakhstan to be more competitive and to withstand the current challenges: competitive fiscal terms, recognise and share the risk; stability of terms and high cost of continuously changing conditions; speed of decision making and quality of decision making.

One of the great achievements in the modern energy world was the way Qatar became the world’s number one supplier of liquefied natural gas (LNG). And they did it very quickly. The Qatar Minister of Energy said they made decisions quickly and, once they made them, they stuck to them.

The fourth recommendation was to have reasonable local content rules in major energy projects in order to create jobs, to spread the benefits, and to ensure technology transfer. But there has to be a balance so as not to add costs or delays.

The fifth need is an efficient regulatory system, as timeliness is very important for investors.

The sixth recommendation is the need of a vibrant upstream. “You need a vibrant ecosystem,” Yergin said, adding that because of the level of activity, creativity, and the new ideas.

Kazakhstan is dependent on extractive industries. Apart from oil, Kazakhstan is a major coal and uranium producer. As a coal producer, it has advantages of surface mining. “But the message from the Paris conference is rather anti-coal, so it means improving the use of coal, improving the technologies around coal, clearly continuing the renewables deployment. And renewables, natural gas, perhaps, nuclear, can help promote diversification in the power sector in the future,” Yergin said.

He continued on by saying that Kazakhstan’s geography has been seen as a challenge since it became an independent nation. But now increasingly it’s also seen as an opportunity because of its 1,783-kilometre border with China. It means that Kazakhstan can pursue a multi-vector strategy and can become a communication hub, and truly can be seen as a bridge between China and Europe in the new era.

“That era requires careful thought, wise decision making, and quality execution. It requires overall policies approaches that are adapted to the new era,” Yergin said.

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