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Tom Nicholls: A Fine Balance

Resource Nationalism Contains the Seeds of its own Demise By Tom Nicholls The International Energy Agency has good news for Russia and other oil and gas producers. A combination of accelerating non-OECD energy demand over the next few years and modest increases in Opec supply are likely to lead to “increasing market tightness beyond 2010” and even a “supply crunch”. Shortages in the contracting, drilling and labour markets will only tighten supply-side bottlenecks. These factors – supported by the almost inevitable continuation of geopolitical problems in some of the world’s most important oil-producing regions — would suggest that high oil prices are here to stay. (Certainly, few analysts are holding out much hope of a significant short-term easing in oil prices. To the contrary: this month Goldman Sachs went so far as to say that unless Opec loosens the taps, oil could rise as high as $95 a barrel by the end of the year.) Not everyone agrees with the IEA of course. Its old adversary, Opec, rejects the idea that it should increase output and upstream investment to cover future market tightness. It sees the problem as predominantly a downstream one, not a supply-related one – it’s not a shortage of crude that is causing high prices, but a shortage of refining capacity to convert the available crude into usable products. Geopolitical problems and futures-market speculation don’t help when it comes to establishing a stable oil price, the cartel argues. However, it seems likely that, without careful planning, the world’s energy-supply system may eventually be unable to cope with the ever-increasing burden of demand. Taking a longer-term view, a new study by the National Petroleum Council (NPC) forecasts a whopping 50-60% increase in global energy demand by 2030. This, it says, may eventually lead to a supply crisis. Persistently high oil prices (although the dollar’s continuing slide has taken some of the edge of recent rises) coupled with worries about energy-supply security will eventually start to have an impact on oil demand, perhaps resulting in slower growth than forecast and leading to a more modest outlook for energy prices in general. Among the measures recommended by the NPC to avert a supply crisis is to spend more upstream. But it also – in a significant departure for an oil and gas industry body whose members have traditionally tended to focus resolutely on oil – says consuming governments should encourage greater energy efficiency, and greater use of alternative energy, such as biofuels, nuclear, renewables and clean coal. Resource nationalism The present phenomenon of resource nationalism – in which producing countries emboldened by high oil prices are reducing access to oil and gas resources to the companies best equipped to develop them – is partly responsible for this change in attitude. However, it contains the seeds of its own downfall because it is one of the reasons behind high oil prices and is tends to encourage more rapid energy diversification. Resource nationalism in Russia – as radical a brand of it as has appeared in any big oil nation in recent years – is proving a success at the moment. Shell and BP have both had prime assets effortlessly wrestled away from them, rolling over with barely a whimper (in fact, sometimes with excruciating obsequiousness). France’s Total, against its better judgment, seems prepared to accept what appears to be the role of glorified services provider to Gazprom at Shtokman. (It will be interesting to see how ExxonMobil, which is likely to be Russia’s next high-profile victim, reacts to Gazprom’s pursuit of control of Sakhalin-1: the US company, backed by Washington, may prove a tougher adversary. But it is Gazprom – co-ordinator of Russia’s gas exports and chief agent of the Kremlin in its nationalization of energy resources – which has the upper hand.) But the long-term success of this type of strategy depends on market dynamics continuing to favour the producer. That seems likely at the moment, but it is not a foregone conclusion.