ENERPO Workshop: Drebentsov, BP’s Chief Economist for Russia and the CIS

by John Collins

Amidst the vortex of uncertainty surrounding world hydro-carbon markets, Mr. Vladimir Drebenstov, the chief economist for BP in Russia and the CIS, arrived last Wednesday at the European University to give a presentation aptly entitled the Changing World of Oil and Gas, and included projections from the latest BP Energy Outlook. The presentation was multi-faceted, addressing many of the existential concerns, which have brought oil and gas suppliers to their knees, not just in Russia, but on a global scale.060416eusp02

As we know, the extreme volatility and eventual collapse of prices since 2014 has been caused by a glut of supply on the international market in conjunction with slower growth in East Asia, still the world’s fastest growing economic region. Yet Mr. Drebenstov added nuance to the simple argument that unconventional production in the US led to the divergence between global supply and demand by examining the actions of traditional oil market shapers, specifically Saudi Arabia, and their role in causing the current crunch. Geo-political developments post US global financial crisis, and especially since 2014, also were given due consideration in the presentation, particularly due to the reality that regional power (and thus energy supply) dynamics in the Middle East are “as capricious as the seasonal flows of the Euphrates”, while Russian relations with the West have deteriorated to levels not seen since the collapse of the USSR.

The over-arching theme to the presentation was to look at recent trends in both oil and gas markets and then to use this information to draw informed conclusions about probable future trajectories in the energy field. As US unconventional production skyrocketed in the first two decades of the XXI century, their import dependency was significantly reduced. By 2015, US net imports were only a third of what they were in 2006 (Figure 1). The corresponding fall in Brent crude price however, had no impact on Saudi production, which remained constant and then increased at the end of 2015/beginning of 2016 (Figure 2). Indeed, OPEC production has significantly increased throughout the second half of 2015/beginning of 2016, led by a resurgent Iraq who will presumably be joined by a defiant Iran in the coming months. Furthermore, Russian production levels are at their highest in a quarter century, largely because small producers have followed their US counterparts in using lower costs and greater flexibility, when compared to the industry giants, to ramp up production. Since the onset of the output freeze agreement with the Saudi’s, Russia’s independent producers, all small market enterprises not party to the deal, have accounted for the vast majority of additional Russian output as the agreement to freeze has faltered from all sides (Figure 3). This confluence of factors has created a perfect storm in which crude prices will struggle to keep their heads over fifty dollars a barrel.


Figure 1: Weekly US net imports of crude oil and petroleum products – Source: BP


Figure 2: Saudi crude output and Brent price – Source: BP


Figure 3: A recent agreement on output freeze – Source: BP

However, it would be doing BP’s chief regional economist a dis-service to speak only of recent trends in international oil markets when discussing his presentation, and certainly too narrow-sighted to not include natural gas in any conversation concerning world energy markets. Regarding gas, BP has made projections about the dramatic increase in the fuel’s role in the international energy mix over the next twenty years, due largely to the dynamic processes associated with technological innovation and new forms of production/supply, as well as growing environmental concerns that see relatively low carbon-emitting natural gas as a viable alternative to coal (Figure 4). Indeed, while trends over the past couple years in the oil markets have had huge ramifications for prices of natural gas, as LNG supply proliferates, allowing for an ever expanding number of producers and the growing relevance of trading hubs and thus spot market pricing, we will see a gradual de-coupling of pricing structures in the two markets (though to what degree remains to be seen).


Figure 4: BP Outlook: Global fuel mix and Annual demand growth by fuel – Source: BP

In the long term, BP remains optimistic, as there is significant potential for economic growth and correspondingly higher levels of energy consumption across much of Eurasia, and even in other Non-OECD countries. BP in particular remains unfazed by US sanctions because of their dearth of involvement in deep water and unconventional projects in Russia. Their rather large stake in Rosneft is perhaps a chink in their armor, due to Rosneft’s somewhat alarming planned capital expenditure policies and investor concerns about whether they will be able to service their debt (especially as the major fields in Western Siberia turn from green to brown). Further problematizing future upstream projects for the oil giants is the fact that SME’s and independent producers have a natural advantage in lower capital expenditures and thus lower abandonment costs. US independent producers also seem to be leading the way in terms of technological innovation, perhaps the most essential competitive advantage in any industry. Still, one has to agree with Mr. Drebenstov that over the long run of BP’s twenty year forecast, market conditions will normalize, and greater access to capital along with the capacity to deploy that capital in the creation of huge upstream, mid-stream, and downstream infrastructure projects, will allow the industries largest players, including BP, to create economies of scale in meeting the demand of China, India, and other developing non-OECD countries.


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