Studies show… Oil prices could peak from 2020
Natural Resources Minister,Raphael Trotman
Natural Resources Minister,Raphael Trotman

-even as cheaper ‘green energy’ threatens fossil fuel demand

 

EVEN as cheaper renewable energy threatens the demand for oil, studies indicate that prices for the latter could peak from 2020 – the year Guyana is expected to start oil production.

Two reports with these findings are the International Energy Agency’s (IEA) 2016 World Energy Outlook (WEO) and a report titled ‘Expect the unexpected: The disruptive power of low carbon technology’. The latter was done by researchers at the Grantham Institute – Climate Change and the Environment at Imperial College London, and independent think-tank of the Carbon Tracker Initiative.

Two of the scenarios discussed in the IEA report were the Current Policies Scenario (CPS), which depicts a path for the global energy system based on policies or measures in places as of mid-2016; and the New Policies Scenario (NPS), which assumes that government pledges, such as those made in response to the Paris Agreement on climate change, will be reflected in legislation.

Under the CPS in the report, even without an oil price shock, the global price of crude oil is projected to rise to US$82 per barrel (bbl) by 2020, US$127/bbl by 2030, and US$146/bbl by 2040.

However, the NPS assumes that policies will cause global oil demand to be lower than in the CPS. Under this scenario, oil prices are projected to rise to US$79/bbl by 2020, US$111/bbl by 2030, and US$124/bbl by 2040. The NPS also forecasts that oil prices could rise as high as 75 per cent from current levels over the next three years.

According to live world market charts in the United Kingdom (UK), oil is currently being traded at US$47 per barrel. ExxonMobil – the company currently drilling for oil in Guyana – has announced the discovery of reserves which could contain between 0.8 to 1.4 billion barrels of oil. The company has so far drilled five wells and is currently completing work on a sixth. Only one has come up dry. A total of 17 wells are expected to be drilled.

The oil firm’s country manager, Jeff Simon has disclosed that the company will be investing US$5B in preparation for production. To date US$800M has been invested by ExxonMobil in exploring the Stabroek Block offshore Guyana – the area currently being drilled.

Since the discovery of these oil reserves, the US-Based company has assured that Guyana could start producing 100,000 barrels of “good quality” oil per day, from as early as 2020. Under the Production Sharing Agreement (PSA) signed between the government and ExxonMobil, Guyana will be entitled to 50 per cent of the proceeds from whatever resources are extracted.

With these developments, Minister of Natural Resource, Raphael Trotman had said that calculating 800 million barrels of oil at a then cost of US$50 per barrel should give Guyanese an idea of how much money the country stands to make.

Environmental Economist, Thomas Singh

Assuming a minimum of 800 million barrels of oil are produced at a rate of US$50 as the Minister indicated, it means that US$40 billion will be generated from this production. Should ExxonMobil benefit from a cost recovery of US$5B (the amount the company intends to invest by 2020) and the remainder divided 50/50 (between Guyana and the company), it means that Guyana could receive US$17.5B (GYD$3.5 trillion) in oil revenues. Using the current policies scenario’s projected market price of US$82/bbl, it means that Guyana could receive US$30.3B (GYD$6 trillion) in oil revenues from 800 million barrels of oil; or US$21.1B (GYD$5.8 trillion) if the new policies scenario estimates are used. Exchange rates for USD to GYD were calculated at 1-200, though it is likely to fluctuate based on market forces.

According to the World Bank, Guyana has a Gross Domestic Product (GDP) of US$3.1B, which is a smaller amount than what could be generated from oil, even if prices collapse. Last year, the country had its status elevated from a lower middle-income to an upper middle-income country.

The agriculture sector has largely been responsible for propelling economic growth in Guyana. At a time when difficulties are being experienced in this sector, record figures are being recorded for gold production.

And with a new revenue stream expected by 2020, President David Granger has said though that some of the proceeds generated from oil will go into a Sovereign Wealth Fund (SWF) with the surpluses being used to develop the country’s education system.

A SWF consists of pools of money derived from a country’s reserves, set aside for investment purposes to benefit the country’s economy and citizens.

A National Sovereign Wealth Fund Bill has been drafted and according to Minister Trotman, that law will ensure that the fund is transparent, independent and inviolable in managing oil revenues for long-term national development.

But Guyana must be cautious and wise in how it handles this natural resource. It is for this reason, the government appointed Dr. Jan Mangal, an expert in offshore and civil engineering, as the country’s petroleum advisor in the Ministry of the Presidency.

Meanwhile, the Grantham Institute-lead study warns that the power and road transport sectors account for approximately half of fossil fuel consumption in the world, therefore growth in these two sectors could have a major impact on the global demand for oil.

Highlighted in the study is that the growth in electric vehicles (EVs) alone could lead to two million barrels of oil per day (mbd) being displaced by 2025 – the same volume that caused a major oil price collapse in 2014-15. Further, it finds 16mbd of oil demand displaced by 2040 and 25mbd by 2050.

The study also suggests that fossil fuels may lose 10 per cent of market share to solar panels and EVs within a single decade. In the past, a similar 10 per cent loss of power market share caused the collapse of the United States (US) coal mining industry.

However, the emergence and growth of solar technology does not pose an immediate threat to the oil and gas sector, says Environmental Economist, Dr. Thomas Singh.

“It doesn’t pose a threat in the near future. It is relatively new technology” he shared with this newspaper.

Dr. Singh, who is also a lecturer at the University of Guyana (UG), explained that it is difficult to make a pronouncement on the impacts of such technology on the global demand for oil since market forces are sometimes extremely difficult to predict.

He was keen to note though that: “We entered into an agreement [with ExxonMobil] at a time when market fundamentals and prices are weak,” adding that if prices rise, Guyana will enjoy higher royalties.
On the other hand, the 2016 World Energy Outlook explains that proponents, who argue that solar technology will put an end to the demand for crude oil, ignore data from countries that have rapidly increased EV penetration. According to statistics from Forbes Magazine, the growth of EVs has not reduced the demand for oil in many countries, including Norway which has the largest fleet of plug-in EVs per capita in the world.

Statistics indicate that Norway’s growth rate for EVs has been averaging 110 per cent for the last seven years. In 2008, that country recorded 567 new EV sales. Oil demand that year was 228,000 barrels per day (bpd). In 2015, Norway reported 39,632 new EV sales, while oil demand for that year was 234,000 bpd – 6,000 more bpd when compared to 2008.

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