Royal Dutch Shell Group .com The new oil boom: “The benchmark price of crude oil hit more than $US50 a barrel for the first time last week as surging demand met rising anxiety over security of supply. This is bad for consumers, but oil companies are making hay while the sun shines.” (


03 October 2004 



The benchmark price of crude oil hit more than $US50 a barrel for the first time last week as surging demand met rising anxiety over security of supply. This is bad for consumers, but oil companies are making hay while the sun shines.


"Right now everybody's making money out of this", said David Ernsberger, the Singapore-based editorial director of oil market information specialist Platts. "There's not a single part of the supply chain not making money."


Oil company share prices reveal the bonanza. This year, BP shares are up 28 per cent from their 2004 low in February; Shell shares are up 17%. Exxon Mobil is up 20 per cent since January, Chevron Texaco up more than 30 per cent. Closer to home, Santos and Woodside in Australia are up more than 20 per cent, Caltex Australia is up 28 per cent in the last six months. Some smaller, more focused oil companies have done even better. Scotland-based Cairn Energy, which has production assets in India and Bangladesh, has seen its shares gain more than 300 per cent this year.


Ernsberger said the wealth was increasingly in evidence at oil industry gatherings around the world. "We are seeing more money than ever. They are spending on expensive parties, gifts for customers, they're talking about buying each other out. They're flush with cash."


There are two distinct factors helping oil companies - the crude oil price, which boosts returns from production; and the refining margin, which boosts returns from refining.


The oil price is driven by complex forces outside the control of oil companies - even of oil production cartel OPEC, the Organisation of Petroleum Exporting Countries.


Much of the world's oil is produced in politically unstable regions and production outages of two million barrels a day are historically not unusual. Two years ago there was a supply cushion of 3-5 million barrels a day, allowing shocks to be absorbed. The world no longer had that luxury, said Kurt Barrow, principal at energy consultancy Pervin & Gertz. "Late last year, early this year, we've had surprisingly robust demand from China, the United States, India, which has shrunk that supply cushion back to 1-1.5 million barrels a day.


So now when we have an outage like unrest in Nigeria - if that production was to fall we'd have a supply and demand imbalance."


Nigeria became a flashpoint just over a week ago when a rebel group in the country's main oil production area threatened "all-out war" if oil companies did not cease production. Shell, the main producer in the country, withdrew 200 workers because of the tension. A truce was agreed late last week, but the crisis had its effect on the highly strung oil market, pushing the crude price to $US50.47.


This is nominally the highest price ever, but it's well below the prices reached after the revolution in Iran in 1979. Then, oil topped $US80 a barrel in today's terms.


Oil production in New Zealand is small by world standards - crude oil output in the year to March was about 8 million barrels, but the high oil price is still good news for local producers and explorers such as Todd Energy, NZ Oil & Gas, Austral Pacific and Greymouth Petroleum.


The interest of the major oil companies in New Zealand is mainly in NZ Refining, the oil refinery at Marsden Point near Whangarei majority owned by Shell, BP, Mobil and Caltex. There, as overseas, the refining business has been enjoying its highest margins for years.


NZ Refining produces about 70 per cent of New Zealand's petrol and more than 80 per cent of our diesel. Both products - derived from crude imported from the Middle East, Asia and Australia - are commodities whose prices are set in international markets. For the Marsden Point operation, this means its profit per barrel of petrol or diesel is determined by the market price for refined products at the Singapore exchange, plus an allowance for shipping costs.


The good news for its shareholders is that margins at the start of the year hit more than $US6 a barrel, compared to an average $US3.24 last year and $US1.97 in 2002. Margins have remained high through the year and were visible in the company's interim result - a net profit of $34.3 million for the six months to June 30, up from $14.1m last year.


Refinery economist Peter van Cingel, with an economist's understatement, said "it's certainly a good time for us".


Oil consultant Barrow said the good conditions for refiners were not linked to the high crude price. "It's due to high demand and a lack of investment in refining." The high margins - $US2-$US3 higher than in 2002 - would help spur refinery expansion and ultimately ease the price pressure, he said.


Maybe not, said van Cingel. "It's unlikely any new refineries are going to be built," he said. They are too expensive and the risk is too great. What's more, much of the expansion of existing facilities has already been done.


Potential investors have a tricky decision, he said. "The fact that prices are sky high now is likely to affect economic growth, so demand reduces and the price reduces. It's all a very wobbly balancing act."


The upshot is that the refining margin may not ease for some time, giving Marsden Point a healthy period of cash flow.


The future for crude prices is much harder to predict. Kevin Hughes, principal of HEH Australia Petroleum Consulting, said some were predicting oil could go to $US60 per barrel. "My judgement is pricing will come back, not to early 2002 levels, but to the mid-30s per barrel."


Ernsberger said people had been talking about the market coming down for some months "and it's just not happening". Although more production was likely to come on stream next year, there was a problem of quality, as well as quantity.


"The issue is the world is running out of light sweet crude. All the new crude coming to market out of the Middle East is heavy sour crude." The latter produces less petrol from refining.


Barrow said: "We'll see high prices above $US40 through this year, but the supply cushion will build and we'll see prices back within the Opec price band at $US30-$US35." But there is a risk.


"That's assuming there's no escalation of the terror situation.",2106,3052865a13,00.html

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