Oil above $70 ‘must be a positive’ as North Sea investors remain cautious

Professor Alex Kemp
Professor Alex Kemp

Higher crude prices should encourage North Sea oil companies to dial down the caution and bring forward more new projects, a prominent petro-economist said yesterday.

Brent crude, the global benchmark, recently edged above $70 per barrel for the first time since early November and will “stay up in the very near term”, according to Alex Kemp, professor of petroleum economics at Aberdeen University.

Prof Kemp said North Sea projects can be profitable at current prices and that the recent increase “must have a positive effect” on companies’ investment plans.

Thirteen new field approvals were delivered in the region in 2018, more than in the previous three years combined, and similar numbers are expected in 2019, trade body Oil and Gas UK said last month.

But the UK North Sea had to wait until the end of March to get its first final investment decision on the year, when Neptune Energy sanctioned the Seagull project.

Prof Kemp said firms had taken a “cautious view” after being rattled by the drop in crude prices in the fourth quarter of 2018.

US President Donald Trump’s plans to impose sanctions on Iran pushed Brent above $85 at the start of October – its highest level since 2014 – as traders expected a large chunk of production to come off the market.

But Washington granted sanctions waivers to some of Tehran’s biggest customers, sending prices plummeting back towards $50 at the end of December.

An agreement by the Opec cartel and its allies to cut production by 1.2 million barrels per day from the start of January helped rebalance the market.

Brent stayed in the $60-65 range for much of the first quarter of 2019, but has topped $70 in the last few days amid fears that the civil war in Libya will disrupt production from the North African nation, Prof Kemp said.

Continuing unrest in Venezuela has also bolstered prices, while tensions between Iran and the US continue to play a part, as the waivers granted in the fourth quarter of 2018 expire next month.

Prof Kemp said: “North Sea industry will be cash positive at current prices. The big question is − to what extent will there be a bringing forward of field development plans?

“Investment intentions are still a bit subdued. We would hope more might come forward.

“Investors are taking cautious view. They see that oil is up past $70, but are not sure whether it will be maintained because of what happened at the end of last year. But the recent increase must have a positive effect.”

Prof Kemp expects the price to hold steady in the coming weeks, but the outlook for the next two to three months depends on developments in Libya, Venezuela and Iran.

He said President Trump would have to “tread carefully” when the time comes to look again at the Iranian sanctions waivers.

This week, President Trump said he would designate Iran’s Revolutionary Guard a terrorist group in a move to discourage any foreign companies or governments from doing business with Tehran.

And commentators have suggested that the White House could renew some of the waivers, but scrap others, which would further dent supply.

At the same time, President Trump won’t want to be held responsible for any significant increases in petrol prices in the US.

Prof Kemp said: “President Trump will have a problem. Although he is not well disposed to Iran, he’s aware that the price of petrol is a very sensitive item in US politics.

“Whatever he does, he has to take that into account. That may restrain him. When sanctions were initially imposed, their effects were eased by waivers because of fears of a petrol price increase.

“President Trump will be well aware of the situation. He has to make a judgement and tread carefully.”

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