Are you sure?

Oil industry grapples with risk and volatile prices

Oil's steep drop of more than $20 a barrel over three weeks last month, sparked by European debt woes, underscored market volatility from stocks to commodities and the fragile state of global economic recovery.

These concerns, together with questions over how the largest oil spill in US history will affect offshore drilling and future crude supplies, would be the focus of this year's Asia Oil & Gas Conference (AOGC) in Kuala Lumpur next week.

“This year, like last year, the industry is still struggling against a fragile backdrop, and many things are in flux, although there are signs of improving demand and economic growth,” said Victor Shum, an analyst with energy consultancy Purvin & Gertz.

“The new reality is volatile oil prices, a weak global economy, lots of spare refining capacity, and a huge environmental disaster. The question is: How will the industry cope with all this?” he added.

The meeting will be attended by executives from oil majors ExxonMobil, BP, Total, ConocoPhillips and traders such as Vitol. Iraqi Oil Minister Hussain al-Shahristani will deliver a special address at the annual conference.

Last month, Greece's sovereign debt woes and its possible contagion effect on euro zone countries sparked a sell-off in global equity and commodity markets.

Hit by investor jitters, oil tumbled 26 percent to a low of $64.24 in intraday trade on May 20, from a year-high of $87.15 a barrel on May 3. On Friday, US crude for July delivery was down 32 cents at $74.31.

The industry is also grappling with the ramifications of the giant oil spill in the Gulf of Mexico after a well blowout destroyed a BP rig, prompting Washington to crack down on offshore drilling in the deepwater region.

While impact from the US move is likely to be limited for now -- as some companies can keep operating if they meet certain conditions -- future rules could affect output from the Gulf of Mexico that contributes 24% to the nation's oil output.

This comes amid concerns from the International Energy Agency (IEA) that there would not be much of an increase in exploration and development investments in the next five years, despite a 9%-10% rise worldwide in 2010 demand versus last year, which is still 10% below the peak in 2008.

The outlook for oil demand is also far from rosy. The IEA told Reuters last week that global demand growth may not be as strong as expected this year because of the European crisis and its possible wider consequences.

Risk aversion is growing, the world's third-largest independent oil trader Trafigura warned. Its Chief Financial Officer Pierre Lorinet said Europe's debt crisis has sparked an outflow of funds from most assets, adding it would take longer than expected for fuel demand to recover.

The time is ripe for a paradigm shift in the oil industry, said Alex Yap, an analyst with consultancy FACTS Global Energy.

Compared to the period of continued growth in both oil demand and prices from 2003 to 2008, there is now more uncertainty due to weak demand from developed economies and large spare capacity within producer group OPEC, he said.

“We're seeing the landscape shift in both the upstream and downstream sectors, with growth and investment increasingly concentrated in Asia and the Middle East,” Yap said.

“The financial crisis accelerated changes that were already on the cards by about five to 10 years and players are having serious thoughts about where they are going to position themselves in the future.”

Still, some industry players are casting aside the slightly murky prospects and pushing on with expansion plans. Firms and banks are venturing overseas to tap future growth, as well as into alternative energy sources and new products.

Asia, in particular, offers a refuge to firms seeking to emerge from the worst of the 2008 financial meltdown and the current turbulence in Europe.

Critical to expansion ambitions by companies is the ability to secure talent.

Firms like Mercuria and China's Brightoil have been on the prowl for new blood in terms of trading expertise, while national oil companies such as Petronas need technical capability for their upstream ventures, competing with majors with deep pockets. (Reuters)