In the final months of 2009, the industry began to approach stabilization post the February lows in both commodity prices and equity markets. This follows a fall of more than 70% peak to trough in liquid crude benchmark pricing.

Looking up

Various upbeat announcements from central bankers lead to the contemplation that the world economy, albeit at slightly different stages, is indeed in the first stages of a recovery. This view was reflected in comments by world leaders and policy-makers at the G-20 summit in Pittsburgh in September and at the annual meeting of the International Monetary Fund/World Bank in Istanbul in October. The G-20 meeting of finance ministers in early November went some way to pledge to maintain stimulus measures in place until at least 2Q 2010, sending most markets to new yearly highs.

Year-to-date change in WTI spot price

Real economy indicators like manufacturing and housing also have improved in Western Europe and North America, while consumer and business confidence have partly recovered from earlier lows.

Data for the second and third quarters indicate that GDP in the developing world reached bottom in 2Q 2009 with positive growth expected throughout this quarter and into 2010. Oil prices have reflected a lot of positive sentiment, increasing 24% in the past three months even as US fuel stockpiles have climbed and record levels of product in floating storage have been seen.

An exciting cocktail of quantitative easing and stimulus measures, on the other hand, has wreacked havoc with the US dollar against a basket of currencies. Any commodity price gains therefore must be considered in this light.

Prices rally

So far, the strategy of storing product in floating facilities has been successful.

2008 – 2009 dollar/euro spot price

The rally in asset prices mixed with a falling US dollar against other currencies has encouraged investors to buy commodities, thus more than adequately paying for the storage costs and still providing a respectable profit. Most worrying, however, has been the double-edged sword of record unemployment (10.2%) and the accumulation of record amounts of middle distillates (mainly diesel in the US). This is used primarily as fuel in trucks, locomotives, and construction equipment, and it functions as an important gauge of the US economy. It is Infield’s view that although the worst of the global recession is likely past, there are clear stumbling blocks in the developed nations of North America and Western Europe, which remain the largest consumers of oil and gas.

Cost indices for the offshore oil and gas industry coattail steel prices, which represent close to 80% of construction costs for most production and pipeline projects. Since their peak in July 2008, benchmark prices have come down nearly 40% in total. This has given some operators breathing space and negotiating room but, nearly as crucial, also delayed decision-making due to renewed negotiation and waiting for more favorable terms.

2008-2009 benchmark steel price

In addition, perception on cost inflation is that it is less of an issue to investment criteria, which has traditionally been more closely related to oil price expectations and access to finance facilities. The most notable casualties of negative cash flows and inability to refinance loans have been North Sea operator Oilexco and speculative contractors Petroprod and FPSOcean.

The year ahead

Looking forward to next year Infield expects production to begin at the Marlim Sul P56 platform in the Campos basin and more development of the on/off Karan Deep Gas project in the Middle East. Much of Karan’s production is expected to be re-injected into Saudi Arabia’s giant onshore fields such as Ghawar to enhance recovery. Final investment decisions for more projects will likely come into fruition next year after price volatility and general indecision directly linked to the financial crisis blighted decision-making in the tail end of 2008 and most of 2009.

Most of the integrated oil companies have used this as an opportunity to renegotiate agreements made at the height of three-digit oil prices. Among the headline projects likely will be Chevron’s announcement of its final investment decision in regard to the development of the Lower Tertiary project hub Jack and St Malo projects. In Europe, Eni is expected to make its intentions clear concerning the go-ahead of the Goliat project in the Barents Sea after the award of the floating production contract to Sevan Marine earlier this year for the company’s arctic concept. Construction is scheduled to begin next year, with production expected in 2013.

West African transform zone

Outside of Angola and Nigeria, the West Africa powerhouses, Infield expects production to start in the later stages of 2010 in the Jubilee field in Ghana, which was discovered in 2007. This, in combination with a series of promising finds more than the last two years, opens up a new chapter in the region with a promising basin running more than 621 miles (1,000 km) in length from Sierra Leone to Ghana, including the Ivory Coast.

This play contains as much as 2 Bbbl of recoverable oil and gas. More specifically, the West African transform margin and the area between the St. Paul fault zone and the Romanche fault zone, which formed during the separation of the African and South American tectonic plates between 70 and 140 million years ago, looks very promising. Prospective developments include Tullow’s Tweneboa field, Vitol’s Sankofa field discovered this year, and Anadarko’s Venus discovery further north in Sierra Leone. These developments are viewed in such a positive light that there have been strong rumors of an ExxonMobil US $4 billion attempt to buy Kosmos Energy’s stake in the Jubilee field from private equity partners Blackstone together with Warburg Pincus. In addition to the Jubilee East field, another three Afren-operated fields in Ivory Coast could come onstream next year or soon after.

Meanwhile, the industry waits to see if ExxonMobil will make a public bid, if there will be a possible counter bid by BP, or if CNOOC of China will show up to spoil Exxon and BP’s party.

Infield views any such speculation of buyouts with positivity, with 2009 marking the absolute bottom to an unforgiving rollercoaster ride. Many market participants were thrown into the air with unrelenting force and were not fortunate enough to land on their feet. Those that have managed to hang on are now better placed than before, and with the momentum of both improved sentiment and underlying commodity prices behind them are ideally placed to take advantage of the next round of spoils of a new “Golden Age” of oil and gas production which will last well into the next decade.