Oil and Gas at Mercy of 2010

Delayed projects, the race to claim Iraq's oil reserves and the challenge of drilling Brazil's giant pre-salt reserves have all set the scene for an interesting year ahead. Demand for oil across the world is declining and if the recession deepens this year, as some onlookers believe it could, the entire oil and gas industry could face a tough 2010.

The effects of the global economic downturn in real terms can be seen from the high number of lagging and stalled projects around the world, many of which are suffering from a lack of capital. Projects have been delayed because oil price has halved, while development costs have risen sharply, according to many analysts. Delayed projects include many Canadian oil sands and others in Brazil, Norway and Saudi Arabia.

Africa's answer

As many big producing nations, including Norway and Saudi Arabia, suffer from delayed projects, the production outlook for Africa remains more positive as the continent rapidly gains importance as an oil producing region.

The sustained high oil price in recent years has highlighted the continent's potential as a supplier of oil.

According to a report by the United Nations Conference on Trade and Development (UNCTAD), Africa has become the focus of attention for major oil importing countries, most notably China. This assessment was followed by the news at the start of this year that three of Uganda's oil discoveries have the potential to produce 100,000 barrels per day for the next 25 years, according to the country's energy ministry.

The east African country has so far discovered deposits of about two billion barrels of crude, of which it is believed about 600 million barrels can be recovered. UK-based Tullow Oil said it plans to start production next year with a targeted Ugandan output of between 5,000 and 10,000 barrels per day by 2012, rising to 150,000 barrels a day within five years.

In the past few years there have been frequent attacks by rebels on pipelines in the Niger Delta, affecting majors such as Chevron and Shell operating in the African nation. Nevertheless, Nigeria is still an important country to watch this year due to the high number of current and potential projects there.

To ensure its success however, Nigeria will have to watch that political strife does not hamper progress, as has happened over the past few years.

All eyes on Iraqi oil

An important focus for oil and gas producers this year will undoubtedly be Iraq. Following the country's last bidding round in December, the hope was that oil production in the country will be raised to 13 million barrels per day from the current 2.5 million. At the bidding round a consortium led by Russian private oil giant Lukoil, together with Statoil, signed a deal with Iraq to develop one of the country's biggest oilfields, West Qurna Phase 2.

While Iraq might hold great hope for securing future energy supplies, independent oil analyst Richard Miller says no production will take place soon. "The recent auctions require the oil companies to raise Iraq's output from 2.5 million barrels per day to as much as 12 million barrels per day, but this is expected to take a decade, during which the world will have lost three times as much in production from current fields," he said.

The unsettled political situation may also cause further disruption to future production, particularly as the country struggles to conquer ethnic divisions.

Brazil's oil bonanza

With its vast pre-salt reserves Brazil is on track to become one of the top ten largest crude producers in the world. Global oil companies are keen to exploit the giant Tupi field, discovered in 2007 and estimated to hold more than 50 billion barrels of oil.

In November 2009 Brazilian Mining and Energy Minister Edison Lobao announced that his country could start producing oil from its vast offshore crude reserves in five to six years, which would put it ahead of Iraq if current estimates hold true. President Luiz Inacio Lula da Silva also announced he is trying to boost state control over the massive subsalt oil deposits that could turn Brazil into a major energy exporter.

Legislation governing the exploitation of oil fields is expected to pass through the Brazilian congress in the first part of this year.

2010 overview

OPEC has put a hold on current oil production levels, which are expected to remain stable and unchanged for the time being, in a bid to support oil prices. But OPEC member countries say they will remain on high alert through 2010, ready to respond to any developments that could place oil market stability in jeopardy.

The US Energy Industry Administration (EIA) said expectations of a continued global economic turnaround have buttressed oil markets. The EIA's expectation is that OPEC crude oil output in 2010 will hold at roughly fourth-quarter 2009 levels of under 30 million barrels per day.

Non-OPEC oil production increases in recent times have been largely the result of higher production from the US, Brazil, and the Former Soviet Union (FSU), with production in Columbia surprisingly strong, according to the EIA. In a statement following OPEC's 155th Extraordinary Meeting in December last year, conference members raised concerns over global contraction following the recession.

In a summary of the conference findings OPEC members highlighted the fact that for the first time since the early 1980s, world oil demand has declined for the second successive year.

"Although asset market prices have rebounded and economic growth has resumed in some parts of the world, it is not clear how strong or durable the recovery might be," OPEC said in a statement following the meeting.

While OPEC members remain cautious but optimistic, Richard Miller is certain the outcome will not be positive. According to his analysis global economies are likely to stall and oil prices will stay at the low end of the range. In a grim assessment he said: "I don’t think genuine recovery scenarios are likely for 2010 or 2011 either."

This means future supply growth will be very limited. "It may become clear as soon as next year that the world has climbed onto the oil plateau. In this new world there is no peak from which oil production continuously declines, it's a place where the increasing urgency to get new supplies on line only results in general maintenance of past supply rates," he said.

It remains to be seen whether his assessment is accurate but what is clear is that oil and gas producers are now at the mercy of economic and political events as they strive to get projects back online to meet rising global energy demand.