The Oil Crisis

Quid prodest?

Who benefits from the drop in the oil price? How fragile is the balance between extraction and consumption? Why is America forcing OPEC countries exports? Why sell offshore oil platforms, specifically built and highly technological, with the capacity to extract oil at great depths? Where does the oil extracted and loaded into high capacity tankers go to? How do owners of large oil fleets make unexpected gains from this crisis? These are just a few of the questions that are raised in the current context. Beyond the seriousness of the situation created globally by the decline in oil prices, personally, I make an exercise of imagination and try to answer another question: is there a way out of this “global Maze”? Perhaps the world economy has been nothing more than a giant, now isolated in an unsafe area, on quicksand.

After a lifetime career in the maritime area – having ordered all types of tankers in the world, being a specialist in tanks of high capacity, VLCC Class (Very Large Crude Carrier) and maritime security – including emergency situations and crisis management – during which I have had the privilege to work with some of the largest ship-owners in the world and work for prestigious companies in the oil sector as BP, Shell, Chevron, China Oil, Stena and so on, I can name myself a true technocrat in the field. From this position I will try to answer to the request of Q Magazine.

Who benefits from the drop in oil price?

With a simple search on open sources, you will find different answers depending on the actors involved – stock exchange, big oil companies, oil exporting countries, major companies and the alternative energy sector, the oil processing industry – although the low price is not found at the average consumer, at the petrol pump.

Importing countries – I have read the other day that the government in Madrid has declared Spain as one of the big winners of the oil crisis, even though it is not an oil producing country. It seems that this situation is convenient for everyone, except the big players in the market: Russia, humiliated economically and with massive losses, being unable to export its own oil; America, that is desperately trying to export as much as possible of its own production, which is another method of world domination; China, with a massive decline in the economy, with stock exchanges in freefall and whose consumption is not keeping pace with imports. Let’s not forget OPEC countries, which have reached a deadlock generated by Saudi Arabia’s decision to maintain a high extraction level – and therefore the low price per barrel – although, according to the Energy Information Administration US (EIA), the revenue of member countries has fallen by nearly half, from 730 billion dollars in 2014 to just 380 billion per year in 2015. Therefore, we have a “lose – lose” situation, no one wins.

How fragile is the balance between extraction and consumption?

In this case, interests are divided. There are a multitude of institutes and experts aimed precisely to make predictions in the oil industry, however, as in politics, it depends on whom they listen to and whose interests they represent. Beyond the controversy, it seems that the threshold of 75 dollars/barrel is the price that satisfies both sides. Above this level, the economy suffers, under it, the oil industry is hit. Behind both sides, there are major institutions and financial funds, which complain that they will not be able to support this mechanism.

One thing is certain: Current oil is expensive, including all parts and configurations in which we find it: maritime, arctic, shale.

Why is America forcing OPEC countries exports?

In 1975, the US Congress demanded President Gerald Ford to ban the oil export, justifying the request with the argument that oil is a commodity related to national interest. Years after, there have been a few exceptions, for Canada and Mexico.

The situation has radically changed after 2008, when the production has increased drastically, especially as a result of extracting shale gas through hydraulic fracturing. Sources in the oil extraction industry give large figures – nine million barrels per day at the end of 2015, placing America over Russia and beyond Saudi Arabia. On the other hand, America still imports 7 million barrels per day.

The US strategy is to flood the adjacent markets with oil from its own sources (Canada, Mexico, the Caribbean, Latin America) thus eliminating the Arab oil in these markets. This is nothing but a new way for America to maintain world leadership.

Oil, in the terms of a commodity, is atypical. It is not perfectly fungible – it cannot be replaced by other oil – depending on its origin, it comes in various degrees differentiated by density and sulphur content. Handling it on pipes and tanks can create blockages. (America has one of the best natural oil sorting systems, large caves; where large quantities are stored – up to 100 million barrels – settling between densities is done naturally, by gravity). The serious problem is the refining, the majority of the refining capacity being built as to process heavy oil from the Middle East, so it requires an upgrade in technology for US oil, which is lightweight – light shale oil shale.

Why sell offshore oil platforms, specifically built and highly technological, with the capacity to extract oil at great depths?

A recent article on Bloomberg tells us that many investment funds are interested in buying offshore oil extraction platforms at minimum prices, to preserve them and then resell or rent them after the crisis. Owners are forced to sell their platforms with big discounts, hoping to cover debts to banks and investors. Although they are considered major investments, the price of such platforms reaching values ​​between 1 and 2 billion dollars – depending on the complexity and technological equipment – it is very difficult to quote a current sale price. The low price is dictated by the fact that approximately one third of these platforms are, at this time, without employment or rental contracts, thus being unprofitable. Daily rental rate of such platforms has gone down to $ 250 000 per day from a minimum of $ 650 000 per day, according to experts. The risk is that the low price of platforms will remain at this level for a long time, making them not very profitable investments on the short and medium term.

Another problem is that these funds are not specialized in exploiting such platforms and they will need experienced operators to preserve and restore them to service. It is interesting to find out who is behind these investment funds and for what purposes.

Could this be the swan song of offshore oil exploitation?

Where does the oil extracted and loaded into high capacity tankers go to?

If we make a brief passage through the daily reality of oil exploitation – according to EIA – we will find 93.097 million barrels per day which are being extracted. The data on regional extractions is very interesting because it tells us about the global movement of oil. To give some numbers: North America (USA, Canada, Mexico, the Caribbean) – 21 million barrels/day; Europe – 3.8 million barrels/day; Eurasia – 14 million barrels/day; the Middle East – 27.8 million barrels/day; Africa – 8.7 million barrels/day.

Over 95% of the extracted oil is transported by sea, with large capacity tankers in the VLCC class. Large oil tankers are loading in the Persian Gulf and West Africa – to name only two oil-exporting areas –and moving towards traditional destinations, to large consumers: China, India, Europe, and America. Below, you can see the current situation of vessels transiting the Persian Gulf.

Source: maritimetraffic.com                                                              * Oil tankers are flaged with red

20 super tankers are waiting to load at Basra – Iraq. In total, there are over 50 super tanks waiting to load the Persian Gulf.

In the Gulf of Mexico, in Houston, 41 high capacity tanks are waiting to unload, other seven tankers in Aframax class, with 700 000 barrels aboard each, are at anchor in the port of Rotterdam. Another 15 million barrels of West African origin are waiting for buyers, the merchandise being loaded on board of tankers. In China there are ships waiting to unload since August.

EIA gives the figure of 3 billion barrels of oil stored in land capacities or aboard of high capacity tankers. At a glance on these figures, we understand how great the pressure on the cargo owners or storage capacity is. If the stock merchandise cannot be sold, you cannot buy another, at these current low prices. The market offer is great, but how else can they sell at minimum prices, very low profit margins, sometimes even at a loss.

How do owners of large oil fleets make unexpected gains from this crisis?

Long storage on high capacity tankers subsequently leads to additional costs for each day waiting to download. On the other hand, ship owners are in high demand, and, as a result, ships are rented at high prices.

A supertanker capable of carrying 2 million barrels per day has come to win over $ 70 000, the highest level since 2008 until now. In October, there have been gains of over $ 100 000 per day. Any delay to contractual conditions means additional costs for those who have rented super tanks, leading, in extreme circumstances, to doubling the daily amount.

It is clear that we are witnessing a global redistribution of world power. In this game, the oil is used either as a means of pressure or as a geopolitical weapon in the new Cold War or simply as currency.

What does the future offer? What will happen to oil as a resource, in a forthcoming article…

Mihnea Dan is a Master Mariner and an Expert in Maritime Security.