PITTSBURGH—The years 2015 and 2016 could be “years of living dangerously” as the world’s energy business goes through dramatic shifts, investment banker and author Tom Petrie told attendees at Hart Energy’s DUG East conference on June 25.
Multiple political and military trends, coupled with the stunning rise in U.S. crude oil and natural gas production, are occurring at the same time. That makes the worldwide energy industry particularly uneasy now, Petrie said.
There are “shifting geopolitical dynamics” happening, particularly in the Middle East and Asia. Russia and China are creating an uneasy alliance, in part due to the West’s economic embargoes set following Russia’s invasion of Ukraine, Petrie said. China, meanwhile, “is transitioning from an export-driven economy to greater, consumer-driven economy while ensuring a one-party rule—a rather important change.”
Meanwhile, China is asserting greater military power in the Pacific, in particular through its new military base in the South China Sea’s hotly contested Spratly Islands. He reminded the conference attendees that “40% of the world’s oil passes through the Malacca Strait [between Indonesia, Malaysia and Singapore] and China wants a role there.”
In the same part of the world, Iran—a major oil producer—struggles to gain international respectability. India, a major oil importer, has shifted its alliances from Russian ally to the U.S. and Europe, he said.
Meanwhile, the U.S. is scaling down its role in the regions and that means “the Saudis are looking east” rather than west to determine where its crude exports go and how, politically, the kingdom will respond. The same holds true for Kuwait and the United Arab Emirates, both major, and politically stable Mideast oil and gas producers.
“Saudi Arabia is increasingly concerned about its security in all directions—Iran, Syria, ISIS and Yemen,” he added.
Petrie is founder and chairman of Petrie Partners LLC and the former vice chairman of Merrill Lynch. He also wrote the book Following Oil, which traces major cycles in the oil and gas business that have led to a threshold for U.S. energy independence.
Separate from that turmoil in the East, the U.S. has scored “a remarkable achievement, a real credit to our industry” of turning itself from a major oil importer to potentially a major oil exporter in a few years, thanks to the shale plays, Petrie said. He pointed out that China and much of Europe have similar geology to North America’s shale plays. However, this nation’s comparatively free regulatory burden and private ownership of mineral interests created a unique opportunity that will be hard to duplicate elsewhere, he said.
The U.S. currently wants to redefine its superpower role but will change to something different while positioning itself as energy independent. Already, the U.S. has emerged as a major petroleum products exporter and (Cheniere Energy’s) “Sabine plant will start up in a few months, providing an export market for U.S. natural gas,” he told a crowd composed primarily of Marcellus and Utica producers and midstream operators.
“We are right on the verge of exporting Appalachian gas, Eagle Ford gas and eventually Rocky Mountain gas,” he said. Petrie added the domestic oil industry’s “technical ingenuity is astounding” and mentioned North America’s resilience and second-to-none midstream connectivity are strong points.
Saudi Arabia and its stable Mideast neighbors still have an advantage in lower lifting costs, compared to the U.S. shale plays. However, Petrie pointed to “the relative rigidity of these countries” that will make it hard for them to respond to the multiple changes underway in the world’s energy business.
How will these multiple changes work out? That remains to be seen, Petrie concluded. “The markets always work out but they work out at their own pace,” he added. “How they work out may surprise us.”
Contact the author, Paul Hart, at pdhart@hartenergy.com.
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