By Our Reporter
Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes or drive their cars.
From 2010 until mid-2014, world oil prices had been fairly stable, at around US$110 a barrel. But since June 2014, prices have more than halved. As of Jan 26, Brent Crude had dipped below US$50 a barrel for the first time since May 2009 and US crude is down to below US$48 a barrel.
The reasons for this change are twofold – weak demand in many countries due to insipid economic growth, coupled with surging US production.
Additionally, oil cartel Opec (Organization of Petroleum Exporting Countries) is determined not to cut production as a way to prop up prices.
While reports indicate that prices may recover in two to three years time, they also argue that the future of oil remains grim given the growing switch away from oil to other more efficient fuels.
Additionally, there are growing concerns about carbon emissions emanating from use of oil and its related products.
This means, going forward, countries are more likely to increasingly shift to other energy alternatives than oil. Already, hybrid/electric and solar powered cars are being manufactured, a development that is likely to cut demand for oil in the next 10-20 years given the fact that a bigger percentage of oil and fuels are used by motorists.
For example, 70% of all oil consumed in the US is used for transportation.
The US transportation sector consumes about 220 billion gallons of liquid hydrocarbon fuel per year and has approximately 250 million personal vehicles, which amounts to about 25% of all personal vehicles in the world. The US consumes 14 million barrels per day for transportation.
The US is now mulling plans of replacing gasoline with non-petroleum American made fuels to completely eliminate dependence on OPEC oil—and set an example for the world to follow.
Despite new oil discoveries across the globe, experts argue that the world’s biggest source of future energy production will come from technology that improves efficiency-not oil and gas.
Energy-efficiency technology will save 500 quadrillion British thermal units over the next three decades, Exxon analyst Ted Pirog said last year, as reported by the Dallas Business Journal.
“That’s the amount of energy that the world uses today. Our greatest source of energy in the future is our ability to use it more efficiently,” Pirog said.
Pirog was presenting a summary of Exxon’s outlook for energy worldwide through 2040 in Irving, Texas.
World population will grow by 2 billion people during that time, and people increasingly live in cities and work in industries demanding more and more energy, Pirog projected.
Global energy consumption will increase by 35 percent by 2040 with the help of energy-efficiency gains, Pirog said, adding that demand would rise much more without new technology.
Pirog also said natural gas will surpass coal as the nation’s No. 1 power-generation fuel due to advances in hydraulic fracturing, commonly called fracking that has unleashed a production boom in several North American regions. The world contains a 200-year supply of natural gas, according to Pirog.
Exxon’s report mirrors reports from the International Energy Agency (IEA).
According to the agency’s report from last fall measuring data from 2005 to 2010, energy-efficiency measures saved the equivalent of US$420 billion worth of oil across 11 IEA member countries.
IEA also estimates that worldwide energy demand will increase by one-third by 2035, with the share of fossil fuels meeting that demand falling from 82 percent in 2010 to 76 percent in 2035.
Uganda’s oil sector to slow down
The falling crude oil prices and the prevailing circumstances, analysts say is not only likely to lower the value of Uganda’s crude oil but also slowdown investments in the sector.
Uganda boasts of proven reserves of 6.5 billion barrels, of which about 2 billion are recoverable if the most efficient methods are employed.
While the country’s first oil is anticipated in 2018, a partner for the development of an oil refinery that was expected to be announced last year is yet to be appointed.
Additionally, Uganda has to attract an investor to construct a 1,325 km crude export pipeline estimated to cost US$4-5bn connecting Uganda to the Kenyan coast.
Uganda will also have to construct an airport in Hoima to deliver equipment for oil production. The construction works of the US$200m airport are expected to kickoff mid this year, according to Civil Aviation Authority.
Razia Khan, Head, Africa Macro at Standard Chartered Bank says while Uganda will benefit from a lower import bill as a result of the falling oil prices, some oil exploration projects may be deferred.
“Weaker oil prices will have a mixed impact on Uganda. In the very near term, Uganda should benefit from a lower import bill. The pass-through into inflation of a weaker Uganda Shilling will also be muted as a result of weaker oil prices,” Khan said in her 2015 economic outlook for Uganda.
“However, with Uganda developing its own oil reserves, the country is also likely to experience the negative effects of a weaker oil price environment.”
She added: “A 2007 moratorium on the licensing of new oil exploration firms was to be lifted, with Uganda hoping to benefit from the issuance of new licenses. Amid a weaker oil price environment, however, interest is likely to be more subdued.”
She notes that share prices of exploration companies have fallen significantly as oil prices have weakened, adding that many will now find themselves in a more difficult funding environment.
“Some existing exploration will continue – especially where resources and equipment have been pre-committed. But overall, exploration budgets are likely to be cut. Economies such as Uganda, which had been hoping for a more substantial boost to revenue from exploration activity, but where actual progress towards oil production has been relatively slow, may now face some revenue disappointment,” she explains.
She however expects Uganda to be on track for the production of first oil around 2018 (following the discovery of oil around 2006).
Uganda Investment Authority (UIA) boss Eng. Frank Sebbowa is also uncertain about Uganda’s oil sector as a result of falling oil prices.
“There are a few things that are worrying us like the falling price of oil and gas at the international market. This could see a slowdown in the investment in this sector,” Sebbowa is quoted as saying in local media.
He revealed that last year, Uganda attracted several investors interested in mineral exploration due to the “huge mineral wealth in the country.”
Ministry of Energy’s Take
Nonetheless, Energy Minister, Irene Muloni says falling oil prices will not affect government programmes towards oil.
“We are proceeding with the programme regardless of the price movements because whichever way the price goes, we have to get the oil out of the ground,” Energy Minister Irene Muloni is quoted as saying in the East African newspaper.
She adds: “What this means is that the operational costs that go into harnessing the resource have to come down, so efficiency will be paramount in whatever we do.”
Further, Ernest Rubondo, the Commissioner for the Petroleum Exploration and Production Department in Ministry of Energy says international oil prices are generally volatile and low oil prices may affect the development of oil and gas fields whose economics are marginal but it was too early to predict the impact of the current low prices on Uganda’s oil fields.
“It is however still too early to tell how low the prices will drop this time round or how long this reduction will last. Predicting the impact of this price drop on Uganda’s oil and gas sector is therefore premature especially as the appraisal of the discoveries in Uganda has just been concluded,” Rubondo said.
One of the major players in Uganda’s oil sector, Tullow oil says their projects are long term and thus variation in prices won’t affect their operations.
“Tullow’s projects are long term, multi-decade and variation in the oil price, which have to be expected over the life cycle of very long projects, don’t fundamentally change their value,” David Onyango, a Communications Executive at Tullow Oil Uganda said.
Nyambura is a senior journalist based in Kampala
Nov 13, 2013 2