Oxford Institute for Energy Studies » Publications

Protection against Default in Long Term Petroleum Joint Ventures

Eduardo Pereira — Tue, 15 May 2012 13:07:07 +0000

Sharing costs and risks are the basic foundation of any the joint venture. However, the required financial commitments might be jeopardized either by a co-venturer who cannot afford the payment of the related costs or a co-venturer who simply chooses not to pay its share. The petroleum industry tends to rely on the forfeiture of interests as a threat to deter such behaviour but as a remedy this is often uncertain in times of its enforceability and could operate to the benefit of the defaulting party. The options to consider are collateral support provision, secured interests and cross-default options structured over wider asset interests. The recommendations which should arise out of this research intend to provide safer guidance for a long term relationship in a joint venture in the petroleum industry.

Fiscal Policy and Natural Resource Entitlements: Who Benefits from Mexican Oil?

Paul Segal — Mon, 14 May 2012 10:57:10 +0000

This paper suggests a new approach to analysing the distribution of natural resource revenues and applies it to the case of Mexico. It defines a natural resource entitlement as a citizen’s per capita share of their country’s natural resource rents. The main finding is that, according to official estimates, Mexican fiscal policy transfers oil entitlements from the bottom 90 percent of the population to the top 10 percent of the population. This implies that, although fiscal policy is progressive relative to market income, it is regressive once oil entitlements are taken into account. I consider a fiscal reform that would ensure that every citizen received their oil entitlement, and in doing so would eliminate extreme poverty.

Is Energy Efficiency Sustainable?

Malcolm Keay — Tue, 01 May 2012 11:09:36 +0000

This presentation by Malcolm Keay was delivered at a British Institute of Energy Economics seminar on 25 April 2012. It looks at the links between energy efficiency and sustainability and concludes that they are much more complex than they might appear at first sight.

The Financialization of Oil Markets: Potential Impacts and Evidence

Kate Teasdale — Wed, 18 Apr 2012 13:49:30 +0000

The financialization of oil futures markets has been held responsible for a variety of phenomena including changes in price volatility, increased co-movement between oil futures prices and other financial asset and commodity prices, a breakdown of the statistical relationship between oil inventories and the price of oil, and an increased influence of the decisions of financial investors such as swap dealers, hedge funds and commodity index traders on the oil futures price. Most importantly, there is a perception that oil futures markets no longer adequately perform their functions of price discovery and risk transfer. In this presentation, Dr Fattouh reviews the evidence in the academic literature and evaluates to what extent it provides support for the proposed effects of financialization.

Will There be a Shale Gas Revolution in China by 2020?

Fan Gao — Wed, 18 Apr 2012 13:26:58 +0000

This paper, by Fan Gao, assesses the extent to which China is likely to achieve levels of shale gas production by 2020 which would make a meaningful difference to its growing need for imports of pipeline gas and LNG. The study suggests that given the rather disappointing progress on Coal Bed Methane production since exploration and development work started some 25 years ago, a cautionary approach is needed in anticipating the outlook for shale gas for the remainder of this decade. The specific challenges include water availability and population density demographics as well as the need to stimulate an innovative competitive dynamic in the Chinese upstream service sector and an appropriate upstream investment framework with foreign participants for the transfer and application of technology.

The paper provides a rare appreciation of the dynamics of the onshore Chinese upstream industry and from that basis a better understanding of what will be required, on a number of policy levels, for Chinese shale gas development to succeed.

Lessons from the February 2012 European gas “crisis”

James Henderson — Mon, 16 Apr 2012 09:23:38 +0000

In February 2012, during a period of extremely cold weather across Russia and large parts of Europe, Gazprom failed to supply all the gas that was requested from it by its non-CIS customers in countries ranging from Poland in the north to Italy and Greece in the south of Europe. This situation led to concerns over a gas shortage and caused gas prices to spike at all the major hubs on the continent and in the UK. This Comment argues that the supposed supply “crisis” was not caused by any production shortfall in Russia but by a combination of inadequate storage available to Gazprom, excess gas withdrawal by Ukraine and in particular by political considerations in Russia ahead of the Presidential election in early March. However, it does highlight the current constraints to the Russian gas supply machine under certain severe temperature conditions. The paper also argues that, in contradiction to the claims of Alexander Medvedev (the Head of GazpromExport) that “spot markets failed to compensate for the increased demand”, in fact the markets had a logical price reaction to daily supply/demand changes. Although this reaction resulted in sharply higher prices in the short term, this provided a potent commercial signal which in turn led to spot supplies and/or demand management and then, as the situation resolved itself, produced lower prices so that the monthly average was still below the oil-indexed average price. While it is certainly true that the mature hubs at NBP and TTF reacted in a more responsive manner than some of the Continent’s less liquid hubs, it was nevertheless the case that, overall, customers were supplied at a market price and traders were able to arbitrage a short-term supply and demand imbalance.

Oil Markets in 2012: Calm or Turbulent Waters?

Bassam Fattouh — Wed, 11 Apr 2012 10:05:28 +0000

To most analysts, the combination of geopolitical and economic factors constitutes a ‘perfect storm’ that will keep an upward pressure on oil the price for the rest of 2012. The purpose of this short article is to broaden the debate and consider some potential weaknesses in the dominant story. The article will highlight three main points. First, the premises upon which the story of tightened market fundamentals is built are subject to a wide degree of uncertainty. Second, the channels expected to put an upward pressure on the oil price are not exogenous: they tend to interact with each other and are shaped in part by oil price behaviour. Finally, the feedback from policy circles seems to be different this time from that seen in the previous oil price cycle, and thus should not be ignored. This is not to say that dominant expectations of very tight market fundamentals may not materialize. They may well do, but this is not a foregone conclusion.

The Role of Speculation in Oil Markets: What Have We Learned So Far?

Bassam Fattouh — Fri, 30 Mar 2012 11:06:27 +0000

A popular view is that the surge in the price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to regulate oil futures markets. This survey reviews the evidence supporting this view. We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. However there is evidence that both oil futures price and spot prices were driven by the same economic fundamentals.

Comments on October 2011 Guidance Issued by Treasury on Valuation of Greenhouse Gas Emissions

John Rhys — Fri, 30 Mar 2012 09:43:25 +0000

The EU emissions trading system is failing to produce a carbon price that is efficacious in promoting low-carbon investment or a low-carbon economy. Carbon price projections from this scheme are nevertheless incorporated in the formal guidance issued by the UK Treasury to guide government departments in appraising policy initiatives and projects. The Treasury’s guidance deals with this issue of the carbon price by trying to maintain a distinction between emissions in what it calls the ‘traded sector’, i.e. sectors such as power and aviation covered by the EU ETS, and the ‘non-traded sector’, which includes domestic gas and road transport. This distinction is untenable and has the potential to create serious distortions in policy. This Comment explains how these are likely to arise.

Issue 87, February 2012

OIES — Tue, 27 Mar 2012 14:36:44 +0000

Oil Price Benchmarks in International Trade by Jorge Montepeque, Liz Bossley, Christophe Barret, Peter Stewart, Mike Davis, Bassam Fattouh, Amrita Sen, Peter Caddy, Giacomo Luciani, Salvatore Carollo