Things to Watch for in 2016: Two Experts Offer Views

Francis Perrin, chairman of Strategy and Energy Policies and Jean-Louis Schilansky, director of the Non-Conventional Hydrocarbons Centre talk to NGE about their expectations for 2016 from low energy prices to the arrival of US LNG on the European market, challenging EU relations with Russia and shale gas exploration in the UK.  

Oil Prices

This year started as 2015 ended with low energy prices, which is of concern for all the energy sector and has serious implications for falling oil output. According to Schilansky, director of the CHNC, “A decrease in the production of shale oil in the US is likely to happen in 2016 because lower prices have limited investments.”

A broadly shared forecast based on the assessment that oil prices will remain low in 2016. Francis Perrin, chairman of Strategy and Energy Policies told NGE why he thinks 2016 will be a bad year for oil producing countries. “There is still an oil surplus in the market. Opec countries keep producing, Iraq wants to increase its production, Iran wants a forceful return on the market, global inventories are abundant. Rising tensions in the Middle East and North Africa would drive oil prices higher but oil markets have not been worried by geostrategic developments for the past 18 months. They see the excess of supply as a safety margin. The ongoing conflict between Iran and Saudi Arabia has no real impact on market prices. It has not been so in similar situations in the past,” Perrin explains. 

If a “big rise of oil prices is very unlikely,” as Schilansky points out, we may see oil prices stabilise or even start to slightly recover. “Oil prices may not stay at $30/b but 2016 will still be a year with low prices,” Schilansky adds.  

Perrin believes a rebalancing of the market is underway helped by low prices which boost oil consumption. “Oil production in the US has started to fall since May 2015 and may do so in 2016, while world consumption will continue to increase at a slow pace. That could lead to a gradual rebalancing of the market. It may not be visible until late 2016 or early 2017. Then prices might go up again unless Opec countries react before we get to that point. But the organization refused to do so in November 2014, in June 2015 or even last December. Members and non-members of Opec could reach an agreement but it’s not clear at all,” Perrin says. 

US LNG

2016 will bring change to Europe with the arrival of liquefied natural gas imported from the US, a new energy player in the European market. “This is a very important development,” Perrin says.

"I have never come across such a situation,” Schilansky says, welcoming the fact that the US will become an exporter of oil and gas. “Natural gas exports to Europe, especially the UK begin this January ensuring a continuation of the activities despite low prices. The US Senate approved crude oil exports last December,” Schilansky adds, putting an end to a 40 years old ban. In the event though US LNG will not leave until February or March owing to problems with the instrumentation in Sabine Pass. And it is not certain that much if any will end in Europe.

The arrival of US LNG is also a major development from a geostrategic prospective. Perrin wonders how Russia is going to react. “The arrival of a competitor is always an important development for Russia but when this new competitor is called the US, that comes with political and geopolitical consequences. Is it going to be a reaction purely based on business interests? Will Gazprom and Russia try to make as hard as possible for US LNG to succeed in Europe using trade conditions and flexible contracts as a way of exerting pressure?“ he asks.

The arrival of this new player has been anticipated on the market. “The market has already reacted and will probably continue to do so as gas prices have decreased,” Schilansky notes adding that the US is a competitor not just for Russia but for Opec and Persian Gulf countries.

From a European point of view, US imports are new opportunities to diversify gas supply and reduce the energy dependency on Russia, a long-term challenge for the EU. “European companies will benefit from the growing competitiveness on the market with a new actor willing to make gains on European and Asian markets”, Perrin says. The chairman of Strategy and Energy Policies cites Azerbaijan to illustrate Europe's strategy to secure its supply. “We will diversify our imports in several years with resources coming from Azerbaijan with the second phase of Shah Deniz gas development project”, he adds.  

Shale gas exploration in the UK

This will be an exciting year for the shale gas industry in the UK, where there will be more shale gas exploration. It could be a make-or-break year for the future of shale gas in Europe. Schilansky stresses the importance of what will come out of the explorations in the UK. “What’s going on in the UK is very important for Europe.” He says energy companies will take a close look at what’s happening there. The first explorations are expected this year according to the UK government. So we will know if there are a lot of resources and if they are viable,” Schilansky adds.

Perrin downplays the expectations without underestimating the importance of the explorations for the entire industry. Many other European countries are still reluctant to explore their unconventional resources. “New developments from UK will be closely watched by gas and oil players. Don’t expect something spectacular this year, given that we are talking about an exploration phase. We cannot totally rule out surprising discoveries but it’s necessary to have a multi-year strategy to assess the resources. It’s a strong signal sent to the oil and gas industries in such a challenging European environment,” Perrin says, naming France and Bulgaria, two countries that have banned hydraulic fracturing. 

Schilansky believes more countries will develop their unconventional resources in the future following the US, Canada, Argentina and China “where production is booming.” For Perrin, the challenges for the UK is to assess whether the development of potential non-conventional resources would be “technically feasible” and economically viable” as oil prices reached a new low.

EU/Russia relations & the Energy Union

The relationship between the EU and Russia will remain a core issue in 2016, Perrin and Schilansky agree. Both raise the Ukraine issue. “How important the question of securing Ukraine supplies will be in the coming months?”, “Is the crisis between Russia and Ukraine going to resurface if winter conditions get tougher?” 
Perrin thinks the Ukrainian crisis will continue to be a major issue in 2016. “Mild weather at the beginning of the winter and all the progress made at a European level to diversify the supply with the Energy Union proposals eclipsed the risks of shortages but the threat has not totally disappeared,” he says.

“In 2016, we should see the realization of some of the gas infrastructure projects included in the energy union framework presented in 2015, aimed at securing supply and reducing energy dependency on Russia for many countries especially in eastern Europe. Perrin expects a “progressive but growing implementation of the Energy Union in terms of infrastructure to ensure a more diverse gas supply and create a more integrated energy market within Europe. 

So 2016 brings a mix of continuing threats and new opportunities. 

Kevin Bonnaud