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An Exclusive Look “Behind-Closed-Doors” from the Dungeon at Windsor Castle

by | published March 11th, 2015

One of the hallmarks of our annual energy meeting at Windsor Castle outside London is the Ambassadors’ Briefing, held in the castle dungeon.

Yes, the dungeon, though it has been converted into a secure location for “behind-closed-door” sessions. The atmosphere is quite unlike any other place I know.

This year, 15 ambassadors and high-commissioners joined us in the chilly air, where they were briefed on the conclusions from the earlier sessions.

The briefing is preceded by an Ambassadors’ Tea, and is followed by a gala dinner in the same room Shakespeare used to perform “The Merry Wives of Windsor“in the early 1600s.

To encourage frank discussion, all aspects of these meetings are held under Chatham House Rules, which facilitates open conversations in politically charged situations.

The rules dictate that the conclusions and themes of what was discussed can be made public, as long as the opinions aren’t attributed to named individuals.

That allows for some very interesting exchanges.

This year was certainly no exception…

Where the Energy Market Goes From Here

After gathering for tea, the ambassadors were briefed on how the high-powered participants viewed the sector and its future path. As always, it was followed by a very energetic exchange of views.

Several fundamental conclusions emerged, each one offering a signal of where the energy market goes from here.

Sort of.

That’s because the first item involves something I have rarely seen in over 40 years in this business. Among the group, there was no consensus on where oil prices are headed.

That was even the case among the diplomats from big producing countries in the Middle East. And aside from Iran (never a participant at Windsor), all the major OPEC members from the Gulf region were represented.

Even so, there is little doubt that the OPEC producers who can afford it will toe the line on maintaining current production levels. For OPEC this has clearly become an effort to defend their market share.

As we have discussed previously, OPEC’s main targets are U.S. unconventional (shale and tight) oil production on the one hand, and Russia on the other.

Of course, Moscow has already begun to adjust its production and export levels after getting hit by the double whammy of sliding oil prices and a collapsing ruble. The main battle is being waged over who gets to export oil to the most prized market of them all: Asia.

The reason why is simple. All indicators now point toward the bulk of global demand moving to Asia through 2035.

But for Saudi Arabia in particular, Russia provides a unique market threat. Its ESPO pipeline from Siberia to both China and the Pacific Coast threatens the Saudis’ Asian market share by offering the prospect of better quality oil at a lower price.

Since the Russian and other Eastern European Ambassadors were part of the Windsor session, there was some lively sidebar conversations among the diplomatic corps during cocktails.

However, it was the impact of U.S. shale production and the possible trigger prices that would cause a major drawback in future production that provided the real interest. In fact, it’s safe to say that this subject was the single biggest point of interest to the ambassadors from OPEC countries meeting in the dungeon.

However, it’s also safe to say there was no real consensus on that score either.

The Biggest Hurdles in the Years Ahead

By comparison, the next two conclusions were virtually unanimous and involved the subject matter of my own presentations.

As I discussed last week, most American producers have been “cost-negative” for some time now. That simply means they have been spending more money to operate than they receive in straight wellhead revenues.

Yet, as ominous as that may sound, being “cost-negative” is usually not much of a problem… at least until recently.

The truth is most projects are run by rolling over their debt. They typically use the proceeds from sales to buttress investor returns, improve their share value, and provide for contingency funds. As long as oil trades in “normal” ranges, the cost of the debt is manageable and the process runs rather smoothly.

Unfortunately, these are not “normal” times.

High-risk debt, the kind that has largely funded the U.S. shale revolution, has reached unsupportable cost levels. This is putting additional pressure on the very survivability of smaller companies and providing fuel for the next round of mergers and acquisitions.

The default rates among these issues will be accelerating, bringing some market uncertainty along with it.

Another point of agreement involved the price tag for the energy infrastructure that’s going to be needed to meet demand through 2035. Everyone agreed that the cost is much higher than initially projected. This matter is so important that the ambassadors have given their support for additional meetings to be held in London and Dubai to deal with this growing crisis.

This involves much more than simply meeting the projections of current demand. It also involves working to provide power to billions of people around the globe who don’t have access to reliable sources of energy. At this point, the brewing infrastructure crisis has become as much of a security consideration as a humanitarian one.

Finally, there was a new concern that everyone agreed has become quite dangerous: The growing threat of cyber-attack.

For instance, not long ago, Saudi Aramco was hit with a debilitating computer virus. It erased data from thousands of computers and put the world’s largest oil producer at risk, along with its reservoirs, pumping network, and control systems.

Cyber warfare of this type has long been the fodder for fiction. But now it’s no longer hypothetical. In fact, this may be the next wave of terrorism, and it needs considerable attention both inside and outside the industry.

Of course, there were a number of other themes addressed in the broader three days of the meetings. Some of them are once again providing early indications of profitable new moves for investors. I’ll be discussing all of them in future issues.

We’ve earned a nice profit from each of the last six Windsor meetings. Number seven promises to be more of the same.

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  1. March 11th, 2015 at 19:17 | #1

    I enjoy Agora’s products and the people that are involved in the group. I am a Canadian, I am curious on what you believe will happen to the Loonie in relation to the greenback for value?

    Dan Benn PhD,MBA,BCs, The Boat Doctor

  2. Cor Venter Storbeck
    March 12th, 2015 at 00:53 | #2

    I think that oil and it polutant factors should ideally be ousted slowly and make space for solar and wind and water energy. Clean green and bright

  3. March 12th, 2015 at 03:04 | #3

    How will the selling of American oil and gas effect the trade balance with other country and who will be the biggest consumer?

  4. March 12th, 2015 at 04:40 | #4

    Hi!, Patrons Of Oil & Energy Et. Al.:

    Given that oil and other types of energy resources are the life blood of civilization, it is my hope that price alone will not become a detrimental road block to human progress waiting in the wings of history being made through the negotiations process, as each country involved in energy resource productions has their economies of scale at stake. Perhaps it’s too much to ask the combined countries’ negotiators to affirm this inevitable fact of life regards the welfare of each others countries at stake in their negotiations but eventually there must be a consensus of relinquishing opinions to this common ground of major concerns is that not right? Personally, my sense of gratitude goes out to each of them, because without them my vehicle would be at a stand still and my home would not be heated like it is today by natural gas. This gratitude allows me to extrapolate the uses of their products for which so many of my fellow humans are dependent upon for their energy needs as well and those needs are so vast that they escape my comprehension of all the activities involved to meet these vast needs worldwide. The fact for example remains in my mind that the Saudis are reliant upon their oil income, in order to fund their own social commitments to their citizens which is true of all the other participants in the OPEC structure of suppliers isn’t it? My hope is that they can each face and resolve this aspect in behalf of their citizens in each country through projecting the empathy each has for its’ own National concerns into the life challenges facing their participants’ National concerns as well. We also have those concerns for those operating here in the US oil patch, because everyone has an interest do they not in surviving for so many reasons they can’t all me announced in this presentation but we need to somehow grow up in OUR attitudes towards each countries’ needs to comply with the standards of production and consumption representative of the needs of every countries’ citizens needs as consumers. The requirements of energy all across the globe are just facts of life for each of us are they not in my opinion and should not therefore be used as political footballs in order to coerce destructive leverages of one country towards any others is my humble opinion. For example, for Russia to threaten Europe with turning off its’ gas supplies, in order to react to the sanctions instituted against it places the participating citizens held hostage to such acts as innocent victims of those political confrontations over which they personally have NO control but must bear the harsh brunt of controlled energy supplies to their households in the dead of winter. Can we fathom the destructive harms to people denied these supplies of energy due to haggling between their heads of state etc.? In my opinion we need to eliminate the haggling and get on with the constructive programs required to continue extending the positive assets of civilization required in the lives of all men/women worldwide. The present haggling aimed at one country attempting to establish better market shares over that of others in a destructive competitive bid is NOT conducive to the constraints of civilization but creates very destructive infrastructures aimed at destroying the entrepreneurial successes desired by other participants is my opinion. We see that developing now again as currency wars don’t we and isn’t this type of internationalized haggling destroying markets through various countries instead of offering them the likelihood that their lesser developed status will instead be given a better chance of upgrading their nations’ developments and what’s to be gained otherwise but civil and cultural unrest? It appears in my eyes that we need a cultural exchange of co-operation but perhaps my desire to see this take place remains today premature? Don’t we as consumers need those who can produce and deliver OUR ever growing energies and don’t the energy suppliers/producers need their consumers which makes US one either unhappy or happy family? It would seem best wouldn’t it, if we can all become and remain one big, happy family of producers and consumers working together to keep civilization alive daily in OUR otherwise mundane lives? Why do we as countries desiring to hold OUR fellow countries hostage to any kinds of economic policy structures designed to tell any other country how to run its’ National consumer affairs? That seems to be heading many countries into the deepest waters of controversy rather the trust and co-operation required of a growing, developing positive atmosphere that creates civilized societies that can get along and continue doing so for years to come? Won’t we all be better off and happier with such a positive outcome ASAP?

    RUSS SMITH, CA. (One Of Our Broke, Fiat Money Corrupt States)
    resmith1942@gmail.com

  5. koconnell
    March 12th, 2015 at 14:51 | #5

    This is a great article.

  6. March 13th, 2015 at 11:01 | #6

    It is important that super powers exercise their powers in a special meeting to boost oil and energy prices as there is supply higher than demand.

    Also super powers should convene a G7 meeting to take necessary action to boost oil and energy to prevent world economies from depression.

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