Oil & Gas UK Economic Report 2014

Behind this unusual Brent price stability lie significant changes in the worldwide balance between demand and supply in 2013 and some large-scale supply disruptions, especially in the Middle East and North Africa. These were largely offset by the continued rise in production of US light, tight oil (LTO). Oil markets tightened moderately in 2013 as the rise in demand (+1.2 million barrels per day (mb/d)) exceeded the growth in supply (+0.6 mb/d) and reported inventories of crude and products, in turn, declined. However, on the supply side, US crude oil production, driven by tight oil plays, rose by 1.1 mb/d in 2013, exceeding ten mb/d for the first time since 1986. This pace of growth of LTO production has continued in 2014 and few observers of the US ‘shale revolution’ are willing to anticipate a halt in this remarkable story. In volumetric terms, the increase in US LTO in 2013 offset the major supply disruptions in North Africa and the Middle East which have beset the oil market since the onset of the Arab Spring in 2011. Libyan output fell by 0.5 mb/d in 2013 while Iranian output declined by a further 0.2 mb/d due to international sanctions. After record production in 2012, Saudi Arabia curbed its crude output in 2013 to 9.4 mb/d, as it sought successfully to balance the world market. Since it is not possible to export US crude oil (except under licence in restrictive circumstances), rising LTO production has been reflected mainly in fewer US seaborne imports of crude oil, increased exports of oil products and wide fluctuations in intra-US crude price spreads until the domestic pipeline network has responded to the new sources of production.

The competitive advantage for US Gulf Coast refiners due to rising LTO production has put additional pressure on European refiners who are already facing a progressive decline in demand for their products. In 2013, an additional 0.3 mb/d of distillation capacity was closed in Europe, bringing the closures since the end of 2010 to 1.5 mb/d. As mentioned, relatively low price volatility characterised North Sea crude oil markets in 2013 and the first half of 2014. Persistent disruption to low sulphur Libyan oil exports supported these North Sea crude prices, although the influence of Korean demand was more subdued than in 2012. Crude oil production continued to decline in 2013 in both Norway and the UK to 1.46 mb/d and 0.80 mb/d, respectively. The combined output from the Brent market’s four component streams (Brent, Forties, Oseberg and Ekofisk) fell to 0.9 mb/d. Encouragingly, recent production data from the UK and Norway indicate that crude oil output has stabilised in the first six months of 2014 compared with the same period in 2013. In recent years, Forties’ higher sulphur content has meant that it is normally the grade that sets the price of dated Brent. However, in 2013, the reporting agencies revised their pricing methods to reflect all four component streams, leading to a more diverse assessment of dated Brent and more frequent trading of non-Forties grades. If Brent is to retain its key benchmark status in international markets, further reform of the Brent assessment process may be necessary in future years. Exchange rates were relatively stable in 2013. The average US$/£ rate moved marginally from 1.585 in 2012 to 1.564 in 2013, which means that the price of Brent crude oil

18

ECONOMIC REPORT 2014