Oil demand drops to record level since 1982, says BP
GLOBAL oil consumption fell by 420,000 barrels per day in 2008, the biggest decline since 1982, BP said in the latest edition of its yearly statistical review of World Energy at the weekend.
Fuel use continued to increase in emerging economies, notably China, which consumed an extra 260,000 bpd, but the developed world used much less.
Organisation for Economic Co-operation and Development (OECD) consumption dropped by 1.5 million bpd, led by a 1.3 million bpd fall in the U.S., the world's biggest fuel burner, wrote Reuters.
The drop in demand in developed countries coincided with record high prices, which rose to a peak of nearly $150 last July for U.S. crude before crashing down to just above $30 in December as the world sank into financial crisis and oil supply outstripped demand.
"In 2008, the world was no longer supply constrained, as production growth exceeded that of consumption for all fossil fuels, particularly later in the year," BP chief executive Tony Hayward said in his introduction to the review.
"Our data confirms the world has enough proved reserves of oil, natural gas and coal to meet the world's needs for decades to come. The challenges the world faces in growing supplies to meet future demand are not below ground, they are above ground."
Oil production increased by 380,000 bpd to 81.8 million bpd, the statistical review said.
Although Organisation of Petroleum Exporting Countries (OPEC) agreed to implement output cuts late last year, its 2008 production was still 990,000 bpd higher.
Saudi Arabia, OPEC's biggest member, pumped 400,000 bpd more, while production from non-OPEC Russia dropped by 90,000 bpd, the first decline since 1998, and OECD output fell by 750,000 bpd.
Mexican oil production, which shrank by 310,000 bpd, experienced the biggest decline. The annual review said the world's proven oil reserves fell by three billion barrels to 1.258 trillion barrels by the end of 2008 from a revised 1.261 trillion at the end of 2007.
Declines in countries including Russia, Norway and China offset increases in Vietnam, India and Egypt.
In a related development, analysts said with crude oil trading above $60 a barrel for the first time since November, the oil exploration and production sector looks ripe for a new wave of mergers and acquisitions.
Concerns about the health of the global economy have damped major deal-making in the space so far this year, despite overall low leverage and reasonable valuations. But signs of life are already beginning to emerge, with the close last week of Premier Oil Plc's $500 million acquisition of Oilexco North Sea Ltd.
The balance sheets of the major industry players suggest an opportunity for more and bigger deals to come.
The cash ratio-cash in excess of short-term liabilities -- is a good measure of a company's liquidity, and therefore buying power. BP PLC (BP) has a cash ratio of 23.9x, Chevron Corp.'s (CVX) stands at 29.9x and Exxon Mobil Corp.'s (XOM) is a whopping 65.2x, according to FactSet.
BP is always on the lookout for attractive assets. "The future has not been cancelled --merely delayed," Chief Executive, Tony Hayward said at BP's strategy presentation in March.
When looking to spend extra cash, potential buyers will focus on their targets' "break-even price," or the cost to extract one barrel of oil.
Break-even prices vary by region, but the average break-even price for the Organisation of the Petroleum Exporting Countries is around $58 a barrel --making $62 oil a profitable proposition.
Wary of the near-term fundamentals for crude oil, companies may decide to hedge against a decline in price and wait for equity valuations to decrease before taking on an acquisition.
Producers can usually hedge their exposures to underlying energy prices, but this year some companies were left in a predicament. Prices were attractive to would-be hedgers, but many producers hedged at higher prices in 2008 and had no remaining credit to add to their positions. Some of these hedges may be unwinding and could put downward pressure on longer-dated crude contracts.
The improved macroeconomic backdrop should also improve the M&A outlook.
The oil and gas sector has accessed the debt markets to the tune of $52.6 billion since the start of the year, relatively high considering all of 2008 saw around $70 billion capital raised in the debt market.
Meanwhile, equity prices in the sector have rallied some 25 per cent from their March lows, and crude is up nearly 70 per cent since hitting a low of $36.51 a barrel earlier in the year.
