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The price of Brent crude plummeted on Wednesday to levels below $35/barrel, hitting lows not seen since 2004.
The 5 per cent losses to lows of $34.21/b follow escalating tensions between Saudi Arabi and Iran, which market players fear may ruin the chances of a production cut deal between the Opec nations which would help support prices despite the global oil glut.
Also on Wednesday US inventory data showed an increase in petroleum products which could signal a further reduction in demand.
For UK utilities, depressed crude prices could threaten what remains of their upstream oil and gas assets, hitting profits and deepening the UK’s already rising reliance on imported gas.
Historic lows in the oil market over recent years have emerged as a strategic threat to utilities with upstream interests by capping the value of European gas, which is still bought using oil-indexed contracts.
British Gas parent company Centrica has already moved ahead with a £1.5 billion strategy shift away from capital intensive E&P and centralised generation to focus on growth areas in the downstream area of its business.
Centrica will now focus on maintaining a smaller E&P business of between 40-50mmboe per annum (from current levels around 75mmboe), focused on the North Sea and East Irish Sea, consuming £400-600 million of annual capital expenditure.
In addition, Icis gas market expert Ben Wetherall said late last year that Brent crude prices below $40/barrel could play a major factor in “exerting strong downward pressure” on the future cost of wholesale gas. But while this will make gas imports cheaper, the lower price could hasten the decline of North Sea gas production and increase the UK’s import dependency.
Former shadow energy minister Tom Greatrex warned this week that the government’s energy policy stance in favour of shale development makes the UK vulnerable to external factors shaping the economics of exploration.
“The Chancellor’s attitude to shale gas is based on an overly optimistic extrapolation of the US experience, which looks highly unlikely to be anywhere near economically viable when a barrel of brent crude is trading at around $36,” he said.
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