Oil supply shortage and the necessity of long-term contracts

The oil sector is now facing a new reality. In its 2017 annual publication World Energy Outlook, which details expectations for global energy trends, the Paris-based International Energy Agency warned that the world could face an oil supply shortage by the end of the decade. This potential shortfall is mainly due to the recent drop-off in investment related to the low price of oil. Low prices, thought to have become the new normal, deterred oil companies from investing in new capital-intensive projects. Supply shortage in would induce increased volatility in markets and pricing, particularly given the political and security risks endemic to some of the world’s largest production zones.

Furthermore, demand is expected to grow year-on-year despite unpredictable supply. While oil demand growth should slow over the projection period, the IEA expects global oil demand to continue to increase at roughly 1.2 million bpd per year to 2022. Long-term, the oil demand will top 103 million barrels per day (mb/d) by 2040, according to IEA estimates.

In this context, oil companies should seek to establish long-term contracts in order to hedge against the increases in price, demand, and both supply and political risk that will occur in the coming decades. Long-term procurement contracts not only provide stability and security from a fulfilment perspective, but they also enable more efficient capital allocation and thus higher profit margins.

The challenge is in establishing these long-term contracts in unconventional or unstable supply regions. To do so requires an understanding of the local, national and regional dynamics. The legal, social, economic and political situations must be carefully analyzed in order to determine the optimal strategy for contractual negotiation, procurement, and delivery of contracted supply.

For example, a decade of instability in Libya has created a market opportunity in the country’s eastern region following the withdrawal of most major players from the area.  The energy sector in eastern Libya is primed to rebound under improved security, with strong room for growth in both the sales and services segments. Libyan oil reserves, estimated at 47.1 billion barrels, are the largest in Africa, among the largest in the World and amount for more than 3% of global reserves. Additionally, eastern reserves are some of the most commercially viable on the planet due to their proximity to the surface and ease of extraction.  However, operational efficiency and security is critical for multinationals working in Libya, and optimal outcomes are only possible through detailed analyses of on the ground realities and a robust local network.    

The Sulaco Group provides its clients with precise solutions informed by extensive sector and area knowledge, unique intelligence gathered from local sources, and our robust network in key institutions, agencies, and ministries. We support our clients’ operations with concise reports that consider socio-political, economic, legal and tribal factors and how these dynamic forces could impact existing operations or inform potential investment decisions. The Sulaco Group assists with market navigation, permitting and visa issues, export / import licenses, customs processes, general project monitoring, tender offers and point of sale negotiations. Our team also facilitates positive outcomes in the fields of government relations, security and shipping via our thorough connections in Tobruk, the location of our regional branch in Libya.

Despite the location of our regional headquarters in Libya’s Eastern region, the Sulaco Group maintains extensive connections in Tripoli, with work focusing more on telecommunications and supply chain management projects. We are the only international firm with a comprehensive east/west network coverage of major players in politics and key industries.

Our North Africa team’s outputs have consistently outperformed international intelligence agencies and major due diligence and risk management companies in the region. Companies often come to us as a last resort after other groups have failed to provide the information or services that they need to operate securely and profitably in Libya, and our ability to fulfil these requirements is just another way that we provide our clients with the Sulaco advantage.