Forecasters need to be independent and free of political bias!

If there is one thing that particularly annoys me its journalists and economists that have little real knowledge of the energy sector not just passing themselves off as oil industry experts but being accepted as such by some politicians because the story they’re being told by them just happens to fit their particular political aims. 

So it’s been recently.  The utter nonsense emanating from the idiotically named Office of Budget Responsibility regarding oil price and production volatility suits the UK Government’s argument against Scottish independence.  It claims – rightly - that tax revenue from North Sea oil and gas for 2012 is £7.3 billion, down from an estimate of £9.6 billion in March and the gas leak on the Elgin field contributed to a 12 per cent drop in production, while the industry has also suffered higher maintenance costs.

However, the OBR then claims though that oil and gas revenues will decline further to £4.6 billion by 2016/17 thanks mainly to a projected 18 per cent fall in prices!   Let me say that again – “a projected 18% fall in prices”

In a similar vein, Professor John McLaren of the Glasgow-based Centre for Public Policy for the Regions (CPPR) came out and declared that he agreed with the OBR. In fact he said - "It seems inevitable that future North Sea tax revenues will remain difficult to predict. Not only do oil prices remain highly erratic and unpredictable, but production from the North Sea also appears to be getting more erratic and difficult to predict.”

There are very few people I know whose opinion on oil prices I actually trust or have ever been proven roughly correct.  But for the OBR, which has got just about every forecast it’s made completely wrong, to dare to venture into the world of oil price forecasting and expect to be taken seriously is just ridiculous especially when it provides no sensible evidence for its claims. 

It is though particularly naïve of Prof McLaren to choose to jump on this particular bandwagon and I’m afraid he’s just made himself look silly by perpetuating the OBR’s ridiculous claims.

So why do this? Well it’s obvious really.   There’s a Scottish independence referendum coming up and the OBR is of course a member of the UK Government’s establishment.  So on this and other topics I simply don’t expect the OBR to be acting independently.  In fact I don’t even expect them to make any effort at all to be even seen to be independent. 

As to Prof McLaren, although he is a former Labour party adviser I don’t necessarily think that would have influenced his opinion.  His problem is that he didn’t really do his research and in particular he didn’t consult with his fellow academic and genuine expert Professor Alex Kemp.

Prof Kemp, Tony Mackay and my old friend Richard Shepherd of Petrologica who sadly died last year, are the only three I know who have or had a clear enough understanding of the industry and what influences it well enough to be able to come up with believable forecasts on both production and price. They also collect huge amounts of data from both the operators and the contractors. So they have well established “knowledge banks” from which to draw.

Fortunately, in Richard’s case the knowledge banks, forecasting methodology and modelling tools he developed have survived him and are now being managed and refined by his old team at Petrologica.

On one website Professor Kemp is actually quoted as saying "The OBR's combination of low production estimates with low price estimates is pessimistic compared with other predictions including our own."

He added that the OBR took their production estimates from the Department of Energy and Climate Change (DECC), who had used a very high contingency for production shutdown, leading to an unusually low estimate of future production and that in its October 2012 projections for oil and gas production. The DECC report admitted to applying “very significant negative contingencies to the aggregate figures.”

Just as importantly, Professor Kemp says the OBR estimates of future prices, were not based on the DECC report but on the future contracts market, resulting in a low price of $89 per barrel.   The DECC estimates of future oil prices are actually much more optimistic, with 2017 prices predicted to reach $120.

Putting the political shenanigans aside what concerns me most is the potential damage this sort of irresponsible assertions might do to the industry in Scotland and the impression they can have on those that have less understanding of the real situation.  Countering such nonsense isn’t easy because the mainstream media much prefers a negative story to a positive one.

Let’s face it, the use of emotive words such as “volatility” is designed to create the impression of an industry that’s unstable and has no real future.  The truth though is quite the opposite as the recent spate of announcements of new field developments and drilling programmes will testify.

In fact the Deloitte petroleum services group report on the UKCS that came out during January was pretty optimistic suggesting a “broader range of tax allowances and a sustained high oil price” had resulted in much better levels of activity during 2012, that field development approvals had reached a ten year high and eight “Brownfield development” project has also been sanctioned by the Department of Energy and Climate Change (DECC).  Importantly, they also say the final quarter of 2012 turned in the strongest performance of the year. We can now of course add to this that the EIA forecast of higher Brent Crude prices on OPEC supply cuts and demand increase out of China.

Optimism is important but accuracy in forecasting is critical.  Those that play politics with data don’t deserve our respect and should be given little credence.

(first published in the Press & Journal "Energy" supplement in Feb 2013)