LONDON, 21 December 2003 — A cautious rise in capital spending budgeted by energy firms for next year will do little to revitalize sluggish oil production growth that has prevented companies meeting output targets, oil analysts said.
Energy companies plan to raise exploration and production spending by only around four percent in 2004, slowing from a rise of 9-10 percent this year, according to recent reports by banks Lehman Brothers and Citigroup.
It is a modest increase given oil’s four-year price boom, as companies target their money on projects that will give them good returns rather chase production growth by lavishing investment on aging higher-cost basins.
“Increases in capital spending are not really coming through in production,” said Rory Stewart of Simmons and Co. bank in Aberdeen. “If you look at the last four years, growth has not been that great outside the former Soviet Union.”
Low-cost new oil supply is increasingly elusive as traditional hunting grounds like the North Sea and United States tip into decline, while Middle East countries prove slow to open up to foreign investment.
The energy giants that have emerged from a wave of mergers over the last five years must now focus on frontier areas such as Russia and West Africa where Big Oil wants to find the big fields that bolster profits.
“Major companies are increasingly going to provinces where they can find larger reservoirs,” said Jim Crandell, analyst with Lehman Brothers, which sees capital spending growth of four percent next year.
The new breed of mega-projects in far flung regions force companies to pay up to ensure their pioneering investments pay off. “These can involve deeper and more complex wells, as well as more political risk,” said Crandell.
Royal Dutch/Shell raised its E+P spending forecast for this year by $2 billion to $11 billion, as it spent more than expected on two giant projects in remote regions: Sakhalin in the Russian Far East and Kashagan in landlocked Kazakhstan.
The multi-billion dollar investments are no guarantee that projects will not suffer delays. BG Group this month cut its 2004 output forecast for its Kazakh project, Karachaganak, by 80,000 bpd because of unforeseen hitches.
All the world’s top three energy firms ExxonMobil, BP and Royal Dutch/Shell struggle to offer oil and gas output growth of three percent a year. “If these companies are bigger they have to do more just to stand still,” said Stewart of Simmons and Co.
Stung by oil’s 1998-1999 price crash which sent crude to $10 a barrel and hammered energy industry profits, many companies since then only given the green light to ventures that will be profitable at $15-$18 a barrel.
The search for better returns has forced companies away from mature regions such as the US Gulf of Mexico and the North Sea where new oil field finds are smaller and decline more quickly from peak production.
Both Lehman and Citigroup forecast US upstream spending to be almost flat next year, in contrast to a six percent increase internationally.
In mature regions much of the expenditure is simply to prop up output at aging fields rather than develop new growth. “In the North Sea, BP is spending a billion dollars a year just to manage the decline,” said Simmons & Co.’s Stewart.
World oil production growth this year of one million bpd has fallen 300,000 bpd below initial forecasts, according to the International Energy Agency. All but 100,000 bpd of the increase has come from the former Soviet Union.
The flipside of firms’ cautious spending is that they reap the rewards from the price strength that results from lower production. London Brent crude has averaged around $26 over the last three years — well above firms’ prices for road-testing new projects.
Next year’s spending growth could yet turn out to be higher - initial projections for 2003 was for spending increases of around five percent - barely half the eventual level. But even then the higher spending is often to cope with problems rather than raise production targets.
Canadian oil output growth, for example, has fallen well below forecasts this year despite a massive 24 percent increase spending as operational hiccups spoil progress at new synthetic oil projects.
