The abstract is now taking a concrete shape. The issue of investments in new capacity, or the lack of it to be specific, is starting to take center stage. Investment bank Barclays is reporting that investments in the sector are down by at least 12 percent.
“While everyone has been so focused on short-term demand, it now looks like we’ll see some real tightening in the market in 2010 due to the drop-off in non-OPEC supply,” said Amrita Sen, analyst at Barclays Capital in London. “There could be a real run-up in prices just as the world economy begins to recover, which is the last thing the economy needs on the way out of a recession.”
Non-OPEC production would fall, mostly in Russia and the US, the second and third biggest global oil producers after Saudi Arabia. Analysts see the two countries’ output declining a combined 1.55 million bpd through 2010. Potentially large drops are also expected in Mexico, the sixth-biggest producer, whose mature Cantarell offshore field has entered a decline, and Canada, the seventh, with its expensive oil sands production. Other at-risk regions include Norwegian and UK offshore fields.
In the US, the number of rigs drilling for oil and gas has fallen by almost 50 percent since September 2008, the steepest decline since 1986, oil services company Baker Hughes said. The global rig-count fell by 8 percent from September through February, and is expected to fall further in coming months, a spokesman said.
Interestingly, this clamor about lack of incentives in the industry for now to invest is no more limited to the producers; it is starting to get beyond. At a conference in Paris last week, there was a definite realization that the current spate of underinvestment in new capacity is not only a cause of great concern; it could definitely spark sharp spikes in oil prices in the months and years to come.
And it was none else than Nobuo Tanaka, head of the International Energy Agency, conceding the need for higher prices to finance exploration and development, saying, “higher prices may not be a bad thing” if the economy recovers as they will encourage investment.
It was definitely a major admission coming from none else than the person representing the consumer world. And mind it; Tanaka is a fairly new convert to this idea. Until recently he has been stressing that cheaper oil would help stimulate economic growth across the world — the equivalent of a trillion-dollar stimulus package. The change is thus a welcome one — for it brings the consumers and producers, once again closer on a moot point — pricing.
And then the clamor does not remain confined to Tanaka. Other industry leaders also hammered through the same message. Chief executive of Total SA, Christophe de Margerie made it a point to underline that Total may not be able to achieve its target of investing 18 billion euros ($23.84 billion) this year, as some projects are likely to be “slightly delayed” — for obvious reasons.
Royal Dutch Shell Chief Executive Jeroen van der Veer admitted the crisis was causing the whole industry to under-invest in new oil and gas projects. Van der Veer said his “gut feeling” is that the overall investment in the industry was down by more than the 12 percent estimated by the Barclays.
And OPEC leaders too continued to reiterate the message in Paris. “If prices stay low for a long time future supply growth will be impossible, leading to another price run up in the future,” Qatar Energy Minister Abdullah bin Hamad Al-Attiyah told the conference, underlining crude prices “must rise to a level that supports investment.”
United Arab Emirates’ Energy Minister Mohammed Bin Dhaen Al-Hamli was likewise gloomy about the trend in investments, warning, “many conventional and non-conventional oil projects have already been shelved or scrapped because of the deteriorating economics.”
“Oil prices need to be at levels that help sustain economic growth by supporting long-term energy investments,” Al-Hamli said. “A failure by investors to invest will result in a supply crunch in the near future.”
In the wake of falling oil prices, within the OPEC, at least 35 incremental projects are currently on hold. “These projects are on hold ... and will continue to be until the (oil) price recovers,” OPEC Secretary General Salem El-Badri said in February. And as a result of the project delays, OPEC will not be able to increase production capacity by all of the 5 million barrels a day by 2012 that was previously expected, El-Badri then added without elaborating. “We cannot really invest at current oil prices,” he was quoted as saying on a separate occasion.
As per a recent report by the Alkhobar based Arab Petroleum Investment Corporation (APICORP), investments in the sector are dropping fast.
“There is a fall of 19 percent in the projected volume of investments in the energy sector, mainly in the oil sector of the Gulf region, from $650 billion to $450 billion over the period between 2009 and 2013,” the report said.
As per the report, about 20 percent of the projected investments of $650 billion will have to be deferred as a result of the financial crisis.
OPEC has been arguing for considerable time now that for long-term economic health, oil prices need to be high enough to sustain investment in new production. Others now seem coming round the argument and for a change that is a wonderful omen, one has to concede.
