Much of the focus yesterday at CERAWeek in Houston was on maintaining investment even while today’s low oil prices make it unattractive. Shell and BP both made clear in their recent Q4 results that they planned to maintain investment levels, and BP chief Tony Hayward called on the rest of the industry to do the same, saying “The world economy will recover. The future is not cancelled.”
Jeroem van der Veer, quoted in the Houston Chronicle:
Shell is maintaining a careful balance in its investment portfolio. For instance, here in North America, we’re investing in onshore (unconventional) gas projects that allow us to dial up and dial down the number of drilling rigs quickly, and hence the cost of activity. This allows us to react rapidly to a changing market environment.
He cited the example of the early 1990s to show how demand can quicky turn, adding:
. . but that demand is only one half of the story. The other half is supply. And supply moves much more slowly.
In today’s market, supply investments are under additional pressure because of the credit crunch. This situation is further amplified by the cost-explosion of the past few years. The oil price may be still roughly double the “about $20″ of the 1980s/90s, but the amount the upstream industry is spending each year has risen five-fold, from $80bn in 1999, to over 400bn in 2008. Good intentions notwithstanding, this makes it very difficult for the industry to afford growth from a return on capital perspective.
On Monday Opec secretary general Abdulla al-Badri warned that 35 of 150 drilling projects in member countries were being delayed as a result of falling oil prices.
However Saudi Arabia’s oil minister Ali al-Naimi warned the CERAWeek audience of a ‘nightmare scenario’ if investment fell:
A nightmare scenario would be created if alternative energy supplies fail to meet overly optimistic expectations, while traditional energy suppliers scale back investments due to expectations of declining demand for their product.
Saudi Arabia, he said, is doing its bit to ensure that future pick-up in demand can be met:
We work very hard to make sure that the global oil market is well supplied and well balanced, and to that end it is our ongoing policy to maintain at least 1.5 to 2 million barrels per day of spare capacity to be used when there is an unexpected need. Given current oil market conditions, our spare capacity will be 4.5 million barrels a day by mid-year when we bring the Khurais mega-project of 1.2 million barrels per day on stream, which is significantly higher than our stated policy.