Delaying investment projects: who’s doing it, and why

There have been a myriad of warnings in recent months that the downturn in oil prices will store up a price rise – at a time when the world economy may not be able to cope. Yesterday the US energy secretary even asked Opec to avoid production cuts for this reason. But ironically, a key threat to the world’s non-Opec supply – which we saw this morning is predicted to see no growth this year – is low prices. Many oil sources are just not efficient at a price below $50 or even $40 a barrel.

The biggest oil companies are just about maintaining their investment levels for this year – although they’re clearly trying to drive down their own costs. Some Opec members are not having so much luck.

And even the outer tier of the big oil companies are finding investment difficult in the current environment. Conoco Phillips this week confirmed it would reduce its spending on projects by $2.8bn this year. At the very small end of the scale, wells that pump 15 barrels a day or less – which provide a fifth of the US production – are also struggling.

UBS analysts Jon Rigby and Melanie Savage from a couple of weeks ago, in which they looked at oil and gas investment projects and found delays everywhere.

They also provide a useful list of those that have already been delayed.

They see a “significant number” of new projects needing an oil price of $60 per barrel, which is their forecast for the year but “with, arguably, risks to the downside”.

UBS

UBS warns there is a risk that falls in oil supply will overshoot the fall in demand, because of the natural decline rate of oil and gas fields. The IEA estimates that the average production-weighted decline rate is 6.7% for post-peak fields and, without ongoing and periodic investment, is 9%. A dip in demand of 1 – 2% will still require continuing investment, says UBS.

Meanwhile there are plenty of projects scheduled for this year, but Rigby and Savage question how this will play out:

“We currently show around the same number of projects due for FID in 2009 and we saw in 2008. Our sense, however, is that the risk to this outlook is firmly to the downside. 2009 feels like it will be a classical deflationary spiral with buyers delaying purchase decisions as the price of commodities and services falls. At some stage an assessment will be made as to an appropriate trade-off and the trigger will be pulled on these projects as well as a whole list of other projects waiting for approval which we have classified for 2010.

In an example of this, BP this month began arranging meetings with its suppliers with a view to driving down costs on projects close to getting the go-ahead.

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