IEA: Oil Companies Need More Realistic Break-Even Point
by Sally Jones and Shai Oster
FWN Select 5/4/2005
URL: rigzone.com
PARIS, May 04, 2005 (Dow Jones Commodities News Select via Comtex)
Oil companies should scrap lowball price forecasts that are keeping them from investing in new oil fields, the head of the International Energy Agency said Wednesday.
Years of underinvestment from when oil prices bottomed out has whittled down global oil spare production capacity to under 2%, supporting economically damaging higher prices.
International oil companies use conservative estimates of $20-$25 a barrel of oil as the break-even point for assessing new projects - when oil's trading at double that and not likely to fall again, Claude Mandil told Dow Jones Newswires.
"Companies need to increase their target price for investment to reflect prices," Mandil said.
Instead of investing in new oil fields, cash-flush oil companies are either returning more money to their stockholders, or buying up rivals because easy-to-exploit oil outside of the Middle East is drying up.
Mandil sounded the alarm in a meeting Tuesday with finance ministers from the 26 members of the Organization for Economic Cooperation and Development.
The IEA, energy watchdog to the richest industrialized countries founded after the oil shocks of the 70s, estimates $16 trillion is needed to keep up with energy demand over the next 25 years. But that target isn't being met, it warns.
"Investments are not keeping up with world demand," Mandil said.
In his meeting, he said spare global oil production capacity has plummeted from 10 million barrels a day 15 years ago to less than 2 million today.
Refineries face a similar decline to no spare capacity from 20 million b/d, and there's very little extra electricity generation or transmission capacity, Mandil said.
One reason for the lower investment is that oil companies are either barred or face tough barriers to some of the world's richest oil provinces.
Mandil called on Russia, Mexico and the Middle East to further open oil markets, including upstream exploration and downstream refining operations.
The IEA will continue its dialogue with the top producers of the Organization of Petroleum Exporting Countries, meeting with them in 10 days in Kuwait, he said.
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