Falling oil price poses threat to supplies
Published: October 22 2008 19:47 | Last updated: October 22 2008 19:47
Christophe de Margerie, Total’s chief executive, has been warning for more than a year that political hurdles such as sanctions meant the world would not be able to produce more than 95m barrels a day of crude oil.
But as the credit crunch delays expensive projects and lower oil prices dissuade oil-rich nations from investing in tapping more of their riches, oil executives are privately warning that even 95m barrels could prove optimistic.
That is a stark reassessment. The world consumes 87m barrels a day of oil and will have to find a lot more energy if China, India and other developing nations are to pull themselves out of poverty.
For now, all eyes are on falling demand and tumbling oil prices but the International Energy Agency has warned that the glacial pace at which supplies are being added will have far-reaching economic consequences.
In its latest report, the IEA, said: “Most large international oil companies and state producers should weather the financial storm. However, investment is being affected at a number of highly leveraged companies in locations such as Russia and the Caspian.”
Russia’s two energy giants, Rosneft, the state oil company partially listed in London, and Gazprom, the natural gas monopoly, depend heavily on debt to finance operations and evidence is mounting that they are scaling down their investments.
Gazprom admitted on Wednesday that the liquidity crisis could affect its ability to refinance debts and might affect its cash flow forecasts. It has told TNK-BP that it might not buy its stake in the giant Kovykta gas field after agreeing in principle to a $700m-$900m deal last year.
Meanwhile, TNK-BP is expected to cut its capital expenditure by as much as $1bn next year, or almost a quarter.
Tim Summers, the company’s chief operating officer, said: “At $120 or $140 a barrel, you are trying to grow the company as fast as you can but you take a different view at $70.”
Oil chart
Oil prices, which in July peaked at nearly $150 a barrel, are trading at about $70 a barrel, after having briefly slipped below that mark.
In Iran, which holds the world’s second-largest oil and gas reserves, Gholamhossein Nozari, oil minister, said: “I think the low price is a real damage to the future of production.”
Chief executives of some of the world’s biggest international energy companies meeting in Venice this month privately voiced concerns that the credit crunch-driven belt-tightening and new spirit of government intervention in business were ominous for the oil industry.
Mr de Margerie said: “All projects which are under way will be completed.” But he also warned that, if the oil price fell to $60 a barrel and stayed there, “a lot of [new] projects would be delayed”.
France’s Total has been one of the most forthright companies about the cost of its newest and most expensive ventures, noting that its Canada oil sands projects need an oil price just shy of $90 a barrel to develop while reducing the environmental impact.
Its developments in the deep waters of Angola require prices of about $70 a barrel to achieve a rate of return of 12.5 per cent.
Analysts said Nigerian deepwater projects, which together with Angola make up the most important areas of growth in west Africa and involve all the world’s biggest international energy groups, demand similar oil prices because of their high cost.
Many of these projects have yet to receive final investment decisions, making them more susceptible to delays in times of economic uncertainty.
Expensive liquified natural gas projects, which are often financed by banks, may also be delayed and capacity additions put on hold, analysts said. BP has shelved plans for its $500m Delaware LNG facility, arguing “market conditions do not support such a project near term”.
It is not just the big oil companies’ investments that count.
In the US, small oil and gas companies produce 82 per cent of the country’s natural gas and 68 per cent of domestically extracted oil. Struggling with a less solid balance sheet than their much bigger peers, many are struggling to finance their operations.
Meanwhile, the willingness of refiners to add capacity is also being tested, meaning that the bottleneck that helped drive oil prices to $147 a barrel this summer will not be solved as quickly as the industry had begun to believe before the credit crunch.
Eni, the Italian oil company, has announced that it has scrapped a doubling of the capacity of its Taranto refinery after cutting back its capital expenditure plans for refining and marketing.
But perhaps the most worrying area, at least in the long term, is Brazil, where Petrobras, the national oil company, last year discovered what could become the biggest new oil frontier to open up in almost a decade.
The company has delayed its highly anticipated strategic review to assess the impact of the credit crunch.
Petrobras is expected to need upwards of $500bn to finance the development of its giant subsalt fields, which “may be further delayed as share prices tumble and amid restrictions on the availability of state development bank funding”, the IEA has warned.
Delays in developing the field and other projects in Russia, Angola, Nigeria, Australia and elsewhere, mean there will not be enough oil available once the world economy is ready to get back on its feet, several energy executives said.
Copyright The Financial Times Limited 2008 |
