Not So Lucrative After All
Companies lose interest in prospecting for new oil as prices dive
Oil companies around the world are rapidly scaling back exploration and refining plans, since the price of crude has plummeted from $147 to just above $40 a barrel over the past four months.
With demand slowing, income plunging and credit scarce, prospecting for new oil looks a lot less lucrative—and is harder to execute.
“Everyone is cutting projects, or they are not planning to increase them. It’s a trend that happened very quickly,” said Ben Brockwell, a senior analyst with the Gaithersburg, MD, Oil Price Information Service.
“A few months ago, everyone wanted to expand, there was a lot of demand for labor. Now they cannot afford to undertake these projects anymore.”
The drop in supplies could drive oil prices back up much faster next year, experts say. The International Energy Association warned that oil prices might soar, after the economy recovers, if companies defer investments. “Exotic” projects like the Alberta oil sands or explorations offshore Greenland are put on hold until investment become profitable.
Hardest-hit by the sharp oil price drop are national or small oil companies obliged to abandon exploration projects.
“We have daily examples of companies cutting plans for spending next year, as they cannot finance their operations,” said Armstrong Addison, director of market research for Tradition Energy, which advises companies on energy management.
Citing lower gas prices, Chesapeake Energy, the largest U.S. producer of natural gas, said it planned to cut $4.7 billion from its capital expenditure plans through 2010. The company lowered its 2008 production growth forecast to 18% from 21%, and to 16% from 19% for 2009 and 2010, said Sandeep Yadav, analyst at the market research firm Global Markets Direct.
Houston-based exploration company Petrohawk Energy cut its 2009 capital expenditure program by a third, to $1 billion. Quicksilver Resources, a production company in Fort Worth, is cutting capital spending too.
“If the oil price remains around $50 or $55, that would mean cutting at least 60 percent of budgeted projects for the next one or two years from the national oil companies,” Fu Chengyu, chief executive of China National Offshore Oil Corporation, told a conference in Barcelona in November.
International oil producers are following suit. Russia’s Lukoil scaled back 2009 spending plans to $6 billion from $11 billion – and could take them down to $4 billion if oil sinks below $50 per barrel, according to Energy Intelligence Group, an independent company that provides energy data and analysis. Russia’s Gazprom will cut spending by 20% next year, while RNK-BP, Russia’s third-largest oil producer, plans to trim its 2009 investment from $4 billion to $3.5 billion. OMV, the Austrian oil and gas group, will also decrease its exploration investment by one third in coming years.
“Any non-conventional oil projects, like investment in Canadian oil sands, are cut first,” said Fadel Gheit, an oil and gas analyst at Oppenheimer & Co. Suncor Energy Inc. and Petro-Canada, two of Canada’s largest oil companies, are slashing 2009 spending plans by a third, due to falling oil prices and credit scarcity.
“Some of the oil companies are dependent on credit, and they can’t borrow money anymore,” said Tom Wallin an analyst with the New York-based Energy Intelligence Group.
Tighter credit has driven oil companies’ public equity and debt offerings down by more than 30% in Q3 2008 from Q2, according to a report by the research company GlobalData, “Financing Trends in the Oil & Gas Industry.”
Yet even as oil companies retrench, the International Energy Agency said in its annual World Energy Outlook that the world must invest more than $1 trillion a year in order to ensure adequate energy supplies.
Many analysts expect oil prices to climb again, as oil demand and production shrink, and putting downward pressure on the oil supply.
“When we’ll come out of the recession, we’ll see higher oil prices,” Wallin predicted.