For Oil Companies, Less Is More
RIGZONE - For Oil Companies, Less Is More
by Bill Farren-Price International Herald Tribune Tuesday, September 20, 2005
High prices are changing the economics of marginal oil developments; but oil companies are not betting the prices will last.
With benchmark prices topping $70 a barrel on Aug. 30, and contracts for future delivery holding above $60, the companies are looking again at projects demanding expensive technology and secondary recovery techniques, and at unconventional reserves in Related Pictures
Orinoco Tar Belt, Venezuela
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Wabasca Oil Sands
(Click to Enlarge)
Canada and Venezuela. Investment in Canadian oil sands and shale projects topped $6 billion in 2004, while production of extra-heavy crude from Venezuela's Orinoco belt has risen 20 percent in two years. But, while some analysts say high prices are here to stay, and most industry observers expect them to hold at least into 2006, most major oil companies are still basing their long-term plans on an assumption that supply and demand will eventually return prices to historic average levels, said Yasser Elguindi, an industry specialist and senior managing director of Medley Global Advisors, based in New York.
"Oil companies still are not sure that a paradigm shift has occurred in the oil market and are still conservatively pricing a $20 to $30 long-term oil price," Elguindi said in a telephone interview last week.
Royal Dutch Shell is a case in point. "With a $15 billion per year investment program and upward pressures on price and costs, Shell plans for medium term cash neutrality at around $25 per barrel," the company said in its most recent strategy review. At that level, oil from the Persian Gulf, costing $2 to $4 per barrel to produce and accounting for more than 60 percent of global proven reserves, would still be profitable. Unconventional reserves would be far less so. Middle East producers, not surprisingly, are hastening to bring new oil into production.
According to the Organization of Petroleum Exporting Countries, members drilled 7.5 percent more wells in 2004 than in 2003, after a slump of 18 percent in 2003.
In Saudi Arabia, the world's top exporter with nearly a quarter of global proven reserves, the state-owned company Saudi Aramco said this month that its Haradh-3 project, designed to bring an additional 300,000 barrels a day of Arab Light crude onstream, was now 70 percent complete after being fast-tracked earlier this year. The Saudi government aims to expand its production capacity to 12.5 million barrels a day from 11 million in coming years.
The problem for international oil companies is that Saudi Aramco has a monopoly on Saudi oil production. The government has allowed some access to its gas, but not to its oil.
Iran and Iraq, with another 20 percent of global reserves, also present access difficulties. Iran in the terms it has demanded from foreign companies and Iraq in its lack of security and oil sector governance.
"The world's great international oil companies are playing a minimal role in the world's great oil challenge," Michael Daly, president of BP Middle East and South Asia said recently. Their share of oil production in Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates was less than 5 percent, Daly said. Stalled in those countries, the international majors are concentrating on Libya, Algeria, and Oman, with a second tier of activity in Sudan, Syria, and Yemen.
Marginalized in the Gulf, the majors are playing cautious.
Still, the scale of unconventional reserves makes them impossible to ignore. Extraction from oil sands and shale has been underway in Canada since the late 1960s and, according to industry data, accounts for 33 percent of Canada's output of 2.6 million barrels a day. By 2015, that could rise to over 60 percent, based on projections from the Canadian Association of Petroleum Producers.
Although usually excluded from the global tally, Canada's sands reserves are impressive. According to the producers' association they contain 315 billion barrels of potential crude bitumen, of which 174 billion barrels are in areas under active development. For comparison, oil reserves in the Middle East total 727 billion barrels.
In Venezuela's Orinoco belt, extra-heavy crude, which is heavier than water and nonfluid in normal conditions, has been under development since the 1980s. Four joint ventures between the state oil company, Petroleos de Venezuela, and foreign partners now extract 600,000 barrels a day of extra-heavy crude and upgrade it into a synthetic light crude that can be marketed and refined internationally. Yet, the technical challenges mean that in both Canada and Venezuela the investment is higher, and must be sustained for longer, than in conventional crude oil developments. Indirect costs may be higher too.
"Investors tend to analyze unconventional oil projects in isolation, but the reality is that there are associated infrastructure development costs that must be factored into the price," Elguindi, of Medley, said.
These costs may be calculable. The future oil price is not. The difference will determine how fast unconventional resources are developed.
"While we do not believe that oil prices will stay at $70 for the long term, we must certainly also believe that the long term price is no longer $25," Elguindi said.
Bill Farren-Price is Deputy Editor of the Middle East Economic Survey.
(C) 2005 International Herald Tribune. via ProQuest Information and Learning Company; All Rights Reserved
by Bill Farren-Price International Herald Tribune Tuesday, September 20, 2005
High prices are changing the economics of marginal oil developments; but oil companies are not betting the prices will last.
With benchmark prices topping $70 a barrel on Aug. 30, and contracts for future delivery holding above $60, the companies are looking again at projects demanding expensive technology and secondary recovery techniques, and at unconventional reserves in Related Pictures
Orinoco Tar Belt, Venezuela
Buy the Wallmap
Wabasca Oil Sands
(Click to Enlarge)
Canada and Venezuela. Investment in Canadian oil sands and shale projects topped $6 billion in 2004, while production of extra-heavy crude from Venezuela's Orinoco belt has risen 20 percent in two years. But, while some analysts say high prices are here to stay, and most industry observers expect them to hold at least into 2006, most major oil companies are still basing their long-term plans on an assumption that supply and demand will eventually return prices to historic average levels, said Yasser Elguindi, an industry specialist and senior managing director of Medley Global Advisors, based in New York.
"Oil companies still are not sure that a paradigm shift has occurred in the oil market and are still conservatively pricing a $20 to $30 long-term oil price," Elguindi said in a telephone interview last week.
Royal Dutch Shell is a case in point. "With a $15 billion per year investment program and upward pressures on price and costs, Shell plans for medium term cash neutrality at around $25 per barrel," the company said in its most recent strategy review. At that level, oil from the Persian Gulf, costing $2 to $4 per barrel to produce and accounting for more than 60 percent of global proven reserves, would still be profitable. Unconventional reserves would be far less so. Middle East producers, not surprisingly, are hastening to bring new oil into production.
According to the Organization of Petroleum Exporting Countries, members drilled 7.5 percent more wells in 2004 than in 2003, after a slump of 18 percent in 2003.
In Saudi Arabia, the world's top exporter with nearly a quarter of global proven reserves, the state-owned company Saudi Aramco said this month that its Haradh-3 project, designed to bring an additional 300,000 barrels a day of Arab Light crude onstream, was now 70 percent complete after being fast-tracked earlier this year. The Saudi government aims to expand its production capacity to 12.5 million barrels a day from 11 million in coming years.
The problem for international oil companies is that Saudi Aramco has a monopoly on Saudi oil production. The government has allowed some access to its gas, but not to its oil.
Iran and Iraq, with another 20 percent of global reserves, also present access difficulties. Iran in the terms it has demanded from foreign companies and Iraq in its lack of security and oil sector governance.
"The world's great international oil companies are playing a minimal role in the world's great oil challenge," Michael Daly, president of BP Middle East and South Asia said recently. Their share of oil production in Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates was less than 5 percent, Daly said. Stalled in those countries, the international majors are concentrating on Libya, Algeria, and Oman, with a second tier of activity in Sudan, Syria, and Yemen.
Marginalized in the Gulf, the majors are playing cautious.
Still, the scale of unconventional reserves makes them impossible to ignore. Extraction from oil sands and shale has been underway in Canada since the late 1960s and, according to industry data, accounts for 33 percent of Canada's output of 2.6 million barrels a day. By 2015, that could rise to over 60 percent, based on projections from the Canadian Association of Petroleum Producers.
Although usually excluded from the global tally, Canada's sands reserves are impressive. According to the producers' association they contain 315 billion barrels of potential crude bitumen, of which 174 billion barrels are in areas under active development. For comparison, oil reserves in the Middle East total 727 billion barrels.
In Venezuela's Orinoco belt, extra-heavy crude, which is heavier than water and nonfluid in normal conditions, has been under development since the 1980s. Four joint ventures between the state oil company, Petroleos de Venezuela, and foreign partners now extract 600,000 barrels a day of extra-heavy crude and upgrade it into a synthetic light crude that can be marketed and refined internationally. Yet, the technical challenges mean that in both Canada and Venezuela the investment is higher, and must be sustained for longer, than in conventional crude oil developments. Indirect costs may be higher too.
"Investors tend to analyze unconventional oil projects in isolation, but the reality is that there are associated infrastructure development costs that must be factored into the price," Elguindi, of Medley, said.
These costs may be calculable. The future oil price is not. The difference will determine how fast unconventional resources are developed.
"While we do not believe that oil prices will stay at $70 for the long term, we must certainly also believe that the long term price is no longer $25," Elguindi said.
Bill Farren-Price is Deputy Editor of the Middle East Economic Survey.
(C) 2005 International Herald Tribune. via ProQuest Information and Learning Company; All Rights Reserved
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