Summary
Jad Mouawad in New York reported that sharp reductions in investment coupled with low oil and gas prices could reduce future supplies. This was based on an analysis by Cambridge Energy Research Associates (CERA). The consulting firm said a drop in production could be a “powerful aftershock following the oil price collapse.” Some large companies will keep 2009 investments unchanged from last year but many producers are cutting budgets. CERA predicts that 7.6 million bbl/day may be deferred or cancelled. In 2008, CERA predicted that production capacity would rise to 109 million bbl/day by 2014. But the new analysis suggests that cutbacks could reduce that to 101.4 million. Seven years of rising crude oil prices has stopped. Christophe de Margerie, CEO of Total thinks producers will find it difficult to supply 90 million bbl/day in the next decade. Global oil demand is expected to drop again this year. The longer prices stay low, the greater the negative effect.
Analysis
While many experts have cloaked the international oil and gas industry in an aura of mystery suggesting that an era of peak oil production beckons and that OPEC, with some 30 million bbl/day of capacity is the master of the oil industry, the fact is that it is a simple business and OPEC, while large, is in fact only one of many producers. The science of geology has advanced today to the point where crude oil and gas deposits can be identified with great precision, even those at depths 20 thousand feet below sea level or in the Arctic regions or the vast deserts of Africa and Asia. Prospecting tools are so sophisticated today that the risk of drilling a dry hole is sharply reduced. Once an underground reservoir is located, petroleum engineers determine what will be the extraction costs (capital) and then, what will the production (lifting) costs be. Once the size of the reservoir is postulated and approximate capital and operating costs are estimated, the next step is to test the structure and, if indeed a hydrocarbon reservoir is found, it is quickly delineated and a second estimate of capital and production costs is made. Following this, an estimate of the sales price of the crude oil and natural gas is made for the life of the project which can range from 5 years to 50 years. In fact, oil companies rarely make predictions beyond about 20 years and after 10 years the discount factors make further calculation marginal. With over one hundred years of experience in pricing coupled with an understanding of price trends during both up and down cycles, oil companies can quickly determine the approximate economics of any given project. After that it is a matter of execution to put the oil and gas into the tanks. The work of finding and developing an oil or gas field is different from nearly all other worldwide occupations. Expertise is hard come by and one judgment decision follows another. At the end of the day, crude oil is flowing to a tanker or into a pipeline where it will ultimately end up in “steel storage”. At that point the game changes to “downstream” which means refining the crude oil into useful products like gasoline, diesel, aviation fuel, lubricants and petrochemicals. It is at this point that consumers get annoyed by high gasoline prices and politicians fan the flames for reasons that are now becoming well-understood. In the lore of the business, refiners are thought to be more conservative, less flamboyant and go to church more often that the drillers. It could be the nature of exploration and production. The work is hard and hazardous and covers the globe. A wildcatter can be in Venezuela this year and in the Persian Gulf next year. Wildcatters get tired of the confines of a drilling location and from time to time feel a need to see the “bright lights” (which in some of their favorite joints can be rather dim). Working together, drillers and refiners provide the world with fuel. Today, while OPEC is important, it is no more important than the super giants like ExxonMobil, Chevron, BP, Royal Dutch Shell and Total. Nor are the super giants more important that the hundreds of smaller companies that, over the years, found a great deal of the world’s oil and gas. With these forces at work, the world will have fossils fuels enough to meet the commercial opportunities that will appear far out into the indefinite future.
