8MM Barrels/Day of Future Oil Supply Growth at Risk

LONDON (Dow Jones Newswires), Mar. 26, 2009

The slowdown in investment in oil and gas production could lop off nearly eight million barrels a day of future oil supply growth, setting the stage for another big crude-oil price spike in the years to come, according to a new study.

The global credit crisis and falling oil prices have squeezed oil companies' finances and forced many of them to cut capital spending and postpone projects. That could have big implications for supply when the global recession ends and demand for energy recovers, the report by Cambridge Energy Research Associates says.

Before the economic crisis set in, CERA projected that world oil production capacity would rise to 109 million barrels a day by 2014 from the current 94.5 million barrels a day. It now says 7.6 million barrels a day -- or slightly more than half -- of that increase is "at risk" due to project deferrals or cancellations.

The report says that reduction in capacity is a "potentially powerful and long-lasting aftershock" following the oil price slide of 2008, when, within the space of a few months, the price of crude oil fell by more than two-thirds, from a record high of $147 a barrel. It is currently trading around $53 a barrel.

"A price collapse of this magnitude really registers on the Richter scale, and its impact on levels of future investment will be felt for years," said CERA Chairman Daniel Yergin in an interview.

The report comes amid ample evidence that companies are scaling back on investments in costly projects that require a high oil price to be profitable, such as the oil sands of Canada or the ultra-deep waters offshore west Africa.

Middle East oil producers, hit hard by falling export revenue, have also reined in their spending plans. The Organization of Petroleum Exporting Countries says as many as 35 new projects in OPEC countries could now be delayed past 2013. Most of the western supermajors insist they are sticking to their big investment plans; but even they have said they are slowing down some developments to take advantage of falling costs.

The slowdown is troubling the International Energy Agency, the Paris-based watchdog that advises oil-consuming countries, which has also trimmed its forecast for supply growth due to the fall in oil prices and the lack of available credit.

The agency's deputy executive director, Richard Jones, told a conference in London this week that upwards of two million barrels a day of new oil production capacity that was due on-stream in coming years looks likely to have been deferred for now.

"Unless sufficient companies have the will and financial ability to invest through the down-cycle, there is a real risk that supply growth may lag the eventual rebound of demand, leading to substantial price increases - possibly as early as this year," he said.

CERA said it expects a large number of new appraisal projects in deepwater Brazil, Angola, Nigeria and the U.S. Gulf of Mexico, as well as in Canada's oil sands and Venezuelan heavy oil, to be postponed or canceled due to the low oil price. It noted, though, that, with industry costs expected to fall this year, so will the oil price necessary to justify investment in such high-cost projects.

Some projects in the U.K. and Norway are also seen as vulnerable, because the credit crunch is hampering companies' access to capital. Other high-cost ventures, such as new biofuels and projects that seek to turn natural gas and coal into clean-burning transportation fuels, are also likely to be affected, the CERA report said.

But CERA hedged its predictions of future supply tightness with uncertainty about the rate at which world oil demand will recover after the recession. If it didn't begin to rebound next year, as many predict it will, the oil market could face a "large surplus of production capacity for the next several years."

Government policies to counteract climate change and increase energy efficiency could also drive down the west's appetite for oil.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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