Economy, Higher Oil Prices May Restart Shelved Projects

Dow Jones Newswires

KUALA LUMPUR (Dow Jones Newswires), Jun. 9, 2009

A rebound in oil prices and signs of economic recovery are renewing interest in exploration and production, but producers are still wary of volatility and determined to cut construction and service costs, which surged last year after oil prices spiked to record levels.

Crude oil prices have risen back above $60 a barrel, from a low of around $42 earlier this year, and are expected to rise further in the next few years as supply fails to keep pace with a global recovery.

Higher prices and lower construction costs have made some shelved projects viable again. Estimated costs for Petro-Canada's (PCZ) delayed Fort Hills oil sands mine have sunk 30% to below C$10 billion, and the company expects to generate a double-digit return with oil prices at $60 a barrel, the company's chief executive Ron Brenneman said in late April.

But a rush back into development could keep costs high and cut the payoff expected from future shortages.

"I think that is bad news...But that's how the world works," said Royal Dutch Shell PLC (RDSB.LN) Chief Executive Jeroen van der Veer.

The Anglo-Dutch major has one of the biggest capital investment programs in the industry at $31 billion to $32 billion this year, but it is striving to further lower costs through negotiations with its contractors.

High costs prompted it to shelve projects such as the Carmon Creek and the Athabasca oil-sands expansion in Canada; Mars B, an oil project in the Gulf of Mexico; and the Pierce field in the U.K.

Van der Veer said he won't be surprised if the Cambridge Energy Resources Associates index, which measures construction costs in the energy industry, falls to 200 this year.

The CERA index surged to 240 in the third quarter of 2008 from 110 in 2004 as investors rushed in when oil prices peaked at more than $147 a barrel last July.

Looking at Future Needs

If producers can control costs, future capacity constraints could mean bright prospects for those who continue to invest.

Global investment in oil and gas projects is expected to decline this year for the first time in a decade, falling about $100 billion, or 21%, to around $375 billion, the International Energy Agency said.

Since October of last year, a sharp downturn in energy prices and lower global demand has caused more than 50 major oil and natural-gas projects around the world to be cancelled or delayed by at least 18 months, the agency said in a report in May.

French oil major Total SA (TOT) isn't delaying any projects in Asia as it remains confident oil prices will rebound from current levels, and capacity constraints will emerge.

"In five years from now, there won't be enough capacity. We'll definitely continue to invest in all projects," said Jean Marie Guillermou, Total's senior vice president for Asia and the Far East.

"We're confident that in the future (the oil) price will come back to a higher level than it is today. It's reinforcing our long-term strategy, which is to invest now to prepare for the future."

With global oil prices still well off last year's peaks, Total aims to cut its operating costs by 20% this year.

Still Too Early to Invest

However, consultants said it's still too early to start investing again.

"The current oil price is still uncertain and it isn't justified by fundamentals," Fereidun Fesharaki, chairman of FACTS Global Energy, told Dow Jones Newswires.

He expects oil prices to fall to $55 per barrel at the end of this year due to high inventories, with many big projects also nearing completion.

"There are so many people contracted to projects but their jobs are coming to an end," Fesharaki said.

"It would take at least about a year to see companies start investing again," he said.

Shell has indicated it will wait until the economics is right before advancing its oil sands and floating liquefied natural gas projects.

"If I feel that by waiting prices will be lower, I prefer to wait," van der Veer said.

J. Robinson West, Chairman of PFC Energy, said some oil producers are looking to scale service and investment costs back down to the 2006 levels, and "some of them are just going to withhold spending as long as possible to get the costs down."

"Some projects are still being slowed. There's still considerable tension between the service sector and the operators," he said.

Operators are also taking another look at long-term drilling contracts, "but needless to say the drillers are going to resist as much as possible," West said.  

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