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Monday 1 December 2008
Low oil prices threaten investment and supply
Oil prices have a long way to fall before producers start to lose money and mothball fields, but even prices around US$50 could choke investment and lead to a supply crunch before the global economy recovers from recession.
Oil prices have a long way to fall before producers start to lose money and mothball fields, but even prices around US$50 could choke investment and lead to a supply crunch before the global economy recovers from recession.
Oil has dived from a record of almost US$150 a barrel in July to about US$50 now, but so far the only supply cuts have been output reductions from Opec as it attempts to halt the slide.
Prices would have to drop much further before they fail to meet most fields’ operating costs, and force wider shutdowns.
“For the bulk of production you can get down into the US$20s or even the teens,” said Mike Wittner of Societe Generale.
Even the most expensive crude, squeezed from Canada’s bitumen-soaked oil sands, is profitable at current price levels, provided the field is up and running.
Marathon Oil’s operating costs in its Athabasca Oil Sands division are US$40 to US45, Neil McMahon, oil analyst at Bernstein estimates, while Royal Dutch Shell’s oil sands operating costs are only US$36.
Traditional crude production is cheaper.
In Saudi Arabia, the United Arab Emirates and Kuwait, operating costs are as little as US$1 to US$2, Ross Cassidy of industry consultants Wood Mackenzie said.
Operating costs are a fraction of the total costs. Industry executives say current prices are not enough to cover the full costs of many types of projects. “I think it is beginning to get dangerous. I think that ... we are getting to a level that will brake investment in a sector that is crucial,” Christophe de Margerie, chief executive of French oil major Total, said.
The International Energy Agency, which advises 28 rich nations on energy policy, expects demand to rebound and markets to tighten in 2010-2011. “We may see prices going even higher than we saw this summer,” IEA chief economist Fatih Birol said on Thursday.
The timing of any price rally might be bad for the world economy.
The Organisation for Economic Cooperation and Development this week forecast Britain, the United States, the eurozone and Japan would still be suffering the aftermath of the financial crisis in 2010, with sluggish growth rates. Growth should return to more normal levels in 2011, but the need to raise taxes to repay the debts incurred as a result of governments’ fiscal stimulus packages will act as a brake.
Higher oil prices, boosted by a lack of investment now, could lead to prolonged economic weakness, the IEA warned in its World Energy Outlook last month.
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Low oil prices threaten investment and supply
Reuters in London
1 December 2008
Oil prices have a long way to fall before producers start to lose money and mothball fields, but even prices around US$50 could choke investment and lead to a supply crunch before the global economy recovers from recession.
Oil has dived from a record of almost US$150 a barrel in July to about US$50 now, but so far the only supply cuts have been output reductions from Opec as it attempts to halt the slide.
Prices would have to drop much further before they fail to meet most fields’ operating costs, and force wider shutdowns.
“For the bulk of production you can get down into the US$20s or even the teens,” said Mike Wittner of Societe Generale.
Even the most expensive crude, squeezed from Canada’s bitumen-soaked oil sands, is profitable at current price levels, provided the field is up and running.
Marathon Oil’s operating costs in its Athabasca Oil Sands division are US$40 to US45, Neil McMahon, oil analyst at Bernstein estimates, while Royal Dutch Shell’s oil sands operating costs are only US$36.
Traditional crude production is cheaper.
In Saudi Arabia, the United Arab Emirates and Kuwait, operating costs are as little as US$1 to US$2, Ross Cassidy of industry consultants Wood Mackenzie said.
Operating costs are a fraction of the total costs. Industry executives say current prices are not enough to cover the full costs of many types of projects. “I think it is beginning to get dangerous. I think that ... we are getting to a level that will brake investment in a sector that is crucial,” Christophe de Margerie, chief executive of French oil major Total, said.
The International Energy Agency, which advises 28 rich nations on energy policy, expects demand to rebound and markets to tighten in 2010-2011. “We may see prices going even higher than we saw this summer,” IEA chief economist Fatih Birol said on Thursday.
The timing of any price rally might be bad for the world economy.
The Organisation for Economic Cooperation and Development this week forecast Britain, the United States, the eurozone and Japan would still be suffering the aftermath of the financial crisis in 2010, with sluggish growth rates. Growth should return to more normal levels in 2011, but the need to raise taxes to repay the debts incurred as a result of governments’ fiscal stimulus packages will act as a brake.
Higher oil prices, boosted by a lack of investment now, could lead to prolonged economic weakness, the IEA warned in its World Energy Outlook last month.
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