Petroleum Review - Editorial - August 2005
Just another turbulent month
One of the great pleasures of writing about the oil and gas industry is that it is endlessly fascinating. A dull month is almost a contradiction in terms and the last month has had more than its fair share of drama and excitement.
The month started very positively, with Lehman Brothers’ mid-year update of its E&P spending survey. The original December 2004 report foresaw increased worldwide E&P expenditure of 5.7% in 2005 by the 356 companies in the survey. The mid-year revision now anticipates a 13.4% increase to $192bn in 2005.
Clearly, tight supply and high prices are now beginning to trigger increased expenditures. However, high steel costs, specific labour shortages, capacity constraints in key supply areas and rising energy costs are all inflating project costs.
It is not at all clear that even the higher expenditures will result in real increases in activity. Shell’s major asset swap – where Gazprom took 25% of the Sakhalin II project in exchange for Shell taking 50% of the deeper producing horizon in the Zapolyarnoye gas field in Yamal-Nenets – appeared a triumph until new cost figures for Sakhalin II were announced. The latest estimate for this key project is now $20bn, where just two years earlier it had been $10bn. There are undoubtedly special features and difficulties in undertaking a major project in Russia, but much of the cost inflation is that faced by every other large oil and gas project.
BP appears to be involved in something of a cliff-hanging drama, with the ballasting problem/accident on the Thunder Horse production platform. Even if the cause proves straightforward and fixable, delays to the project start-up appear to be inevitable as official enquiries/surveys/certifications grind through due process.
BP’s minority partner in Thunder Horse – ExxonMobil – can be forgiven a certain pride that the Kizomba B project started up early, in July. The Kizomba B project is one of a select few major projects to have genuinely started up early. Company PR departments love to put out early start-up announcements – however, these are invariably only early on the revised, revised schedule. Kizomba B is exceptional in being early even against the earliest schedule. Something of a triumph for Exxon’s standardisation under its ‘design one, build several’ philosophy.
Michel Contie, in his Cadman Lecture speech reminded us that people still have a lot of fun working in the oil industry, while also noting how the challenges are getting tougher.
One of the industry’s major challenges is to replace the production lost to capacity erosion each year. [Petroleum Review now intends to use the term ‘capacity erosion’ rather than ‘depletion’ simply because the latter seems to provoke irrational and emotional responses as well as implying the cause is physical rather than financial.]
Our analysis of the latest BP statistics shows that, although the number of countries, where capacity erosion is leading to a reduction in volumes produced, has increased from 18 to 20, the overall volume of production lost to capacity erosion actually fell by 200,000–300,000 b/d in 2005. Clearly, incremental investment is now slowing capacity erosion. The analysis has been greatly complicated by the size and extent of recent data revisions in the BP Statistical Review. North Sea production data also seems to be the subject of larger than usual data revision. Hopefully this will lead to more accurate data to work with.
Our reviews of the US and Canada show some of the ambitious plans to expand Gulf of Mexico production and Canadian tar sands output. They also hint that future gas supplies remain a concern and a constraint. The Mackenzie Delta pipeline has yet to get the go-ahead, while the Alaska pipeline appears as far away as ever. More encouragingly, LNG import terminals in the US and Canada are now under construction.
On the oil front, although prices remain very firm, spiking above $60/b on any negative news, the supply situation appears reasonably well balanced. According to the latest International Energy Agency (IEA) report, stocks are starting to build, Opec is maintaining high levels of output and new projects are coming onstream more or less on time. However, the ‘900-lb gorilla in the corner of the room’ is what happens in the fourth quarter when, according to the IEA, demand hits 85.9mn b/d – up from 81.9mn b/d in the second quarter and 83.7mn b/d in the third quarter.
However, if oil supply is going to be challenging later this year, then so is gas. The BP statistics tell us that in 2004 US production fell by 1.2%, while demand rose by 0.2%. In Canada, production was flat and demand declined by 2.9%. This effectively let the US off the hook, with Canada and LNG making up the US shortfall. This year looks more challenging, with the forward gas price already over $9/mn Btu for the winter quarter, which, in turn, is producing forward electricity prices up to 50% above recent levels.
In Europe the outlook is even more challenging. Gas production in 2004 fell in Germany (–7.5%), Italy (–5.5%) and the UK (–6.7%), but demand grew by 0.4%, 3.8% and 2.7% respectively. UK forward gas prices are escalating dramatically, as are forward electricity prices. This summer’s drought is likely to restrict hydro generation and may lead to shortfalls in French nuclear generation or low river levels. Supplying gas and electricity in Europe is going to be very profitable this year. Customers may see it differently.
Chris Skrebowski
The opinions expressed here are entirely those of Chris Skrebowski, Editor of Petroleum Review, and do not necessarily reflect the view of the EI.
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