The last few weeks have seen major international oil and gas companies (IOCs) confirming their intentions to maintain, and in a few notable instances to marginally increase, capital expenditure levels through 2009.
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The last few weeks have seen major international oil and gas companies (IOCs) confirming their intentions to maintain, and in a few notable instances to marginally increase, capital expenditure levels through 2009. This comes in the face of declining oil prices in the second half of 2008 with no sign of improvement so far this year, which have and will severely impact profit margins. However, these companies realise that not to invest would be to repeat the grave errors made during the previous oil price downturns, most notably in the 1990s. As Tony Hayward, Group CEO, BP, commented during his opening speech at the 28th CERA Executive Conference in Houston last month, ‘the world economy will recover. The future is not cancelled’. This recovery will surely prompt a return to the double-headed spectre of rapidly increasing demand against a backdrop of constrained supply, potentially pushing oil prices to even greater heights than the US$ 147 witnessed in July 2008. With the International Energy Agency (IEA) predicting a 40% increase in energy consumption by 2030, and a corresponding need to invest more than US$ 26 trillion to meet this demand, the industry as a whole can ill-afford a two year investment hiatus during the current downturn.
So with Shell, BP, Total, Chevron and ExxonMobil all announcing their commitment to continue capital expenditure, the industry would appear to be well set to weather the current turmoil and emerge in a position to deal with a rising demand picture. Not so. Whilst IOCs sense an opportunity to build resources, national oil companies (NOCs) appear to be doing the exact opposite. NOCs, hit hard by falling share prices are suffering from an acute lack of funds with which to pursue their planned investment projects. A recent report by PFC Energy shows that ExxonMobil has regained its place as the largest listed energy company, overtaking PetroChina who managed to remain top dog for barely a year. Other IOCs have climbed the rankings once more at the expense of Petrobras, Gazprom and Sinopec who have exited the top six and now occupy the lowly ranks of nine, 11 and 12 respectively. PFC records a 15% drop in ExxonMobil’s share price in sharp contrast to a 74% drop by Gazprom from a market capitalisation of US$ 332 billion in 2007 to a mere US$ 83 billion today.
Gazprom’s predicament is representative of many NOCs and has prompted an announcement that it will take ‘tough measures’ to reduce costs and reschedule major investment projects. Whilst specific projects facing the axe have not yet been formally identified by Gazprom, an air of stagnation abounds. Key projects such as Shtokman, which Gazprom is planning to develop in combination with Total and StatoilHydro, remain on the drawing board with the final investment decision postponed from 2009 to the first quarter of 2010 at the earliest. StatoilHydro itself is also planning to reduce spending from US$ 16 billion in 2008 to US$ 13.5 in 2009. This includes a cut of 13% in oil and gas exploration from US$ 3.1 billion to US$ 2.7 billion with plans to drill considerably fewer exploration wells this year.
With approaching 80% of the world’s oil and gas resources held by NOCs such as the aforementioned and with access by IOCs strictly controlled, a lack of investment will indeed be a major obstacle to meeting demand in the years ahead. Add to this the decline of oil production in mature oilfields, for example, in the USA and the North Sea, the political unrest and uncertainty in Iran and Iraq and the financial question marks that now hang over many non-conventional oil projects such as Canada’s oilsands developments, and the outlook appears distinctly bleak.
The solution relies on co-operation and innovation. NOCs must be prepared to work with IOCs and open their resources to inward investment and the application of cutting edge technology. Likewise, IOCs must be able to offer NOCs creative financial inducements, which provide transparent and fair returns on investment for all parties. This as ever is the future of the oil and gas industry.