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The recent ‘cost tsunami’ and now the rapid fall in oil prices, as witnessed over recent months, could have major implications for future security of oil and gas supply.


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The recent ‘cost tsunami’ and now the rapid fall in oil prices, as witnessed over recent months, could have major implications for future security of oil and gas supply. Whilst the global financial meltdown has reduced worldwide demand for energy in the short term, the actual and potential postponement of a series of major international oil and gas projects will surely lead to pressures on future supply and a return to escalating oil prices.

It is today well established that the era of ‘cheap and easy oil’ is over. It is also recognised that production in many of the world’s largest fields is now in steady decline. However, the world is not running out of oil, far from it. It is merely becoming increasingly harder to access, whether from a technological or political perspective. The solution as ever, lies in significant investment in oil and gas exploration, production and infrastructure. In their annual World Energy Outlook, due out later this month, but previewed by The Financial Times, the International Energy Agency (IEA) discloses its belief that current reserves are declining faster than it had previously predicted, at a rate of 9% per annum. To offset this supply shortfall and generate new oil and gas resources to meet increasing demands from expanding economies such as China and India, the IEA believes that the world’s oil and gas industry must invest US$ 360 billion a year from now until 2030.

In the current climate of financial uncertainty this would appear optimistic. It would be fair to say that the era of ‘easy money’ is now over too. Oil prices have fallen from a high of approaching US$ 150 to less than US$ 60 at the time of writing, in a few short months. Oil companies, whether they are independents or national oil companies, are extremely anxious about making investment decisions whilst this degree of volatility persists. Saudi Aramco, which had committed to investing US$ 129 billion on various high profile energy projects, with the aim of lifting production capacity 2.5 million bpd higher than its current target of 12.5 million bpd, has decided to re-evaluate all of its investment plans.

Similarly BG Group has placed the third phase of its Karachaganak project, in Kazakhstan, on indefinite hold whilst it reviews its position and re-examines project costs. In the oilsands sector, the backlash to diminishing oil prices has been even greater. Despite reporting strong third quarter results, Shell’s Chief Executive, Jeroen van der Veer, announced that his company would be delaying investment plans on the second phase of its Athabasca oilsands project. This follows similar decisions by companies such as Statoil, Suncor and Petro-Canada, also operating oilsands ventures, a sector which is particularly vulnerable to increasing costs, especially when accompanied by decreasing oil prices.

Despite these concerns, any lull in oil and gas construction activity must only be a temporary phenomenon. As the IEA findings clearly illustrate, any delay in investment today will have serious repercussions for future oil and gas supply. Fortunately, oil and gas companies appear well aware that the current ‘malaise’ will ultimately reverse the upward cost trend in the industry. Weaker demand will lead to a greater availability of manpower and a fall in the prices of such vital raw materials as cement, steel and copper, the inflated costs of which have been crippling investment. The stalling and subsequent renegotiation of key contracts will allow the industry to re-emerge from the current global downturn in a stronger position. It will enable oil and gas companies far greater control over their costs, allowing them more freedom to invest in those key, and often most technologically challenging and capital intensive projects, but which will ultimately derive the greatest returns of hydrocarbon resources.

This issue of Oilfield Technology provides an extensive range of analysis and technical information from around the world. It details a host of innovative technologies and solutions available to the oil and gas industry in meeting the challenge of building global oil and gas reserves. For further information about Oilfield Technology and the nine issues we will be publishing in 2009, please visit our website www.oilfieldtechnology.com.


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