Posted on 10/29/2008 8:35:01 AM PDT by thackney
The slump in oil prices has spread relief among consumers and fuel-reliant industries, but also is squeezing the companies who could invest in new sources of oil -- spurring concerns that prices will prompt them to shelve investments.
Industry executives warn that could mean the world will face a dramatic ramping up of prices as soon as the global economy, and demand, begins to rebound.
"Low oil prices are very dangerous for the world economy," said Mohamed Bin Dhaen Al Hamli, the United Arab Emirates' energy minister, speaking Tuesday at an oil-industry conference in London. "We need an adequate and reasonable oil price that will continue to stimulate investment." With prices now languishing, he said, "a lot of projects that are in the pipeline are going to be reassessed."
The global economic slowdown has driven down demand for oil, pushing crude prices to levels not seen since the spring of 2007. In an attempt to stem the decline, the Organization of Petroleum Exporting Countries agreed last week to slash output by 1.5 million barrels a day -- its biggest single reduction in almost eight years.
But the move didn't stop the slide. U.S. benchmark crude for December delivery fell 49 cents on Tuesday, or 0.78%, to $62.73 on the New York Mercantile Exchange. That is down about 57% from its record high of $145.29 in July.
Nobuo Tanaka, head of the International Energy Agency, the Paris-based watchdog, was one of several experts at the annual Oil and Money conference here predicting that the industry could be setting the stage for yet another supply-and-demand whiplash down the road. "We're concerned that supply won't catch up with demand after this crisis," Mr. Tanaka said. "The supply crunch may come again, but in a more acute way."
The price of crude began its rally five years ago, when an oil industry that hadn't invested enough in new capacity during the years of low prices failed to cope with surging demand from the booming economies of China and India. That scenario could now play out all over again. "I hope we don't go through the same cycle," said Mr. Al Hamli.
In two years' time, "we could see much higher prices than we saw three months ago, if the investments are not going through," said Fatih Birol, the IEA's chief economist.
To be sure, most big oil companies have shown no sign of trimming their investments. Royal Dutch Shell PLC says it is sticking to its capital-investment target of $36 billion for this year -- the largest in its history -- and Chevron Corp. is also charging ahead with its $23 billion program.
Most of the majors' big projects are designed to break even at prices substantially lower than the current cost of crude. "I don't think there will be major changes in investment," said Paolo Scaroni, chief executive of Italian oil company ENI SpA. "Maybe in unconventionals, but not conventional oil projects."
Yet it is precisely the so-called unconventionals that have become a big focus of the oil companies' activities in recent years. Billions of dollars have been poured into squeezing crude out of Canada's gooey tar sands, converting Venezuela's heavy oil, and pumping ultra-sour natural gas in the Middle East. Some of those projects could now be scaled back or even abandoned, conference speakers said. Already, some independent companies producing natural gas in the U.S. have announced cuts in investment.
"If this oil price stays low, alternative energy, Canadian oil sands, Brazilian new discoveries will be out of the market," said Abdalla Salem El-Badri, OPEC's secretary-general.
Though forecasters expect demand for oil to be flat or even negative next year in the rich world, it is likely to grow in countries like China, whose economy has so far weathered the world-wide financial crisis.
Mr. Birol said falling oil prices will also deter investment in alternative energy. Low-carbon technologies such as wind and solar were economically competitive only so long as oil prices were high. Countries set to meet in Copenhagen next year to agree a new deal on curbing emissions may decide it is a "luxury" in view of the financial crisis. Lower oil prices are "not good news for climate change," he said.
We are really there right now. I’ve read and heard through the the grapevine that numerous shale players are shutting in or curtailing production. I’ll include a link to check “one of the SWestern areas pricing structures and you can see that natural gas is considerbly lower than NYMEX in this area. Same for the Rockies. Chesapeake is definitely a company that has already shut-in some production.
The engineering dynamics of a recently drilled, fraced Barnett Shale well would normally demand that the well be produced full bore initially until the water is dropped off the formation. If you shut one in immediately, it can be hell trying to bring it on a few months later, due to pressure/water factors. I’ve been told that by experts (engineers)and it is not my end of the business.
In summation, it is not a pretty picture for producers right now, for either crude oil or natural gas. Rig prices have not yet fallen to a degree that would match the commodity decline, although they are coming down. Acreage acquisition costs are going down, but not enough from the stratospheric heights they reached in some of the hot shale plays like the Barnett, Haynesville, Marcellus, Fayetteville and others.
Pricing link:
http://intelligencepress.com/features/intcx/gas/intcx_gas_point.emb?pointcode=ICEWTXWAHA
bttt
Low oil prices dangerous to economy? No, what he really meant was that low oil prices were dangerous to his POCKETBOOK and that of all the other oil thugs of OPECKER.
Thanks for the info.
I do know the LNG import terminal completed earlier this year in Freeport, Texas is not being used because the price dropped to low in the US. They are petitioning to use it as an export terminal now.
Thanks both of you, very useful. Chesapeake put in two pipelines (one for water, switch to gas later) to service these new wells, so maybe they will go forward as Bob indicated. Bob, your statement on the frac and water issue should apply to these wells (Tarrant County Barnett shale).
Another note, a private firm (can’t give name) in Denver told me they are actively negotiating buy-ins on producing oil fields and proven areas as they think deals look attractive now. These people just buy interests, they don’t operate/drill.
It should indeed. The engineer who explained the mechanics to me used Tarrant County, Barnett Shale wells as his model.
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