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High oil prices ‘for 20 years’

THE SUNDAY TIMES: High oil prices ‘for 20 years’

June 12, 2005

By Dan Box

THE price of oil could remain above $40 a barrel for the next 20 years, according to senior executives at Shell.

This bold prediction is likely to cause surprise, with analysts predicting that if it is accepted by the industry it could lead to a fresh wave of mergers between oil companies.

“The longer-term signal is one of clearly increasing prices,” said Albert Bressand, a vice-president of Shell and author of the oil giant’s global scenarios report, published last week and long seen as authoritative in the industry. “We are at about $50 a barrel today. What we describe in the scenarios is coherent with the long- term price being in the $30-$40 range.”

Bressand’s position is different from that of Lord Browne, chief executive of BP, who said on Wednesday that world oil prices were likely to remain above $40 a barrel only until new supplies come on stream in a few years. This figure is double the approximate $20 price both BP and Shell use as a long-term benchmark when deciding whether to invest in new projects or make acquisitions.

Bressand said: “Browne talks about oil only over the next five years and he gives a number of phenomena such as an increase in Saudi capacity and new investments in the Caspian that might then bring this price down. The figures in our scenarios are over the next 20 years.”

The Shell scenarios suggest that increased demand from economies such as China, worries over the security of the oil supply and the potential cost to companies of carbon emissions will inflate the cost of oil.

The price of oil has risen sharply in the past year to more than $51 a barrel today. Despite this, analysts said they were surprised at Shell’s long-term oil forecast.

“This is a step change in a leading company’s thinking,” said Fadel Gheit, the veteran oil analyst at Oppenheimer in New York. “It leads me to believe the industry is acknowledging there has been a change and a return to $20-$30 a barrel, while possible, is very unlikely.”

The more the market accepts that high oil prices are here to stay, the more likely a new round of mergers in the industry becomes, he said.

“If oil is going to be supported at $40 a barrel, they can justify higher acquisition prices for target companies,” Gheit said.

The last round of oil-major mergers took place in 1998, during which BP acquired its American rival Amoco and Exxon merged with Mobil. It was triggered by a fall in the price of oil to about $10.

Gheit said: “What is going to trigger mergers in the industry now is not a drop in the oil price, but the realisation that prices are going to remain high. Companies will finally throw in the towel and go for it.”

Separately, Paul Golby, chief executive of Eon UK, a large energy supplier, has warned that domestic bills could rise again this winter.

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