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Project delays ‘drive up prices’

Financial Times: Project delays ‘drive up prices’: “Royal Dutch Shell, Europe’s second largest energy group by market capitalisation, this year made headlines with delays at its Sakhalin oil and natural gas project off Russia’s east coast and its Bonga oilfield in Nigeria.”

Tuesday 27 September 2005

By Carola Hoyos in London

Delays of big oil projects are helping to drive oil prices higher as energy companies become increasingly unreliable at delivering production from new oilfields on time, a recent analysts’ report has warned.

Oil production in 2007 will be 2m barrels a day less than expected because companies are increasingly having to delay the date at which their projects deliver their first barrels of oil, according to Sanford Bernstein, an international research group.

“The industry is truly dreadful at project management, or at least at predicting the timing of project start-ups. The amount of production growth that has been lost to projects being delayed over the past few years is stunning, over 2m b/ d-2.3 per cent of expected global production in 2007,” the report said.

As a result Bernstein believes annual supply growth will slow to 1 per cent in the next decade, compared with the 2 per cent expected by many other analysts – including those at the International Energy Agency, the industrialised countries’ watchdog agency.

Royal Dutch Shell, Europe’s second largest energy group by market capitalisation, this year made headlines with delays at its Sakhalin oil and natural gas project off Russia’s east coast and its Bonga oilfield in Nigeria.

But apart from ExxonMobil – the world’s biggest, and possibly most tightly run energy group, the problem of ‘project slippage’ is industry- wide, the Bernstein report said.

The problem is caused by companies having to venture into increasingly difficult terrain and use untested technology as the world runs out of big, easy-to-find oilfields.

Meanwhile, new competitors attracted by high oil prices have made hiring exploration rigs increasingly difficult. The project delays are particularly serious in today’s tight market conditions where the world’s oil producing states are barely managing to keep up with strong demand, especially from the US and China.

Had the 40 large oil projects that Sanford Bernstein studied been delivered on time, the world’s spare oil capacity would be double today’s volume of 1.3m b/d. “Thus, it could be argued that this effect has been a direct, contributory driver of current oil prices,” Bernstein said.

The longer-term prognosis also looks bad. John S. Herold, the industry consulting and research firm, said in a report released yesterday that worldwide oil reserves had “barely changed in 2004, the poorest performance by the sector in many years”.

Total year-end reserves were up only 2.8 per cent, with companies spending more on share buy-backs than on exploration, said Tom Biracree, vice-president at John S. Herold.

He agreed with Bernstein’s broad analysis of project delays. “When did you last hear that a project was going to come in on time. It does appear that delays and cost overruns are routine.”

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