Royal Dutch Shell Plc  .com Rotating Header Image

Reuters: Oil output hit by high costs

EXTRACT: Royal Dutch Shell and BP, the world’s second- and third-largest fully publicly traded oil firms, both indicated in July they may miss their 2006 output targets.  Both firms cited the effect of production-sharing contracts under which they get fewer barrels at high prices. Shell’s output was hit by attacks on oil installations in Nigeria, where it is the top foreign producer.

THE ARTICLE

LONDON (Reuters)
Tight market for rigs and services delay projects

The world’s top oil firms are struggling to expand oil and gas output, hit by a tight market for drilling rigs and rising costs, hampering development of new supplies at a time of record prices.

Production is falling at many companies even as capital spending rises. Crude oil has more than tripled since early 2002 to $70 a barrel, driven by worries about supplies and growing world demand.

Norway’s Norsk Hydro cut its 2006 output goal in June and Statoil in July said it may miss its target — signs that a tight market for rigs and other services is hitting firms’ ability to develop projects on time.

“Company production targets and market expectations for production growth are at risk of disappointment,” Deutsche Bank analysts said.

“Delays to drilling programmes and project start-up seem increasingly likely.” Oil and gas output at eight major European oil firms dropped a collective 530,000 barrels of oil equivalent a day in the second quarter, Deutsche estimates. That is equal to half of daily oil demand in The Netherlands.

Royal Dutch Shell and BP, the world’s second- and third-largest fully publicly traded oil firms, both indicated in July they may miss their 2006 output targets.

Both firms cited the effect of production-sharing contracts under which they get fewer barrels at high prices. Shell’s output was hit by attacks on oil installations in Nigeria, where it is the top foreign producer.

Other analysts say rising costs pose a risk of delays to projects, potentially deferring new supply.

“The upward pressure on costs is just huge,” said Bruce Evers, oil analyst at Investec Securities. “A lot of projects are going to get delayed. It’s a fact of life these days.”

Soaring costs due to high demand for oilfield services is prompting firms to consider mothballing some investments to avoid hitting returns.

Shell said in May it might postpone some deepwater projects because of rising costs. The cost of hiring a rig has more than doubled in the past two years, according to BP.

Rigs are only part of the picture. Costs of materials like steel for pipelines and equipment such as pumps and valves been rising too, analysts say.

Cost inflation is partly a result of a jump in spending now after cutbacks years ago when prices slumped, analysts say. Oil prices slid to $10 in 1998 because of the Asian economic crisis, sparking predictions of low prices for good and prompting companies to cut back on investment.

“That put a lot of small service companies out of action,” Investec’s Evers said. “So when companies put their foot to the floor, surprise surprise, service companies couldn’t deliver.” The number of rigs drilling worldwide averaged 3,155 in July, the highest monthly average so far this century, according to oil services firm Baker Hughes.

It was much higher in the early 1980s, when oil companies were drilling hell for leather for new supplies. The rig count rose above 6,000 in late 1981. But any tightness in the rig market is unlikely to last as more are built, analysts say.

“There is a scenario whereby rig capacity is a lot more comfortable by the end of 2007, because there are rigs being constructed,” said Jason Kenney of ING.

He said that rig availability is unlikely to hinder growth plans, but a lack of workers to build projects like liquefied natural gas (LNG) plants may lead to delays.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Reuters: Oil output hit by high costs”

Leave a Comment

%d bloggers like this: