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Big companies rue loss of ‘easy oil’

The New Zealand Herald

Big companies rue loss of ‘easy oil’

5:00AM Thursday May 22, 2008
By Grant Smith and Jim Kennett

Never have so many oil and gas companies spent so much to produce so little.

That’s the challenge facing Exxon Mobil, Royal Dutch Shell, BP, Chevron, Total SA and ConocoPhillips, which will spend a record US$98.7 billion ($127.41 billion) this year on exploration and production, Lehman Brothers Holdings estimates.

Costs more than quadrupled since 2000 as explorers targeted more challenging reservoirs and demand rose for labour and material.

New supply from outside Opec nations will meet about 20 per cent of growth in world demand during the next four years, data from the International Energy Agency (IEA) show. The lack of supply has traders betting oil will remain at about US$120 a barrel for at least eight years, according to futures on the New York Mercantile Exchange.

The wagers are buttressed by delays at fields including Kashagan, a Kazakh deposit where the budget has more than doubled to US$136 billion and the first production is eight years behind schedule.

Waters frozen half the year forced contractors to build artificial islands, while care must be taken to protect workers from deadly hydrogen sulfide fumes emitted by the wells.

“The future is going to be very trying for the international oil companies,” said Robert Ebel, chairman of the energy programme at the Center for Strategic and International Studies in Washington.

“There’s no more easy oil for them. Kashagan is a shining example of the problems they face bringing new oil into play.”

The failure to develop new energy sources may drive crude to between US$150 and US$200 a barrel within two years, Arjun N. Murti, an analyst with Goldman Sachs Group predicted this month. Options contracts that let buyers to lock in crude at US$200 a barrel and expire in December on Nymex have risen more than ninefold since January.

Oil companies are turning to more technically challenging fields as oil-rich nations limit access.

Russia is taking control of BP’s stake in the Kovykta gas field, a deposit in east Siberia big enough to supply Asia for five years. Algeria has imposed a profits tax, and Venezuela seized four oil ventures from companies including Exxon Mobil and ConocoPhillips a year ago.

Drillers could access only 7 per cent of known world reserves in 2005, down from 85 per cent in 1970 after Middle Eastern nations took control of their fields, according to a July report by the National Petroleum Council in Washington.

The 13 members of the Opec held 919 billion barrels of oil as of 2006, or 76 per cent of proved global reserves, according to BP. Add Russia, the world’s second-biggest producer, and the total rises to 83 per cent.

“Normally, high prices would mean higher supply,” said Fadhil Chalabi, executive director at the Centre for Global Energy Studies.

“What is happening is something different. The international companies are denied access to areas of abundant oil within Opec, and it’s getting costlier in other areas.”

The cost to find and develop a barrel of crude between 2000 and 2007 more than quadrupled to US$18 from US$4, said Andrew Latham, vice-president of exploration services at Wood Mackenzie Consultants in Edinburgh. Demand in the period climbed 11 per cent, or 8.8 million barrels a day, according to the IEA.

Consumption will jump another 8.5 per cent to 95.8 million barrels a day by 2012, the figures show.

Even as countries reclaim their reserves, many are relying on high oil prices rather than increased production to meet government budgets. Output in Russia is expected to fall for the first time in a decade, and Saudi Arabia’s decision this month to increase output by 300,000 barrels a day still won’t offset a 390,000 barrel-a-day drop in monthly Opec production in April.

“This is a huge issue,” said Joseph Stanislaw, chief executive officer at JA Stanislaw Group and former head of Cambridge Energy Research Associates. “We don’t have access to those areas to push the peak production higher and higher.”

Oil companies agree, to a point.

Exxon Mobil could “do even more if governments provide access to further quality opportunities”, said Tony Cudmore, a spokesman for the Irving, Texas-based company.

Shell chief executive Jeroen van der Veer said in January that the company has to deal with state-run companies demanding better terms when negotiating energy deals and that this trend will continue.

Previous oil shocks led to new supply, including the drilling in the North Sea and the 800-mile Trans-Alaska Pipeline System. Record prices support drilling Brazil’s Tupi field, which may have 8 billion barrels of recoverable reserves.

Consumers are paying for the failure to find more crude. It takes US$220,000 to fill a Boeing 747 with jet fuel, about double the price a year ago.

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