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Oliver L Campbell : 
Will postponed investment push peak oil forward?

 

The recent drop in oil prices has given rise to two items of perceived wisdom which are worth looking at:

1. Low prices will halt much new investment. Development of high cost production, which includes areas like pre-salt offshore Brazil, the Gulf of Mexico and the Athabasca Tar Sands, will be postponed or delayed till prices rise again.

2. Peak oil will be advanced. The postponement in developing new production means current capacity will not be replaced as it is consumed. Peak oil will thus occur soon after the current economic crisis is over and world demand, particularly in China and India , takes off again.

On the first point, we can be guided by history to see what effect low prices have on investment. In June1998, the oil price went down to $10 a barrel, it did not reach $30 till February 2003, and it took till October 2004 to attain $40. You can say that, in the five year period to 2003, the incentive to invest was low, yet in the subsequent years there was enough oil to meet demand.

Right now, you can see new apartment blocks and housing estates that are half built and temporarily abandoned by their builders and say that is what will happen to oil projects. But there is a big difference--housing projects are mainly financed by the banks whereas oil projects are largely self financed. The oil companies have such a large cash hoard that the larger ones have been repurchasing their shares. Also, lead times in the oil industry are long so, once projects to find and develop new production are started, they not often abandoned--they may be slowed down but seldom postponed indefinitely.

As regards the second point, Mr Chris Skrebowski, a member of The Oil Depletion Analysis Centre (ODAC), a UK charity established to promote the awareness of oil depletion, is one of those who argue that, though there is still sufficient oil in the ground, oil companies will not have the capacity to meet demand and peak oil will occur by 2012, if not before. To arrive at this conclusion, he meticulously looks at all new development projects to which the oil companies are committed, calculates the depletion of current oil provinces, and comes up with a probable net effect on production capacity.

It is true the current postponement and slow-down in projects support Mr Skrebowski's contention and those who think like him, but are they right? I much doubt it because history is not on their side. Back in 1998, the oil companies took their foot off the pedal and changed down a gear, but they soon accelerated when conditions started to change in 2003. I see no reason why they cannot do the same once oil prices pick up again and reach, say, the $60 a barrel mark. Offshore production in deep waters is costly--some say in pre-salt offshore Brazil it could be as high as $40 a barrel--and so is production from tar sands, but both should be sufficiently attractive at a price of $60 a barrel.

Though I agree the development of new capacity in high cost areas will slow down during the current downturn, I believe it will continue at a slower pace. Because the oil companies all want to increase their production capacity, I also believe investment in lower cost areas will continue at the same pace as before. The fact some oil production will be shut in for, say, two years during the present economic downturn will also offset the effect of postponed investment. The net result, I believe, is that peak oil will not be pushed forward because of a delay in investment in some high cost areas. It is hard to deny, as I previously wrote, that peak oil production has again been put on hold.

 

Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in  England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.

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Petroleumworld News 12/16/08

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