Retrieved From: Lexis Nexis
Date: October 29, 2008
Title: OPEC Warns Oil Price Fall To Hit Projects
Byline: Margaret McQuaile and Jacinta Moran
Length: 828 Words
Link to relevant WorldOilNews blog posting here.
OPEC and oil officials warned October 28 that the recent sharp fall in world oil prices and the ongoing global financial crisis were likely to deter investment in new oil projects, leading to future supply shortages.
"With this low price I guarantee you we will not be able to invest and there will be a shortage of supply in the future," OPEC Secretary General Abdalla el-Badri told the Oil & Money conference in London. He said that if crude prices were to continue around current levels for some time "alternative energies will be out of the market, Canadian oil sands will be out of the market."
Qatari Oil Minister Abdullah al-Attiyah, speaking at the same conference, said he also thought the economic turmoil would result in expensive projects aimed at adding new production capacity being delayed.
"I am seeing that a lot of projects will be postponed. A lot of projects will not exist because the finance is not there," he said, adding this included new refining projects as well as upstream developments. However, it would not apply to Qatar and its planned LNG projects, he said, which are all under construction.
Attiyah's counterpart from the UAE, Mohammed bin Dhaen al-Hamli, agreed, saying it was "now extremely, extremely difficult to finance these expensive projects."
"We need...a reasonable oil price that will stimulate investment," Hamli said. "Costs are rising; it isn't cheap to continue to invest."
Shokri Ghanem, head of Libya's National Oil Corporation and head of the country's OPEC delegation, said OPEC national oil corporations need to obtain $2.4 trillion to expand OPEC production capacity to meet future demand. "The point is, can the NOCs get this money? And if they can't get the money, where is it going to come from?" he asked. "The problem with NOCs is that they are government companies. They are constrained by the budgets allocated to them" by their governments.
The OPEC officials were speaking on the same conference panel as Nobuo Tanaka, executive director of the Paris-based International Energy Agency, who said failure to invest in new capacity could lead to a new supply crunch.
"We have enough below-ground reserves," Tanaka said. But he warned that because of constraints above ground, "supply may not catch up with demand after this recession. We need...investment now...or a supply crunch may come again but in a much more acute way," Tanaka said.
Paolo Scaroni, CEO of Italian energy group Eni, noted that the oil price, which had been around $70/barrel in September 2007, had "more than doubled in nine months and then promptly halved again. These dramatic swings up and down are bad news for everyone."
He added: "Spiking and plunging oil prices certainly make life complicated for oil companies, whether they be international or national, as they try to plan something in the region of $1 trillion of investments over the next five years and provide adequate returns to shareholders," he said.
"When oil prices are lower than expected, planned investments need to be delayed. And when prices rise too high, the surplus cash tends to cause asset price bubbles, which are then pricked when oil prices come down again," he said.
Furthermore, Scaroni said, "oil price spikes and falls have important geopolitical impacts, periodically shifting power between countries which have oil and countries which use oil."
Oil prices have plunged by some $87/b from peaks of more than $147/b in early July, with North Sea Brent trading as low as $59.02/b earlier this week. OPEC agreed at emergency talks in Vienna last week to cut crude production by 1.5 million b/d from the beginning of November.
Eni's Scaroni, meanwhile, called for a new contractual framework for the global oil industry that would recognize the need of producers for stable demand for their resources.
He said the "exact shape and nature" of such a framework would need to be discussed carefully, but suggested the industry could look to natural gas market take-or-pay structures for ideas.
"The time is ripe for the oil industry as a whole, producers and consumers, to move beyond short-term power shifts and work together in the interest of mutually beneficial stability," he said.
"One idea would be to work towards a new contractual framework which ensures producers can count on stable demand for their oil and stable revenues, perhaps taking a leaf out of the take-or-pay structures which are common in the gas market," he said.
"This would give producers rational incentives to invest in exploration and production capacity, to the benefit of consumers, without the fear of being caught out by the downturn and seeing their returns on investment collapse."
It was in everyone's interest "to forsake their short-term interests and work towards a compromise," he said.
"Just as consumers need supply stability, producers need demand stability. And the whole world needs to ensure oil is used rationally and efficiently," he said.
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