LONDON - The plunge in oil prices toward $80 a barrel will curtail oil companies' spending on new projects, limit production growth and perpetuate the industry's tendency for boom and bust.
The surge in oil prices since 2004, to an all-time high above $147 a barrel in July, supported an explosion in spending on new oil and gas projects that is now at risk as recession fears prompt analysts to drop crude price forecasts sharply.
The world's second-largest non-government controlled oil company by market capitalization, Royal Dutch Shell doubled capital investment between 2004 and 2007, when it spent $26.6 billion.
Rivals such as industry leader Exxon Mobil and BP Plc, in third place, also lifted investment as they rushed to explore new areas and as expensive projects, such as liquefied natural gas (LNG) or squeezing crude from Canada's oil sands, became profitable.
The fall in oil prices, coming on top of the credit crisis which partly caused the drop, is expected to end this trend.
"It's certainly going to impact the number of projects that go ahead," John Brannan, president of the integrated oil division of EnCana Corp told a conference in London this week.
High cost projects will be cut first and all eyes are on Canada's oil sands projects. Christophe de Margerie, chief executive of France's Total said last month that $90 a barrel crude was needed to generate a 12.5 percent return on his oil sands plans.
Increasingly tough economics, due to rising costs and regulatory delays, had already prompted the Canadian Association of Petroleum Producers to cut its 2015 oil sands production forecast by around 600,000 barrels of crude a day (bpd) to 2.8 million bpd, compared with around 1 million bpd today.
Analysts say deep water oil projects, which have delivered millions of extra barrels per day of production in the past decade, were also at risk.
"Some of the deep water projects we see in Nigeria and Angola have breakeven prices of $80/barrel or slightly higher," Derek Butter, head of corporate analysis at Wood Mackenzie, said.
North American gas companies have also been cutting back on capital expenditure (capex) plans following falls in U.S. gas prices, analysts at Citigroup said this week in a research note.
With share prices having fallen sharply in the sector, companies may prefer to buy rivals than invest in new capacity.
"The M&A (mergers and acquisitions) market does look more attractive and will look a lot more attractive if the oil price continues to cool off," Butter said.
Even if companies want to invest in new projects, their ability to do so may be limited.
Oil companies have used record profits to boost dividends, something that companies are usually slower to cut than capex. BP's second quarter dividend of 14 cents a share compares with 7.1 cents a share in the same quarter of 2004.
Oil companies will need crude around $78 a barrel in 2009 to meet dividend and spending obligations, analysts at JP Morgan said.
With a Brent crude price of around $82 a barrel on Thursday and double-digit inflation in industry costs, this gives companies little leeway.
Increased borrowing costs due to the credit crisis -- from which oil and gas companies were largely insulated until now due to high oil prices -- may compound the impact.
Traditionally, multi-billion dollar projects such as LNG terminals are majority financed largely by borrowings from banks or even the oil companies themselves.
While bankers say they remain happy to lend to the sector, the combined impact of lower profits from these projects and higher borrowing costs may make them unattractive.
BOOM AND BUST
The increasing role national oil companies play in global oil production may temper any overall drop in capital spending as their investment decisions are largely politically driven.
However, analysts point out the Western oil majors still account for most investment. Exxon says its capex plans of $125 billion over the coming five years compare with $210 billion for all of the Organization of the Petroleum Exporting Countries.
Cutbacks in capital spending in the wake of falling oil prices is nothing new for the oil industry. The collapse of crude in the 1980s cost hundreds of thousands of jobs in the sector in the United States alone.
In the late 1990s, as oil dipped below $10 a barrel, budgets were slashed again and analysts blame these cuts for the anemic production growth witnessed since 2000, which was a major factor in the surge in crude to $147 a barrel.
Similarly, executives predict that any drop in investment now will lead to less spare capacity in energy markets in future and therefore higher prices when the global economy recovers, continuing the industry's cyclical pattern.
"It is the nature of the beast. In the past, the industry has tended to overextend itself in periods of rising prices and that has let to a sharp pullback as prices have fallen," Butter said.
The surge in oil prices since 2004, to an all-time high above $147 a barrel in July, supported an explosion in spending on new oil and gas projects that is now at risk as recession fears prompt analysts to drop crude price forecasts sharply.
The world's second-largest non-government controlled oil company by market capitalization, Royal Dutch Shell doubled capital investment between 2004 and 2007, when it spent $26.6 billion.
Rivals such as industry leader Exxon Mobil and BP Plc, in third place, also lifted investment as they rushed to explore new areas and as expensive projects, such as liquefied natural gas (LNG) or squeezing crude from Canada's oil sands, became profitable.
The fall in oil prices, coming on top of the credit crisis which partly caused the drop, is expected to end this trend.
"It's certainly going to impact the number of projects that go ahead," John Brannan, president of the integrated oil division of EnCana Corp told a conference in London this week.
High cost projects will be cut first and all eyes are on Canada's oil sands projects. Christophe de Margerie, chief executive of France's Total said last month that $90 a barrel crude was needed to generate a 12.5 percent return on his oil sands plans.
Increasingly tough economics, due to rising costs and regulatory delays, had already prompted the Canadian Association of Petroleum Producers to cut its 2015 oil sands production forecast by around 600,000 barrels of crude a day (bpd) to 2.8 million bpd, compared with around 1 million bpd today.
Analysts say deep water oil projects, which have delivered millions of extra barrels per day of production in the past decade, were also at risk.
"Some of the deep water projects we see in Nigeria and Angola have breakeven prices of $80/barrel or slightly higher," Derek Butter, head of corporate analysis at Wood Mackenzie, said.
North American gas companies have also been cutting back on capital expenditure (capex) plans following falls in U.S. gas prices, analysts at Citigroup said this week in a research note.
With share prices having fallen sharply in the sector, companies may prefer to buy rivals than invest in new capacity.
"The M&A (mergers and acquisitions) market does look more attractive and will look a lot more attractive if the oil price continues to cool off," Butter said.
Even if companies want to invest in new projects, their ability to do so may be limited.
Oil companies have used record profits to boost dividends, something that companies are usually slower to cut than capex. BP's second quarter dividend of 14 cents a share compares with 7.1 cents a share in the same quarter of 2004.
Oil companies will need crude around $78 a barrel in 2009 to meet dividend and spending obligations, analysts at JP Morgan said.
With a Brent crude price of around $82 a barrel on Thursday and double-digit inflation in industry costs, this gives companies little leeway.
Increased borrowing costs due to the credit crisis -- from which oil and gas companies were largely insulated until now due to high oil prices -- may compound the impact.
Traditionally, multi-billion dollar projects such as LNG terminals are majority financed largely by borrowings from banks or even the oil companies themselves.
While bankers say they remain happy to lend to the sector, the combined impact of lower profits from these projects and higher borrowing costs may make them unattractive.
BOOM AND BUST
The increasing role national oil companies play in global oil production may temper any overall drop in capital spending as their investment decisions are largely politically driven.
However, analysts point out the Western oil majors still account for most investment. Exxon says its capex plans of $125 billion over the coming five years compare with $210 billion for all of the Organization of the Petroleum Exporting Countries.
Cutbacks in capital spending in the wake of falling oil prices is nothing new for the oil industry. The collapse of crude in the 1980s cost hundreds of thousands of jobs in the sector in the United States alone.
In the late 1990s, as oil dipped below $10 a barrel, budgets were slashed again and analysts blame these cuts for the anemic production growth witnessed since 2000, which was a major factor in the surge in crude to $147 a barrel.
Similarly, executives predict that any drop in investment now will lead to less spare capacity in energy markets in future and therefore higher prices when the global economy recovers, continuing the industry's cyclical pattern.
"It is the nature of the beast. In the past, the industry has tended to overextend itself in periods of rising prices and that has let to a sharp pullback as prices have fallen," Butter said.
