Business Times 17 Dec 08;
(NEW YORK) From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or cancelled in recent weeks as companies scramble to adjust to the collapse in energy markets.
In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with petrol down from its summer record to an average of US$1.66 a gallon, and still falling.
But the project delays are likely to reduce future energy supplies - and analysts believe they may set the stage for another surge in oil prices once the global economy recovers.
Oil markets have had their sharpest-ever spikes and their steepest drops this year, all within a few months. Now, with a global recession at hand and oil consumption falling, the market's extreme volatility is making it harder for energy executives to plan ahead. As a result, exploration spending, which had risen to a record this year, is being slashed.
The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. 'It's a classic - if extraordinarily dramatic - cycle,' said Daniel Yergin, chairman of Cambridge Energy Research Associates and author of The Prize, a history of the oil business. 'Prices have come down so far and so fast, it's become a shock to the supply system.'
The list of projects delayed is growing by the week. Wells are being shut down across the United States; new refineries have been postponed in Saudi Arabia, Kuwait and India; and ambitious plans for drilling off the coast of Africa are being reconsidered.
Investment in alternative energy sources such as biofuels that had flourished in recent years could dry up if prices stay low for the next few years, analysts said. Banks have become reluctant lenders, especially to renewable energy projects that may prove unprofitable in an era of low oil and gas prices.
These delays could curb future global fuel supplies by the equivalent of four million barrels a day within the next five years, according to Peter Jackson, an energy analyst at Cambridge Energy Research Associates. That is equal to 5 per cent of current oil supplies.
One reason projects are being shut down so fast is that costs throughout the industry, which had surged in recent years, are still elevated despite the drop in oil prices. Many companies are waiting for those costs to come down before deciding whether to go forward with new projects.
Different companies have different price thresholds for going forward with drilling projects. But across the industry, a price drop this big has 'a dampening effect', according to Marvin Odum, the vice-president for exploration and production for Royal Dutch Shell in the Americas. 'The big uncertainty is how long this economic environment is going to last.'
In today's uncertain environment, a slowdown in spending is inevitable, according to energy executives. Last year, spending on exploration and production amounted to US$329 billion, according to PFC Energy, a consulting firm. That figure is certain to fall.
'We're in remission right now,' said Mr Odum. But once the economy picks up, he said, 'the energy challenge will come back with a vengeance.' - NYT
