Thursday December 25, 02:48 AM

Source: Indian Express Finance

Major oil projects come undone with price collapse

From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled 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 gasoline down from its summer record of just over $4 to an average of $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. 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. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle. As familiar as the pattern may be, the changes this time are taking place at record speed. In June, analysts were forecasting oil at $200 a barrel and companies were scouring the earth for new places to drill; now, no one knows how low prices may fall. 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 in the US; 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 like 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 fuel supplies by the equivalent of 4 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% 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. The global market has been turned upside down since the summer, the International Energy Agency, a leading energy forecaster, said in a recent report. In today s uncertain environment, a slowdown in spending is inevitable, according to energy executives who are devising their budgets for next year. Last year, spending on exploration and production amounted to $329 billion, according to PFC Energy, a consulting firm. That figure is certain to fall. We re in remission right now, said Marvin E. Odum, the vice president for exploration and production for Royal Dutch Shell in the Americas. But once the economy picks up, he said, the energy challenge will come back with a vengeance. Oil demand growth has weakened throughout the industrial world. The International Energy Agency projects that worldwide demand will fall this year, for the first time since 1983. So much surplus oil is sloshing around the world that some companies, including Shell, are using oil tankers for storage. Oil prices have declined by more than $100 a barrel since July, returning to levels last seen more than four years ago. Prices could drop below $30 a barrel, according to Merrill Lynch and other forecasters, if the Chinese economy slows drastically next year, which looks increasingly likely. 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 Odum of Shell. The biggest cutbacks so far have been in heavy oil projects in Canada, where some of the world s highest-cost production is concentrated. NY Times / JAD MOUAWAD