Oil Majors Cut Back on New Wells as Prices Fall
Until recently, the oil sands of Canada were heralded as a secure and potentially lucrative substitute for Middle East crude oil. But on Nov. 17, Petro-Canada (PCZ) became the latest company to call a halt to its work in the tar-rich province of Alberta. The Calgary-based company planned to open a 140,000 barrels-a-day oil sands project by 2011. But now Petro-Canada says the price of oil simply doesn't justify the project's construction costs, which have soared by 50% in just the last year, to about $24 billion. "We're going into tough times," Petro-Canada Chief Executive Ron A. Brenneman told reporters on Nov. 25. "It's more important to us to get the costs right than to meet a predetermined schedule."
When oil prices surged over the last two years to $147 a barrel, they generated a flood of energy projects previously regarded as prohibitively expensive. But now a plunge in prices to a three-year low of about $50 is having the opposite impact. From Canada, to Russia, to Saudi Arabia, and Thailand, oil companies are slashing planned capital spending on wells and refineries—the energy infrastructure the world still depends on. In a Nov. 19 report, Morgan Stanley (MS) lists 17 specific energy projects that have been delayed or canceled since October alone, in addition to across-the-board capital-spending cuts by a dozen companies. Most Big Oil corporations (the six biggest producers, including ExxonMobil (XOM)) have yet to announce any cutbacks, but they are expected to do so. Credit Suisse (CS) sees a 5%-to-10% drop in the $342 billion in capital spending planned for 2009 by the 26 largest global integrated oil companies, including national producers such as Saudi Aramco and Gazprom. Some predict worse. "Companies are whacking [capital spending] by 20%," says Christopher Ruppel, an analyst with the Greenwich (Conn.)-based brokerage Execution.
Among the hardest-hit regions is Alberta. Its tar-rich sands are estimated to hold about 175 billion barrels of oil, second in volume only to Saudi Arabia's reserves. Although oil sand is among the most expensive kinds of petroleum on the planet to extract, these projects would be profitable at $85 to $95 a barrel, a level surpassed in the price surge earlier this year. But now nearly every major oil sand development has been put on hold, including expansions planned by Royal Dutch Shell (RDS) and Suncor Energy (SU). Elsewhere in the global oil patch, expansion of a giant Kazakhstan gas field has been postponed, and construction of the critical Yanbu refinery in Saudi Arabia has been delayed.
The cuts may set the stage for another price spike. By late 2010 demand in China, India, and the Middle East—tamped down now because of the gathering worldwide recession—will begin to pass global supply and push prices near or even above $100 a barrel, say analysts. By 2013 spending cutbacks will reduce projected new production capacity by some 3.8 million barrels a day, or 4% of current supply, according to Cambridge Energy Research Associates. Says Fatih Birol, chief economist at the Paris-based International Energy Agency: "We may end up with prices even higher than we saw last summer."