Oil companies underinvesting in oil, gas

Energy companies are underinvesting in new oil and gas production capacity by up to 20% according to the International Energy Agency, the developed world’s energy monitor. The comments follow a warning by Claude Mandil, IEA executive director, that the world was not investing enough in new energy supplies. Energy industry executives said the IEA was becoming more vocal about its concerns after companies had ignored earlier pleas by the watchdog for more investment. Fatih Birol, IEA chief economist, said that investment in the oil sector was 15-20% less last year than what was needed to meet IEA estimates for the next 25 years. This underinvestment resulted from two factors: listed companies returning cash to shareholders and international companies’ lack of access to countries with vast reserves.

“This (lack of access) is the biggest issue the industry faces. We need to move on from asking whether we need to invest, to working out a new investment framework in oil-producing countries that is suitable for both sides,” said Birol. Lack of access was a problem both in Middle Eastern member states of the Organisation of the Petroleum Exporting Countries as well as non-cartel producers such as Mexico and Russia, which also restrict foreign investment. Birol said IEA executives would visit Kuwait on May 15 to talk to Opec officials about domestic investment in the Middle East. He said companies’ lack of access to Opec reserves had caused most exploration expenditure to flow to mature and therefore costly oil and gas fields in North America and Europe.

These two regions accounted for 71% of the 25,000 new fields drilled over an eight-year period in the late 1990s and early 2000s, while the Middle East accounted for only 2%. Energy ministers from the 26-member IEA, meeting in Paris last  week, discussed the issue of underinvestment in closed door deliberations described by one official as “pessimistic.” But the world’s biggest listed oil companies reject the accusation that they are under investing in the sector. They argue that they would be in danger of overinvesting in projects that often take up to 25 years to develop when oil prices, now above $50 a barrel, could fall back to much lower levels. Analysts said that only a sustained period of high oil prices would convince oil executives to scrap the $20-$25 a barrel yardstick they now use to approve a project.

Francisco Blanch, senior energy strategist at Merrill Lynch, argued that “long-dated oil prices will have to stay at or above $45 for the next two to five years to encourage a significant increase in investment in the oil sector.” He argued that a lack of new projects in production and refining would sustain prices. The International Monetary Fund says Opec countries are constrained by “competing demands for social and infrastructure expenditures and, in some cases, high public debt levels (that) have limited the funds available for investment in the oil sector.”

Analysts said this was a major reason Opec producers were content to see oil prices above $50 a barrel. Most of them restrict foreign investment, in spite of having limited domestic resources to develop the sector. Yet Birol said the high prices had attracted sufficient capital into non-conventional oil sectors such as oil sands and raw bitumen in Canada, extra-heavy oil in Venezuela and gas-to-liquid projects in Qatar. He said the high oil prices had also stimulated interest in alternative energy sources such as biofuels, hydrogen and nuclear.