(EnergyAsia, September 24 2014, Wednesday) — Investment decisions on many major upstream projects will be delayed if crude oil prices fall below US$85 a barrel at the same time that companies are struggling to contain rising business costs, said consulting firm Douglas Westwood (DW).
Oil prices have been falling in recent months on account of weak demand growth in China, Japan and Europe and the ongoing production surge in the US that have combined to more than offset the supply disruptions in the Middle East and North Africa.
Brent remains under selling pressure after falling to a two-year low below US$100 a barrel.
“In the short-term, supply could start to be taken out of the market quite quickly if lower price levels are sustained – we have earlier noted that returns for most exploration and production (E&P) companies have been eroded by rapidly-rising costs,” said DW.
“This has pushed hurdle rates for new projects higher often to around US$80 per barrel, indeed many are described by our E&P clients as ‘marginal’ at US$100 per barrel, which means that we could start to see a major shift in oil company strategy if prices fall much further.”
Future supplies could come pressure as companies cut budgets, delay sanctioning investments and undertake major project modifications with crude oil price below US$85, said the UK firm.
Longer term, DW expects Russian production to come under pressure from reduced foreign investments as a result of Western economic sanctions on Moscow over the Ukraine crisis. Exxon will soon have to stop working with Rosneft in the Arctic that will hit oil field services providers like Seadrill which supplies deepwater rigs. However, as Artic joint ventures are long-term in nature, DW said any impact on oil supplies is most likely to be seen only after two to five years.
Without political interference, DW said markets eventually self-correct.
“Much of the additional production capacity added in recent years is high cost US unconventional oil – and these wells peak early and decline rapidly,” it said.
“So if drilling stops, over-production capacity will quickly evaporate which could bring global oil supply down materially, and as we have stated so often in the past, if investment slows significantly we will be short on oil supply and there will again be upward pressure on oil prices.”