Prices Have Fallen, But Stakes Remain High

Participants in Wednesday’s morning’s opening plenary session, titled “High Price, High Cost, High Stakes,” agreed that while oil prices have fallen considerably, the costs of doing business and the stakes for the industry remain high.

Seven industry experts, representing international and national oil companies, offered  insights into the current economic environment and what it means for the industry going forward. Price cycles in the oil and gas industry are routine, said Tim Cejka, President of ExxonMobil Exploration and one of the moderators of the panel session, “but I have never seen anything but high stakes.” The industry must continue to focus on the long term, he said, because projections still show that the world will need 50% more energy by the year 2030. “Our job, as an industry, is to provide energy for the world,” no matter the price cycles, he added.

Ramian Malek, Vice President of E&P for Petronas, evaluated the situation the industry faces today vs. what it appeared to face just a few months ago. Although oil and gas demand is now declining and prices have fallen from a peak of USD 147/bbl to under USD 50/bbl, operating costs remain high and the talent shortage still appears to exist. E&P costs remain high because of existing contractual obligations. The industry now confronts several challenges, including whether to defer or proceed with certain projects. More emphasis must be placed on cost management and containment going forward, he said.

Nasser Al-Jaidah, Chief Executive Officer of Qatar Petroleum, added that whatever the price of oil, energy security and geopolitical stability questions will continue to center on the Middle East, where the bulk of the world’s oil reserves lie. That will continue to present problems for the industry because of existing ethnic and border tensions, he said.

High stakes and high costs appear to be a given, agreed Jean-Marie Masset, Senior Vice President Geosciences for Total. By 2030, 75% of the world’s energy supply will come from fossil fuels, of which 35% will be oil and 22% gas. “These are the high stakes for the industry,” he said.

Raw material costs have risen sharply in recent years, including for steel, casing and tubing, and drilling platforms, he added. Production costs are also increasing, especially for unconventional resource development, including ultradeepwater, enhanced oil recovery, extra-heavy oil, Arctic development, and oil shales. Those rising costs and projected global demand numbers suggest that the future oil price will not remain low.

Times of market turbulence offer hidden opportunities, said panelist Hugo Repsold, E&P Strategy and Portfolio General Manager for Brazilian national oil company Petrobras. Companies that are best situated to weather economic downturns are those that

• Have a high-quality E&P portfolio
• Have solid positions throughout the supply chain so they are able to decrease marginal costs
• Have strong fundamentals that allow them to grow through mergers and acquisitions during the period
• Have good project and cost management skills.

“The next generation of outperforming companies will be those who can benefit from the current business scenario,” he added.

JPT Editor John Donnelly is in Kuala Lumpur for the International Petroleum Technology Conference being held 3-5 December 2008.