THIS is a difficult time for the oil&gas industry. Demand is falling because of the recessions in many countries, oil prices are currently about one-third of last year’s near $150 per barrel peak and capital investment has fallen dramatically.
World oil consumption is currently about 83million barrels per day – about 3% less than last year; 2008 demand was about 1.5% below 2007.
Latest forecasts from the International Monetary Fund (IMF) and others indicate that the recessions will continue into 2010 and that there will only be a modest recovery then. Thus, it seems reasonable to assume that worldwide demand for oil&gas will remain depressed for at least another year.
Opec has responded with production cuts to try to force prices higher, but they have had little or no effect to date. Saudi Arabia and other key members appear to accept that, short-term, higher oil&gas prices may exacerbate the economic situation.
However, offshore seems to be doing better than onshore, which should be surprising given the much higher costs.
I estimate that the offshore industry accounted for 39% of world oil production in 2008, compared with 32% in 1998. Offshore gas contributed 30% of world gas production, up from 22% a decade ago.
These percentages have increased slowly, but steadily, over the last 20 years. I expected them to fall last year, but that does not appear to have happened.
Global offshore expenditure was about $190million in 2008, which was 13% higher (in real terms) than in the previous year. Opex accounted for 49% of that total, capex 42%, exploration 7% and decommissioning less than 2%.
The opex proportion has been rising steadily, whereas the capex share appears to have peaked, and I expect it to fall significantly over the next few years.
Much of the recent increase in offshore expenditure is attributable to cost inflation, as exemplified by rig day rates, which is clearly abating now.
Thus, the offshore capex will fall because of both fewer projects and lower unit costs. Offshore opex should continue to rise for a few years until worldwide offshore production peaks – remember that the North Sea and Gulf of Mexico are well past that.
The fall in capex will be offset to some extent by increasing expenditure on decommissioning offshore platforms and other equipment.
The main reasons for the increasing importance of the offshore industry are geographical. There has been substantial growth in offshore output and expenditure in the Asia-Pacific region (which is now the biggest offshore market in the world), West Africa and the Middle East. That is a result of offshore discoveries made during the last decade.
In contrast, there have been relatively few onshore discoveries and output has declined in many mature oil provinces.
That has been particularly noticeable in the Middle East, where the only real growth has been in offshore gas, notably the North Field/South Pars offshore Qatar and Iran.
UK oil&gas production and expenditure have declined for some years and that will almost certainly continue. 2009 may well be the peak year for Norway. The Gulf of Mexico is also a declining market, as this month’s front-page story indicates.
Asia-Pacific and West Africa have compensated for those declines in the recent past and I expect that to continue to be the case for the next few years, but possibly not after 2013.
Saudi Arabia, Iran and other Middle East countries will become more dominant again as world oil&gas consumption resumes its growth.
Another significant factor is that most of the Opec production cuts have been from onshore rather than offshore fields.
Saudi Arabia is the best example of that. The implication, therefore, is that there will be a relatively large increase in onshore production when worldwide demand picks up again in 2010.
Nevertheless, I expect offshore to be busy for the next few years, even if oil&gas prices remain relatively low.
The geographical changes will continue, and probably strengthen, because low prices will adversely affect mature provinces such as the North Sea more than regions such as West Africa and the Asia-Pacific.
Tony Mackay is MD of economists Mackay Consultants
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