Need for energy the best gauge of spending levels

Bob Tippee

Concern has arisen that oil and gas companies aren't spending money fast enough.

Some observers think spending on exploration and production should rise as a function of increases in the prices of oil and natural gas.

That would make sense to any investor who believed price strength could last forever. These days, investors of that mind are rare.

Spending is, in fact, increasing—just not as fast as oil and gas prices. And it hasn't risen as fast as it did in past price run-ups—a healthy sign of caution learned the hard way.

More important as a spending gauge than commodity price is the investment required to supply energy at rates matching projected consumption.

In a report published late last year, the International Energy Agency estimated that exploration and production expenditures would have to total $4 trillion through 2030 to keep oil and gas production capacities at current levels. That's $148 billion/year.

According to a study by John S. Herold Inc. and Harrison Lovegrove & Co. Ltd., global spending on upstream oil and gas work last year totaled $161 billion, up 9% from 2002 (OGJ Online, Sept. 22, 2004).

Whether last year's spending went to uses contemplated by IEA is anyone's guess. The number at least was on the comfortable side of the indicated annual average requirement.

But production capacities for oil and gas must do more than hold steady. IEA expects total energy use, of which oil and gas will retain commanding shares, to increase by two-thirds during the study period.

Against the challenge of not just sustaining production but greatly increasing it, the crucial question is whether investors have enough opportunities of sufficient size on which to risk capital.

In relation to global oil and gas potential, the answer is no. Access remains limited to too much of the resource. The US government won't lease huge portions of its promising land. And the Middle East's important resources remain under control of governments unable to fund all potential development but resistant to the participation—or at least presence—of outsiders.

Spending isn't the problem. Opportunity is.

(Author's e-mail: bobt@ogjonline.com)

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