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IFP: 2009 E&P investment to stabilize or slow

Doris Leblond
OGJ Correspondent

PARIS, Dec. 4 -- Exploration and production investments should stabilize in the first few months of 2009 after which "there is limited visibility," said Institut Francais du Petrole (IFP) Pres. Olivier Appert at a press conference Nov. 27 as he gave an update of the oil service and equipment industry.

"It is a perilous exercise to forecast future investments when I see projects being postponed, resized, or scrapped," he said, adding that even the forecast pointing to "stabilization" in 2009 is seen as "an almost optimistic scenario."

Investments began slowing in 2007, but should grow at the same 18% rate, reaching $394 billion by yearend, driven mainly by the Middle East and Asia (minus China), said IFP chief economist Nathalie Alazard.

E&P investments should not react to the world economic slowdown over the next few months, Alazard said. It should take 6 months for drilling activity and about a year for production to suffer from the impact.

She said 80% of capex the last 2 years reflected soaring production costs, which should fall by mid-2009 due to slumping industrial materials costs and oil companies' growing pressure on service contracts.

"Some contract bids have already been relaunched three times to bring prices down," said Dominique Michel, president of GEP, France's oil service and construction company union.

IFP said 2008 national oil company investments rose by 24%, led by Gazprom, China's NOOC, Saudi Aramco, Sonatrach, and Petrobras, while international oil company investments grew by 16%, led mainly by Total and ENI.

For 2009, IFP is uncertain that the oil price will be the central factor of an E&P investment slowdown. A correlation might be made if the price falls further. Demand erosion could impact investments, however.

The necessity for oil companies to renew their hydrocarbon reserves in the medium and long term will be the main driver of the E&P market, said IFP, and they must pursue field development to maintain production levels.

Geophysics markets
The 2008 geophysics market saw 19% global growth for seismics, with 45% growth in offshore driven by new 3D multistreamer seismics for deep offshore work. But 4D seismics used for production follow-up is still limited to some dozen campaigns.

The geophysics market grew by 25% to $12 billion in 2008: Currently 350 teams are active worldwide each month. In 2009 the acquisition market will still be on a growth trend, albeit slowing considerably to 0-3%.

The relevant 2008 equipment market of $2 billion is up from $1.7 billion in 2007. Volumes and prices should stabilize in 2009, with a stronger impact on smaller companies as the heavyweights are positioned with high-tech equipment.

Wells drilled
The number of wells drilled worldwide fell by 3.5% in 2007 dragged down by the North American gas market, which picked up, however, in 2008. Worldwide drilling activity rose by 12% this year, but in 2009 falling oil prices and demand could compromise this upturn.

Onshore drilling fell by 5% worldwide this year and could fall 5-15% in 2009, while offshore drilling is expected to post a 23% increase by yearend and maintain a 10-15% growth in 2009, due to high prices.

The engineering construction and equipment market for offshore rigs was still on a strong growth trend in mid-2008, with a 30% growth rate expected to yearend, of which 40% is for fixed and subsea equipment and 10% for floating installations. World sales achieved by yearend 2008 should amount to $52 billion, up from $43 billion in 2007.

The Asia-Pacific region uses almost half of the fixed platforms, with 125 projects in SE Asia and 29 in India. The Middle East accounts for 73 fixed platform projects.

The highest project growth rate is in the Caspian Sea and the Mediterranean area off North Africa and Western Europe. The lowest project growth areas are in North America and the Far East.

Subsea installations built through mid-2008 increased by 40% to some 100 units (following a 10% drop in 2007), the result of projects planned 2 years earlier. Order books of the main equipment, construction, and service companies were filled by June.

However, IFP sees signs that 2008 could herald the end of a cycle and expects a downturn in 2009 hovering at 10-15%. This would mean the market would not be able to exceed sales of $60 billion.

Following a surge in refining investments in 2007 to $57 billion, a further increase of 8.6% in 2008 brought investment to $62 billion, of which 12% or $24 billion is for capital expenditure. This was a positive trend to fill the refining capacity gap.

Further efforts are needed, says IFP, the more so as environmental investments bring about a further strain. However, recent economic and financial events are already slowing demand in industrialized countries, and it is probable that refining expenditures will either stabilize or fall in 2009.

Planned projects
Projects in the design, engineering or construction stage total around 21 or 2.7 million b/d (mbd), 6% more than in 2007. Of new refinery projects, 53% are in the Middle East and Asia-Pacific region, two are in Germany, one is in Spain, and there are six new refineries scheduled in North America.

Projects at construction stage should proceed, but those in design or engineering may be postponed or scrapped.

There are 300 projects for capacity extensions, or 40 mbd, while conversion capacity to match demand and supply total 9.7 mbd or 115% more than in 2007. Of projects in the construction stage, some 3.3 mbd could come on stream in 2013.

This will increase world refining capacity by 3.8% during 2007-13 to 130 mbd. Considering demand forecasts for that period, this could still mean a shortage of 0.8 mbd.

Refining margins have also been falling since yearend 2007. Coupled with lower demand and the credit squeeze, which could hamper nonintegrated companies' capital expenditure, investments might well stagnate in 2009, says IFP. In France most projects for maintenance or revamping in 2009 have been scrapped, Michel said.


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