By OGJ editors
HOUSTON, Feb. 12 -- In spite of current high oil and natural gas prices, oil and gas companies are expecting a period of high market volatility and therefore are keeping a close watch on future spending in the coming year, according to a new study, "Harnessing the Storm," presented at a Tuesday session of Cambridge Energy Research Associates' annual week-long energy conference in Houston.
The study, which was in collaboration with management consultants Accenture and polled 16 companies operating across the energy value chain, pointed out four constraints for oil and gas companies through to 2010:
-- Competing growth targets.
-- Limited availability of critical infrastructure.
-- Shortage of skilled workers.
-- Inadequate access to capital.
"The study suggests that energy companies must therefore anticipate and resolve key supply-chain issues while adapting to the sometimes sharp up-and-down movements in commodity prices," the study said.
Growth targets
Currently, all oil and gas companies are operating at a time when predicting market volatility has become increasingly important for bolstering profitability. "Markets will provide no clearer investment signals in the coming decade, leaving companies to rely on their ability to anticipate infrastructure and capital constraints and act accordingly," said David Hobbs, E&P strategy director, CERA.
In the upstream sector, companies surveyed by CERA said that they are targeting 2-8% annual growth rates. "The combination of current 'above average' oil prices and the high success rates in exploration over the past few years has created a situation in which non-OPEC (Organization of Petroleum Exporting Countries) supplies appear set for strong growth."
Meanwhile, maintaining downstream capacity will require investment for certain supply-chain components, CERA found. "Quality specifications for refined products continue to tighten in North America, Western Europe, and developed countries in Asia," CERA said.
Infrastructure limitations
The availability of infrastructure has posed various constraints in several areas of potential supply growth, CERA noted.
Success from non-OPEC growth has come from advances in technology that allow for production from deep water (>2,500 ft), CERA said. "However, delays in deepwater offshore construction are eroding returns for the engineering and construction and the exploration and production sectors," the study said. Lack of deepwater drilling capacity is also a concern to operators.
Separately, shortages in transportation infrastructure loom for Russia and the Caspian region, the study said. ". . .Russia will see its exports constrained or margins reduced by suboptimal solutions such as the use of rail transport," CERA noted. "While (ongoing) pipeline project(s) in the Caspian region will (ensure) sufficient capacity in the near term, additional capacity may be required by 2010." it said.
Another infrastructure challenge is industry's aging tanker fleet. "The replacement of older vessels with double-hull, double-bottom tankers is expected to accelerate, given the recent Prestige tanker spill off the coast of Spain."
Demographics
To reverse the trend of losing experienced workers, "companies need to reach out to new geographies and implement policies to retain experienced employees," the study found. "Solutions might involve more aggressive recruiting from non-OECD (Organization for Economic Cooperation and Development) countries or the relocation offshore of many of the oil companies' activities," CERA said.
Access to capital
All three of the aforementioned constraints impact a fourth constraint for oil and gas companies, namely access to capital. CERA's study noted, "When returns are threatened, the industry will have trouble accessing sufficient capital to fulfill the needs of the supply chain.
"Identified projects throughout the value chain, but predominantly upstream, call for capital expenditures as high as $175 billion(/year) by 2006. Unless economic growth is robust through the decade, the increase in global demand may be less than the gains in just non-OPEC productive capacity," the study noted.
The study concluded, "Faced with the continuing role as swing producer, OPEC may be unable to cut supply enough to support prices. The result may be a decline in the oil price sufficient to reduce the excess productive capacity and reassert OPEC's price-setting capability."
