Westwood: Big oil needs new business model

The fundamentals of population and economic growths are driving a worldwide demand for oil that has recently pushed crude prices to $100/bbl, said John Westwood, managing director of Douglas-Westwood.

Sam Fletcher
Senior Writer

HOUSTON, Jan. 10 -- The fundamentals of population and economic growths are driving a worldwide demand for oil that has recently pushed crude prices to $100/bbl and have producers scrambling for the reserves to satisfy market needs, said John Westwood, managing director of the UK consultancy Douglas-Westwood Ltd.

"In my view, 'big oil' now needs a new business model, and nothing demonstrates that more than oil company stock buybacks—this is paramount to saying investors can find a better return for the money than oil companies can. So the key question that remains is 'where can big oil profitably reinvest?'" said Westwood at a luncheon meeting of 200 oil and gas industry participants Jan. 10 in Houston.

Based on historic data, "oil production tracks world population [growth] except when oil is too cheap or too expensive," Westwood said. Weakness of the US dollar against the euro and yen is "without a doubt" one of the major factors supporting high oil prices today. Another is the declining production of oil outside the Organization of Petroleum Exporting Countries, "particularly in shallow [ocean] waters," Westwood said. With the "easy" oil now gone, the big onshore and offshore projects vital to the major integrated countries are now "in politically troubled areas," he said.

In the early 1970s, international oil companies controlled 80% of world oil reserves. But now the position has been "completely reversed" with the national oil companies holding 80% the remaining reserves. "Even in shallow waters, the oil companies now face much higher costs. For example, per barrel lifting costs in the UK sector of the North Sea in 2005 was $15, but by 2007 it had increased by 67% to $25," said Westwood.

"Virtually the only place where giant fields will be found in future years is in deepwater; Brazil's recent Tupi elephant find is testament to that," he said. Douglas-Westwood sees world deepwater production growing worldwide to 11 million b/d by 2011 from 6 million b/d in 2007. "This drive to produce what is very high cost oil, from deep water is the oil companies' response to declining production in offshore continental shelf areas such as the North Sea and Gulf of Mexico and the increasingly onerous terms being sought by the biggest holders of on-shore oil reserves, the NOCs," Westwood said.

"Another hard place is Arctic waters where the prospects of massive reserves (estimates range from 160-300 billion bbl of oil equivalent) have resulted in a 'great subsea land claim' being played out by Russia, Canada, and the US, against a spring 2009 deadline imposed by the United Nations Convention on Law of the Sea," he said. There are 45 countries that are trying to prove up potential claims to portions of the Arctic. "Russia may have control over 60% of the Arctic reserves, but it hasn't the technology to develop them," Westwood said. That means Russia will have to bring in Western partners with the equipment and expertise to develop Arctic reserves, as well as the huge investments to finance such programs.

"Recent $100 oil has only served to add to the already massive demand for the products and services of firms that supply the offshore oil and gas companies. Suppliers are virtually beating off the customers, but demand continues to grow," said Westwood. As a result, he said, "The offshore oil field services sector is facing unprecedented levels of business; some companies that might normally have a 6-month backlog are now booking work for 2011."

Douglas-Westwood expects capital expenditures of $25 billion to be invested annually in deepwater projects in 2008-12, a 30% growth over spending in the previous 5 years. "This will drive demand for deepwater drilling rigs, floating production systems, subsea production hardware, and more," said Westwood.

Recruiting and retaining qualified personnel remains a major challenge for all of the oil and gas industry. "The real crunch is the lack of experienced people—that's the single biggest problem year after year," Westwood said.

Contact Sam Fletcher at samf@ogjonline.com.

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