Oil industry lacks confidence in high oil prices

Despite higher revenues generated by higher oil prices, 1998's low-price environment and the severe impact of the East Asian economic crisis have left many oil industry players leery of launching new upstream projects, said delegates today at the Asian Oil & Gas Conference held here.


KUALA LUMPUR�Despite higher revenues generated by higher oil prices, 1998's low-price environment and the severe impact of the East Asian economic crisis have left many oil industry players leery of launching new upstream projects, said delegates today at the Asian Oil & Gas Conference held here.

Recent oil prices have been in a very healthy range, yet there is not enough comfort in translating the resulting revenue into upstream development, said Dr. Mark Moody-Stuart, chairman of the Royal Dutch/Shell Group. Delegates attending the 2-day conference said they feel prices are "temporarily high," and any significant drop could result in projects being abandoned and delayed. Except for this year, a price below $20/bbl for North Sea Brent crude is forecast through to 2003.

Mehdi Varzi, research director at Dresdner Kleinwort Benson, predicted that the price of Brent would move down from $22/bbl at the end of this year to $19 by the end of 2001, to $17 at the end of 2002, and to $16.50 at the end of 2003. "Current prices cannot be sustained in the long term, since they will attract more high-cost projects outside OPEC [countries]," said Varzi.

He pointed out that member of the Organization of Petroleum Exporting Countries have done well since March 1999, but the market has yet to be convinced over the long term.

Last year, a mere 300,000 b/d separated demand of 75.1 million b/d from supply of 74.8 million b/d, he noted. By the end of this year, supply is expected to rise 700,000 b/d higher than the forecast demand of 76.4 million b/d, which would cause oil prices to drop. The situation will not change much next year, speakers agreed.

They also pointed out another matter of concern, however: the delicate balance between supply and demand. Oil prices could surge to unacceptable new highs if supply from one source is disrupted for any reason. If current oil prices are maintained through next year, there is a possibility of fresh investment, albeit moderate, in building up spare capacity.

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