Will the end of the credit crunch mark the beginning of the commodities crunch?
James Hall,Infield Systems Limited, London
EDITOR'S NOTE: The following is extracted from a recent Infield Systems white paper titled "Oil Price & Offshore Markets" that was circulated at the recent Offshore Europe conference in Aberdeen. For more information about the topic, visit the company's website at www.infieldlive.com.
Are we seeing the beginning of the end of the credit crunch? Compared to late 2008 and early 2009, the market is showing positive change. It will take time, but the worst appears to be over. Our view is that we see recovery through 2010 and 2011, but we are also asked frequently what is beyond this.
Looking forward, we have increasing concerns over the ability of our industry to deliver the required production growth on the required timeline. With greater production volumes associated with deepwater, the time from discovery through development to production is likely to continue to increase, accentuating the cyclical attributes the industry is famous for.
By example, the latest update from BP on Tiber, a technically challenging, very high pressure lower tertiary development in the Gulf of Mexico, states a production start-up around the middle of the next decade – 2014 – 2016. Full production profiles for Brazil's pre-salt developments also imply 2014 – 2016. Before this period and on the back of the reduced activity today, new production growth in 2012 and 2013 is a potential concern.
The number of offshore exploration and appraisal wells globally has dropped dramatically and even our current forecast, which ties in with license blocks and drilling plans, suggests a slow recovery and further underlines increasing concentration and effort to continue to grow production.
In conjunction with concerns over new production and underlying activity, current depletion rates are on the rise. We have been used to routinely noted depletion rates in the range of 3% to 9% with a 6% average. Now, 6% to 15% is common, and nearly 9% is the average. The old adage of running harder while standing still is a greater reality than ever.
It is also important in this debate to note the continued integrity of existing infrastructure cannot be taken for granted. As we stand today, 43% of the world's operational platforms are greater than 25 years old, as are 26% of the world's operational pipelines. If we roll forward five years, these numbers increase to almost 60% of operational platforms and more than 34% of pipelines. This will put increasing strain on maintaining the integrity of an infrastructure that will be asked to deliver continually increasing production.
All of these factors underlie our increasing concerns and the inevitability of increased costs and volatility. On a wider sociological aspect, this is a concern, but from the perspective of the supply chain, this spells opportunity.
Harking back to the earlier comments on reducing backlogs and revenues for contractors and suppliers, this is a temporary situation. Overall expenditures will rise, and within 12 months backlogs will start to grow again with revenues following.
We don't subscribe to impending doom scenarios of curtailed production and short-term peak oil, but we do use the phrase "commodities crunch" to highlight the increasing perspective that oil and other commodities will have in national and international thoughts. Ignoring the bellicose attitude of much of the energy and oil debate, our concerns are practical. Simply delivering expectations of increasing production will be a challenge – one we don't doubt the industry will be up to, but at increased cost, complexity, and simple force of effort.
Our view on average annual oil price shows a rising trend, but this will also be accompanied by odd moments of sharp increases and decreases and ultimately settling at higher levels as the reality of the challenge becomes clearer.
About the author
James Hall works as a senior analyst for Infield Systems Limited specializing in commercial due diligence, M&A, commodities/equities research, and offshore vessel market dynamics. He holds a bachelor's degree in environmental science from the University of London, QMC. His research interests include energy and commodity markets, energy and development, and natural resource management. Prior to joining Infield, Hall worked in research and business development with a business consultancy and has three years' experience working in Asia.
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