Middle East spending gap may let Big Oil off hook
New York, June 5, 2014
By Christopher Swann
The Middle East region needs to invest about 23 percent more a year in their oil wells, according to the International Energy Agency. Otherwise, a shortfall in black gold could push the price up by $15 a barrel.
These states' other priorities make such outlays unlikely. That's good news for Exxon Mobil and others under pressure to cut costs.
Over the past six years returns on capital employed at the world's largest oil companies have halved to around 15 percent, consultancy IHS calculates. In large part, that's because a series of monster projects gobbled up far more cash than expected.
The Kashagan field in Kazakhstan, one notable flop, has soaked up $50 billion of investment from Exxon, Total and others. It's now running five times over budget and a decade behind schedule.
That could change if the IEA's projections are correct. The agency reckons oil-producing states in the Middle East collectively spent an average of $73 billion each year between 2007 and 2013 on their often aging oil and gas fields. Keeping pace with rising global demand would require that they boost that by another $17 billion annually.
Yet Middle Eastern governments may actually be more likely to scale back their oil budgets so that they can spend the money elsewhere - such as to offset potential civil unrest.
Saudi Arabia, for example, boosted annual state outlays by about 60 percent in the wake of the 2010 Arab Spring protests. With more than half of the region's population under 25 years old, states have a big incentive to boost public-sector payrolls to absorb new job seekers. That would leave less for longer-term investments in hydrocarbons.
That outcome would suit the West's oil companies. The IEA reckons the price of oil would jump by $15 a barrel - a relative boon after several years of Brent staying more or less flat. That's almost certainly not enough to restore margins to their former glory. But oil executives looking for ways to placate their shareholders will take any help they can get.
* A potential shortfall in investment in production in the Middle East could create a $15-a-barrel spike in the oil price by 2025, according to the International Energy Agency's report on spending patterns in the industry. The report was released on June 3.
* Fatih Birol, the chief economist at the IEA, said oil-producing states in the region needed to spend $90 billion a year through 2025. That is 23 percent more than the average investment over the past six years, the report calculated.
* Last produced in 2003, the IEA's report argues that $40 trillion in investment is needed globally by 2035 in order to meet growing demand for fuel and falling production from mature sources of energy. - Reuters
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)