US: February 18, 2008


HOUSTON - Are the lacklustre production and reserve replacement rates reported by the largest oil companies precursors to a looming oil crisis?


The largest oil companies have had increased difficulty meeting a range of challenges to increase their production, including mature oil fields with declining production rates and restrictive regimes that have tightened their hold on their resources as commodity prices have.

The issue was much debated by oil executives and industry watchers at the CERA energy conference this week.

"An oil crisis is coming in the next 10 years," said John Hess, chief executive of Hess Corp. He said that he believes oil producing companies and countries are not investing enough to ensure sufficient production capacity to meet growing demand.

"While recent discoveries ... are promising, we need to find a new production basin like the Alaska North Slope or Angola every year to ensure that we can grow our oil resource base to support increases in production for future generations. We stopped making such meaningful discoveries during the late 1990s," he said.

As their coffers have swelled in recent years from record oil prices, many oil companies have spent more on dividends and share repurchases than on capital projects.

Earlier this year, Chevron and Royal Dutch Shell indicated that their replacement levels of produced oil and gas for 2007 would disappoint investors, and even Exxon's first-quarter production was lighter than many analysts had hoped.

"There is an urgent need to strengthen the flow of capital into upstream oil," said Nobuo Tanaka, executive director of the International Energy Agency. "We remain comfortable with the adequacy of the world's hydrocarbon reserves, but we are anxious to mitigate the above ground risks that complicate today's markets."


PEAK APPROACHING?

Ironically, StatoilHydro CEO Helge Lund said the shortage of industry spending is due in part to the high oil prices that have brought in that windfall to the companies.

Oil companies could be hesitant to spend money to pick up new exploration and production projects because they will have to pay for these assets based on an oil price that they believe is inflated.

"It is a question of whether you can make efficient investment decisions and be at the right cost level in the current environment," he said.

Cambridge Energy Research Associates, the conference's host organization, believes that adequate oil supply should be available in the near term.

According to a study released last month, CERA estimates that the global decline rate of fields currently in production is 4.5 percent -- a lower number than previously believed. The group says this means that the oil supply won't hit a peak and start to contract in the short term.

Even those who don't see a peak approaching still expect challenges.

"The supply of easy oil will not keep up," said Linda Cook, executive director of gas and power at Royal Dutch Shell, noting that unconventional resources like oil sands and oil shale, as well as liquefied natural gas, will have to pick up the slack.

(Editing by Marguerita Choy)


Story by Michael Erman


REUTERS NEWS SERVICE