Low Prices = Reduced Investment | Russell T. Rudy Energy LLC
A recent article in “World Oil” cites analysis by the International Energy Agency (IEA) which contends that a period of sustained low oil prices will result in reduced exploration and production investment. The underlying assumption is that prices reflect a balance between supply and demand. Increasing prices imply a need for more supply which requires more investment. Accordingly lower prices result in lower investment.
Upstream investment is highly sensitive to oil prices. Given the price collapse that began in 2014, we likely face several years of capital spending that will be well below the annual average over the last 10 years. Oil and gas production involves careful management of existing output as well as careful evaluation of new opportunities. Often, these new opportunities involve very long lead times as evaluation, exploration, appraisal and development require large amounts of time, expertise and capital.
Past history is instructive. After prices increased in 1981 and 1982, investment in exploration and production reached over $100 billion in 2014 dollars. Subsequently, as prices fell through the end of the century, investment fell to the $20-30 billion dollar range. However, from 2003-2014 prices essentially tripled and upstream investment reached a high of $158 billion.
The EIA’s 2015 Annual Energy Outlook Reference case projects an average price of $70 per barrel through 2020 and accordingly, much lower exploration investment during this period.
To read the article in its entirety, please go to http://www.worldoil.com/news/2015/9/25/sustained-low-oil-prices-could-reduce-ep-investment-eia .
