Oil sector enters new investment phase

The oil sector, for the first time since 1970s, is entering a new investment phase, said Goldman Sachs International (UK) global head of commodities research Dr Jeffrey R. Currie. The current investment phase, in its fourth year, will likely last at least another 5 to 10 years.
Currie said the previous investment phase lasted for 10 years, providing the sector with two decades of growth. Much of the investment that occurred in the 1970s, before global rig counts peaked in 1981 at more than 6,000. The number of rigs have never been high since.

The rising cost now reflects the need for substantial new investment, he said.
"Prices will only decline if the industry can meet both demand growth and displace older fields. The current investment phase will require a significant increase in spending and time before returning to an exploitation phase."
He said the industry will need to replace nearly all of today’s production by 2013 to meet demand growth and replace older higher cost production. This will cost $ 2 tn ($ 1 = RM 3.80) over the next decade.

Currie said equilibrium price of oil would likely remain above $ 30 a barrel, assuming trend demand growth of 2 % per annum over the next five years and an equal expansion in global crude oil production. Global crude oil production capacity would have to expand by an additional 5 mm bpd by 2008 to bring the equilibrium price below $ 30 a barrel.
Currie noted that capital spending had already increased significantly, diluting company returns, but will need to rise further to meet demand over the next 10 years.
"Current spending is not sufficient and will need to double over the next decade."

Oil prices must average at least $ 30 a barrel to keep the returns above 8 % for marginal high cost companies. Increased upstream costs and producer taxes by $ 2 a barrel and $ 5 a barrel respectively had raised the equilibrium oil price.
Infrastructure shortages had added $ 3 a barrel to bring the net costs to $ 10 a barrel over the last decade, pushing the equilibrium price to $ 30 a barrel. Currie said oil company returns were supported during the 1970s by significant government aid in building infrastructure.