Shell Delays Oil Sands Expansion
31 October 2008
Financial Times. Royal Dutch Shell has delayed a decision on the second phase of the expansion in its Athabasca oil sands project.
...Jeroen van der Veer, the chief executive, said the company would “wait for costs to cool down...before any new investment decision is made&rduqo;.
Projects in the oil sands of Alberta, which are fiercely criticised by environmentalists, are among the world’s highest-cost oil developments. In recent weeks, several companies operating there, including Suncor, PetroCanada, Nexen and Opti Canada, have delayed investment plans.
Shell’s oil and gas production fell by 6.6% in the third quarter, mostly caused by hurricanes in the US and planned maintenance in the North Sea.
Crude oil at less than 70 USD pretty much halts all new oil projects in the northern hemisphere. The lead time on oil projects is 3 to 6 years meaning it takes from 3 to 6 years from a drilling project is started until it starts producing oil. Projects that are started but not yet ready for production will not be terminated because that will result in huge capital loses. For this reason new production will still go online in the coming 3 years that can make up for oil depletion of old production installations. The global depletion rate is 6 to 9% pro anno meaning that in order to sustain current production globally 6 to 9% new oil projects must start production every year. This is why the current drop in oil price is outright dangerous for future oil supply. If new oil installations are cancelled for just 2 years globally you could see a drop in oil production of 10% to 15% three to five years down the road. And supply cannot be fixed in a hurry no matter how high the oil price because it takes 3 to 5 years from an investment decision is made until it bears fruit in terms of oil production.
The point is we need to stabilize the oil price at minimum $100 per barrel to keep investments in new oil production stable. This is more important than ever because the lead time in the oil industry has more than doubled. Ten years ago you could get production online in 12 to 24 months. This is impossible now for oil sands and deep see drilling and this is why the world economy need stable oil prices. After the presidential election they should start buying oil for the strategic reserves and bid it up to 100 USD. There is plenty of oil to be drilled in deep see or in oil sands at 100 USD or more but there is none at 70 USD.
Posted by: Henrik | 31 October 2008 at 01:21 AM
And just how would you 'stabilize' oil prices at $100 a barrel? What do you want, a price subsidy--for oil! Fat chance of that happening. Taxing Arab oil imports like the Europeans, though, is a good idea. That will give local & allied producers breathing room to invest. Plus oil producers could pay for the air quality damage they do.
Posted by: Ross Nicholson | 31 October 2008 at 02:56 AM
To repeat, the oil price can be stabilized using the strategic oil reserves. If the price goes below $100 start buying extra oil for these reserves and if the oil goes above $120 start selling oil from these reserves if there is more than plenty in them to deal with a real emergency. Also make an annual meeting to adjust the proper oil price band e.g. from $100 to $120. It may change due to technological progress, increasing marginal oil drilling cost etc. It should be coordinated in G8 to make the system more efficient. If we don’t do it you will see a future where the world economy is cycling from boom to bust every 5 year or so depending on wildly fluctuating oil prices. This will lower the long-term economic growth rate and cause unnecessary distress among people and businesses.
How important is the crude oil price for the global economy? Using 85 million barrels a day a 10 USD increase in oil prices will cost 310 billion USD per year. The global economy is at 65,000 billion USD so 10 USD is about 0.5% of global GDP so it is important and a large oil price increase of 60 USD or more could potentially reduce global economic growth by roughly 3% and bring it into recession. The current drop in oil price is good because it will help to slow down the current and mainly bad debt induced recession but it is not sustainable for very long (1 year max) or we will have a mayor oil crisis in 3 to 5 years from now that it will take 3 to 4 years to get out of.
Posted by: Henrik | 31 October 2008 at 04:57 AM
The price of oil has been artificially fixed for decades. Speculation and Cartels have replaced the sacro-saint supply and demand commercial system. Profits have gone up to unsustainable levels ($ trillions/year).
Extraction cost varies from $10/barrel in the middle East to as much as $50+/barrel in remote places and from non-conventional tar sands. A fix price based on average extraction cost would not be fair.
Variable royalties + carbon taxes + import taxes/duties could be used to bring the delivered price (to the refiners) to something close to $70/barrel +/- $10.
To do that, both producers and consumers countries would have to agree to replace the current speculative system with a more regulated system.
Are the countries involved mature enough to arrive at such solution? One could have serious doubts.
Alternatively, the current oil price speculative system could be effectively nullified with the massive introduction of e-vehicles, e-HVAC, syngas and biofuels. Reducing fossil liquid fuel consumption by 50+ % could have a long lasting drastic effect on oil price.
The final solution may be a partial or total ban on oil consumption, but that is not for tomorrow.
Posted by: HarveyD | 31 October 2008 at 07:57 AM
How about (US) variable import duty for non-NAFTA oil?
Posted by: Andrey levin | 31 October 2008 at 09:33 PM
i can see how the oil price will fluctuate up and down. The price discovery mechanism system is like a system feedback loop. Price shoots up, curbs demand and price shoots down. Because of the time lag it will overshoot then undershoot, oscillating until stability is reached.
Regulations could be improved to damp the system and reduce wild gyrations. There is too much trade in oil for the US government to control price.
The capitalist world is full of monopolies, duopolies and cartels. In every sector, not just in oil. It's the inevitable result of the so called "free market" ideology. No regulations produce a worse result than over regulated markets.
Personally I'd like the idea of less investment in oil sands. I hope they are regulated out of further expansion in a few years time when the price is higher.
Posted by: Andrew | 01 November 2008 at 03:52 AM