Global investments in oil and gas are headed to face a turmoil. It has seen a sharp fall in 2008 and till the last reports came in for 2009, many of them are expected to go bad. Recession and lack of financing apart,

if oil prices do not stabilise, new investments will fall and many of
those which are already in the pipeline will not see the end of tunnel
very soon.

Investment in oil is being adversely hit by volatility in oil prices.
The oil prices have turned increasingly and rather unduly sensitive to
market demand, supply and stock positions, and to put it more precisely
the rumours and speculations about them. The oil price indices are not
necessarily reflective of the real market conditions and with multiple
of them running, the spot market provides huge arbitrage opportunities
making things worse.

It is possible that large international oil companies or the national
oil companies are in a position to absorb the shock created by
extraordinary changes in the market conditions and overcome and
withstand the inefficiency created by such speculation-driven
consequences in the market. But, not the small players, for sure.

It is also difficult to expect the large international oil companies
and cash-rich national oil companies to remain calm about it and go
ahead with their upstream investments such as those in exploration and
prospecting. They have also been hit hard both by the recession and the
political issues in many nations where investments have already been
made or are planned to be made. They may be better placed in the
capital market to mobilise resources, but the investors are wary of the
prospects of oil prices, especially if they believe that the same may
remain below $80 a barrel on the average for a long time, they may also
not jump into oil so easily.

After all, while from most of the conventional assets, one can deliver
oil at $15-30 a barrel, the costs may rise to $60 for several new
projects and considering the investments they are often forced to make
on building infrastructure in economically backward areas where oil
resources are being explored and pay taxes at steep levels, a price
below $80 is certainly a risky proposition for investments in new
upstream oil assets.

When the oil prices rose sharply till the middle of last year, fight for oil resources went up in the…

: same proportion. The investments in both conventional and
non-conventional oil and gas assets saw increases in multiple levels
driven also by national energy security concerns of countries which are
expected to remain dependent on imported oil, such as China . Today,
with oil prices down to below $80 levels ( or around that ) from the
peak of about $145 last year, investments made in most of these assets
in the past are proved burdensome. While the larger oil companies have
been managed to sit pretty with them, the small and mid size players
are in real trouble.

There is, in fact, nothing to worry about the long-term prospects of
oil and gas demand. The problem lies in the immediate and short term
scenario, where oil demand is likely to remain tightly range bound for
another year or so. The global oil demand has been estimated to grow to
116.3 million barrels a day by 2030 from the current levels of about 84
mb/day.

The investments made in all segments of the oil industry and those
which are being planned right now have the potential to maintain a huge
excess capacity in the industry for a long time. The Opec policy of
maintaining a spare capacity “strategically” will also not facilitate
new investments by others, however good they might look at the first
sight. With gradual and large capacity expansions and maintaining a
moderate oil price regime, the Opec may be able to discourage high cost
investments in new conventional or non-conventional areas, mainly to
maintain their oligopoly position in the market.

The global oil market for both crude and refined products are turning
increasingly complex with issues such as geopolitics, logistics,
capital investments trends, uneven course of economic development and
diverse regional trends in economic recovery post recession.

This will also adversely hit the free will of oil companies to invest
anywhere and everywhere thinking that oil resources are the safest bets
considering the long term energy security concerns of the parent
nations. Today, politics playing above pure economics of oil
exploration and refining, even the cash rich companies seeking their
national interests will have to follow a different approach to acquire
these assets.

More importantly, not all the assets talked about are as attractive as
they are made out to be. They will be proved risky at current swings in
the market….

Source: Financial Express

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