Flat-Lining and Resurrection

Spending money to make money is a long-held tenet of the petroleum industry. So why has capital reinvestment essentially flat-lined?

That is the question posed by James Kinnear, president and CEO of Calgary-based Pengrowth management Ltd., one of North America’s leading energy income trusts, during an Economic Club of Canada presentation to federal politicians, lobbyists and analysts on Parliament Hill.

Kinnear said the current global slump in crude prices meant “cutbacks, reductions, deferrals and even cancellations of projects,” including in Alberta’s oilsands, where $80-85 a barrel is considered minimal for further development.

The fact that major fields in Saudi Arabia, Mexico, the North Sea and Russia had peaked or are in decline was significant for the future of oil supply. “One of the largest growth areas forecast for the next 5-10 years has been Canada . . . mainly because of the tarsands.” However, he added, high capital and operating costs of new plants was clearly problematic.

“You have to keep re-investing to offset your depletion and your decline,” Kinnear said, citing an International Energy Agency study of 600 fields worldwide, which indicated that reserves were declining by 6.7% annually.

“Once you slow down your re-investment rate, your production actually declines . . . In an 87-billion-barrel-a-day world, that means you have to replace about four to five million barrels a day each and every year just to stay even. . . . More significantly, it’s actually rising as time goes along. New fields that are being developed are more expensive.”

Kinnear expects prices to remain weak in at least the short term, an outlook underscored by OPEC’s recent decision not to cut production as prices swing by as much as 5-10% a day. “For the world’s most actively-traded commodity, that is significant. . . . Whether we believe in peak-oil theory or not, it may not be significant if indeed the lack of new investment in the sector continues.”

Global crude production is generally accepted as having peaked in 2005-2006, underscored by the fact that despite a tripling of world prices over the last 4-5 years, there had been no response on the supply side. ”If the oil doesn’t come out at $90, when does it come out?” Kinnear asked.

Good question. Resurrection clearly is going to take a while.