Schlumberger Chairman and CEO Speaks Out About Need for Investment
It’s rare these days for anyone to formulate a coherent picture out of the wildly esoteric facts and figures that pervade the oil and gas trade. In an industry dominated by scientists and analytical-types, the urgency of the message is sometimes lost by the complex way in which it is communicated. “We’re running out of air in here” becomes “The chamber is depleting O2 at a rate of 15 lbs per square inch.” That’s why it was so refreshing when, in a recent speech given to an international gathering of the oil and gas investment community, Schlumberger Chairman and CEO Andrew Gould spoke plainly about the challenge of planning and investing in the coming years. His speech gave a coherent framework for often-uncontextualized and somewhat abused industry facts and figures. So, if you’ve ever wondered why the Energy Information Administration’s (EIA) 2002 forecast for world demand in 2010 should matter to you, read on.
Oil and gas companies, and their industry counterparts, use forecasts of future petroleum demand to formulate their business plans. That’s how it’s supposed to work, anyway. Recent forecasts have diverged more and more from actual outcomes, so that the current surge in demand has caught the industry unprepared. Demand coming from non-OECD nations such as China was vastly underestimated, causing world demand increases to rise almost two years ahead of the EIA’s 2002 forecast. Last year, according to Gould, demand was a “colossal 5.8 mb/d above the original 2003 figure” provided by the EIA. “Our industry simply cannot cope with errors of this magnitude. Investment decisions, project durations, capital and resource allocations need to work on much longer timeframes,” he said.
The lack of foresight regarding demand prevented the industry from preparing for today’s consumption rates. This is obvious in the refining sector, where capacity is so tight that the slightest blip in operations sends ripples through the U.S. economy. Other, less obvious, sectors of the industry have also been caught off-guard. According to Gould, “operating companies have been devoting scarce human and technical and equipment resources to new development projects,” leaving almost no resources available to stem decline rates. As a result, companies are finding it necessary to choose between essentials: 1) utilize an operating company’s skill, technology and equipment to reduce decline rates in maturing fields OR 2) divert those resources to new exploration projects needed to replace rapidly depleting reserves. It’s not an easy choice. According to Gould, in the future it’s one that shouldn’t have to be made. “For perhaps the first time in more than 30 years the industry will need to pursue exploration for new reserves at the same time it grows and sustains the existing production of both oil and natural gas,” he said.
In addition, growing resource nationalism is severely restricting the efforts of private firms to replace depleting reserves. The lion’s share of oil reserves are in the hands of a few nations, the majority of whom simply don’t possess the resources or organizational stability to increase production at the rates needed. As supplies grow more and more scarce, nations are closing their doors to the outside world in the hopes of becoming self-sufficient. Although the instinct is natural, it is also often counter-productive. Resource nationalism constricts growth in the regions that hold the most potential for rapid production gains. “This does not mean that production gains will not occur, but it does mean that they will take longer than in if access had been open to private international equity,” said Gould. In other words, because private firms have been shut-out of highly desirable regions, there are a lot of investment dollars going unused. “In addition,” he added, “geopolitical and security issues have either hampered efforts to maintain production, such as in the Niger Delta, or have prevented development of new production with Iraq being the most obvious example.”
The good news, and there is good news, is that Gould seems optimistic about the industry’s ability to respond on a going-forward basis. There is hope that new exploration plays will open up in regions currently off-limits. Nations such as Iraq and Nigeria may stabilize as new leaders find their footing. In addition, “The economics of sustained higher oil prices are making exploration plays - that would have seemed impossible only three years ago – very attractive and this will affect the types of technology required as well as overall technology uptake.” Gould contends that technology will become more and more crucial in E&P as the industry seeks to diminish production decline rates and make discoveries in increasingly complex environments. Of course, technology is expensive. However, we must allow recent forecast blunders to teach us that substantial investments are necessary in all aspects of E&P. Because at the center of it all is this fact: we are going to need it all . . . every last drop.
Published Thursday, September 20th, 2007 at 9:15 pm and filed under Articles.