Fall in exploration may trigger oil crunch
Price spike expected as demand exceeds supply

July 15, 2009 | By Christopher Johnson, Reuters | read source

An oil crunch looms following a decline in exploration, energy consultancy Moyes & Co. Inc. said Tuesday.

Photograph by: Herald Archive, Reuters

A sharp decline in oil and gas exploration because of the global credit crunch will lead to another spike in prices, probably within the next four years, a leading energy finance consultancy said Tuesday.

Christopher Moyes, president of Dallas-based Moyes & Co. Inc., which manages acquisitions and investments for dozens of medium-sized oil and gas companies, said the spiralling cost of capital over the last year has slashed the number of exploration projects and hit the value of potential oilfields.

As the cost of financing all projects has escalated, oil companies are turning their backs on risky exploration and are instead under pressure to obtain hydrocarbon resources through the easier route of mergers and acquisitions.

"It is bound to lead to a supply crunch," Moyes told Reuters in an interview. "Sometime between 2013 and 2016 we will have another price crunch.

"The last three price spikes have had a lead time of about 1,500 to 2,500 days. The bottom of the price trough was January. It is about 1,500 days until where we run into the supply crunch again, when demand rises and we can't supply.

"The problem will be a demand issue out of China and India, putting pressure on the market, causing prices to go up and we won't be able to turn the taps on fast enough."

Oil prices peaked a year ago at over $147 US per barrel for benchmark U. S. light crude oil futures but then collapsed to under $40 in December before recovering to over $70 in June and falling to just below $60 Tuesday.

The International Energy Agency, the Organization of Petroleum Exporting Countries and other agencies have warned that an oil supply crunch is possible if exploration does not begin to pick up fast.

Evidence of a collapse in upstream activity is mounting.

Oil and gas drilling in British waters fell by 57 per cent in the second quarter, with only 15 exploration and appraisal wells started.

U. S. gas drilling rigs were down 56 per cent year on year last week, according to oil services firm Baker Hughes.

As demand for new acreage has fallen, so have prices, with the value of some oil and gas fields down as much as 90 per cent.

Some potential Texas oilfields are now selling for around $4,940 a hectare when they would have sold for closer to $24,700 a hectare before the financial crisis, he said.

"Exploration values fell between 50 and 90 per cent from July 2008 to the end of the first quarter 2009. It's a nine-month slide," he said.

"Fields naturally decline at 10 per cent or faster, so unless you are continually replacing it, you are constantly eroding that cushion that we have got. (Investment) now is probably not enough to fill the gap between the declining production and where demand will be in five years' time," he said.

"If the industry gets more money it will start new developments. But it takes lead times of two to five years to get even existing discoveries on stream," he said.

Moyes said countries such as Iraq wishing to develop their resources might have to accept much lower prices from oil companies, particularly Western ones, to attract them.

"A lot of governments are going to find much lower bids for exploration programs and only the best are going to attract investment," he said.

"This means less oil will be available to be produced. We have enough oil in the world to last probably 40 to 50 years -- it is access to it that we won't get."

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