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Service Costs
Inflation (or
deflation) of the costs of equipment and services since 1990 have been
broadly cyclical, following oil price movements, with a short delay. From 2002
prices have significantly increased for rigs, consumables and services.
This was especially so in 2005 and 2006 as demand for almost everything
increased and as fuel costs escalated. The magnitude of this growth,
especially in rig rates, was partly attributable to intense competition within
the service sector over the previous 6 years of relatively low prices,
which had led to large-scale consolidation of providers and consequent
under investment, especially offshore in higher specification rigs,
floating production systems and associated hardware, and in personnel.
Rising oil
prices also have a triple effect on inflation within the oil and gas
industry. A higher price is not only the catalyst that increases
activity and thus demand for equipment and services, but it also
increases the cost of services because of the higher cost of energy.
Moreover, high oil prices inflate the profit expectations of the service
sector and the salary demands of personnel.
The oil price
rises that began in 2003 have thus had a big effect on prices but note
that not all cost escalation can be ascribed to inflation. Costs are
also going up as more advanced rigs, production systems and services are
used for deeper and more complex reservoirs and more extreme conditions.
Oil Price Forecast
The
Energyfiles forecast for oil prices over the next five years is of
erratic but generally lower levels in 2008 (US$80 to US$110) as oil
demand growth has been forced down by higher oil prices; as new OPEC and
non-OPEC production enters the market from the deep waters of West
Africa, from the Gulf of Mexico and from the Caspian Sea; as new LNG
developments and coal continue to replace oil use in Asia; as
modest amounts of other alternative energy sources appear; and as the
US dollar strengthens slightly.
In recognition
of the cyclical nature of oil price and cost escalation these effects
will be temporary. Renewed oil price escalation is forecast from 2009
eventually leading to more cost inflation. A big increase in oil prices
is expected from 2011, soon after which service costs will begin to grow
again significantly. However, this will probably be the last such cycle
as the combined effects of inflation plus general cost increases and of
lack of opportunity will have created an increasing disconnect between
spend levels and drilling and production trends.
Regardless of
speculators who buy and sell, of warm winters and of above or below
ground factors, ultimately the price of oil is driven by a most basic
economic tenet - the supply/demand balance. Demand wants to rise and
supply is about to fall. The hundred dollar oil milestone is not the top
of a hill, it is a ledge on a mountain. Only a portfolio of alternative
fuels and conservation programs can slow demand for petroleum and take
the edge off higher prices.
By 2012 the
world will have begun to enter a new, permanent energy
capacity-constrained environment waiting on real large-scale
alternatives to oil in the transport sector. After 2012 the oil price
will begin to move rapidly upwards, past $200, $300 and even $400 per
barrel, hardly affected by declines in demand which will be unable to
keep pace with declines in output. Demand will be forced down in many
uncomfortable ways.
© 2007 Dr Michael R.
Smith
(all quotes from this article should be
cited: "Dr Michael R.
Smith, Chief Executive of Energyfiles, the oil and gas forecasting
company") |
