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Page added on August 15, 2014

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Billions in oil investments at risk from low crude prices


More than half a trillion dollars of investments in major oil projects over the next decade are at risk from high costs and low crude oil prices, an environmental think tank said on Friday, warning that shareholders’ returns could suffer.

To meet anticipated future demand, oil majors including BP , Chevron, and Eni, are spending billions to extract harder-to-reach oil, for example from Canadian oil sands and deep below the Atlantic Ocean.

But many of the projects require high crude oil prices to turn a profit or even begin production, Carbon Tracker Initiative (CTI) said in a report on Friday, adding that some plans should be deferred or cancelled to avoid wasting capital or destroying shareholder value.

“The majors have a potential capital spend of $548 billion over the period 2014-2025 on projects that require a market price of $95/barrel,” CTI said, adding that $357 billion of this is earmarked for as yet undeveloped, high-cost ventures.

“(Cancellation or deferral) is becoming increasingly necessary as near term cash flows are not sufficient to maintain both dividends and capital expenditure plans.”

CTI works to highlight to shareholders how investment in fossil fuel resources based on expectations of growing demand might be affected by the global drive to curb climate change by cutting carbon emissions.

The organisation is funded by several U.S. and European foundations, including the Rockefeller Brothers Fund and the Joseph Rowntree Charitable Trust.

Using capital expenditure and production estimates from Oslo-based Rystad Energy, CTI identified in the report 20 major oil projects forecast to cost a total $90.7 billion that it said are candidates for cancellation due to most of them needing a crude price of at least $110/barrel to break even.

Sixteen of the projects involve extraction by drilling deepwater wells or through processing oil sands.

“This capital could instead be returned to shareholders rather than being put at risk in projects that are already high cost and low return,” CTI said.

According to recent estimates made by the World Bank and the U.S. Energy Information Administration, nominal crude prices are expected to rise to around $109/barrel by 2025.

Despite rising geopolitical tensions in the Middle East and between Russia and the West, prices are at their lowest in months, mainly due to ample supply and sluggish demand globally.

Front-month Brent prices hit a 13-month low of $102.10/barrel on Thursday, while the equivalent West Texas Intermediate contract dropped below $96/barrel for the first time since January.

CTI said Conoco Phillips and Royal Dutch Shell have the most production potentially at risk from low prices, while Total and Exxon Mobil were found to have the largest percentage of their capital expenditures that are dependent on high crude prices.

CTI urged investors to ask the firms to forecast how lower prices would impact the projects and future profits.

The organisation in May said investors could spend up to $1.1 trillion over the next decade on projects that will never reach production due to new environmental rules.

Such measures could slash fossil fuel demand, lower prices and cut profits, leaving assets and investments “stranded”.



33 Comments on "Billions in oil investments at risk from low crude prices"

  1. rockman on Fri, 15th Aug 2014 7:48 am 

    “…major oil projects over the next decade are at risk from high costs and low crude oil prices…”

    Wow…smart folks: they’ve discovered the dynamic that has rule oil/NG developed since Col. Drake poked that first hole over 100 years ago. No telling what these folks will figure out next. LOL.

  2. Kenz300 on Fri, 15th Aug 2014 8:53 am 

    Price is the ultimate behavior modifier……

    As the price of oil, coal and nuclear rise they make all alternatives more competitive.

    Wind and solar keep dropping in price every year. Once installed there are no monthly fuel bills for the life of the system avoiding those unpredictable price increases of oil and coal.

    Electric, biofuel, hybrid, CNG, LNG and hydrogen vehicles are all making progress and growing in use around the world.

    Even bicycles and trolley’s are making a come back in many cities.

    People are looking for ways to save energy and save money…….

    High energy prices change behaviors.


    Global Renewable Energy Status Uncovered

  3. MSN Fanboy on Fri, 15th Aug 2014 9:11 am 

    “The majors have a potential capital spend of $548 billion over the period 2014-2025 on projects that require a market price of $95/barrel,” CTI said, adding that $357 billion of this is earmarked for as yet undeveloped, high-cost ventures.

    This paragraph says it all

  4. JuanP on Fri, 15th Aug 2014 9:46 am 

    I don’t think we will leave any of the oil talked about in this article where it is, we will extract it and use it all. Prices will go up more than down in the future, IMO. I am aware of the several theories that sustain this is not possible, but I believe we will see $150 barrels before the decade is over. The only scenario that could bring prices down significantly would be a global recession not caused by oil scarcity, and it would be very temporary, as lower prices would increase demand immediately.

  5. Makati1 on Fri, 15th Aug 2014 9:48 am 

    Too high = Recession/Depression.

    Too low = Recession/Depression.

    ‘Just right’ seems to be around $100-$110.

    Until it isn’t.

  6. shortonoil on Fri, 15th Aug 2014 10:26 am 

    Many of the individuals that order a copy of our report are engineers who invest in oil. When the report was written that was the readership it was directed at. One of the basic premises of the report is that when the energy half way point is reached, that is, when it requires half of the energy content of a unit of petroleum to produce it, and its products, that the cost of production must begin to increase faster than its price can increase. Now, this is not rocket science. Any college student in engineering who has taken thermodynamics (and who didn’t spend the entire year drooling over the co-ed sitting in front of him) can understand this. It falls right out of the Second Law.

    Of course, determining when that point will be reached is the object of about 56 of the reports 57 pages of graphs and equations. Criticisms of the report always revolve around our plus, minus 4.5% error margin. They are never about whether, or not, someone has been mucking around with the Second Law. Anyway, the report concludes that the half way point must of been reached no later than 2012. Because of that pesky margin of error it could have been as early as 2000.

    From that half way energy point margins will compress, E&D will contract, and petroleum will begin its phase out period. ROI on new projects will fall until it becomes impossible to continue them. Our advise to the petroleum industry is: send your bean counters to lunch, and sit down, and have a long discussion with your engineers. You’ll survive a lot longer if you do.

  7. JuanP on Fri, 15th Aug 2014 10:43 am 

    Short, I am learning much from you. Thanks.
    Do you think some governments will take over the oil industry and operate it at a loss for as long as they can to keep BAU alive at some point, making the ROI less of an issue and leaving dividends out of the picture?
    What is the relationship between the dividends oil companies pay out and there additional E&P costs? Is the money paid in dividends more or less than what’s needed to support E&P? I understand the situation gets worse every day, but could it happen for a while?

  8. Sharpie on Fri, 15th Aug 2014 11:24 am 

    “Low” prices lol.

    Low is just relative.

  9. Davy on Fri, 15th Aug 2014 11:26 am 

    Juan, I am forecasting martial law to do precisely that. I see a martial law governing body producing energy even if it is at a loss. The loss will be paid for by further wealth transfer and triage of lifestyles of the GP. Liquid fuels will be too expensive for the GP but TPTB will manage to have it and give it out as needed to further stability. Essential services will have to continue and liquid fuels are a vital part of that. The big question is can they maintain power through martial law. Will a complex interconnected delocalized local globalism transition to a command control military style centralized government. I am wondering if the complexity can be maintained enough to keep all the vital modern infrastructure of distribution, command/control, and production running. There will be huge losses of efficiency making that transition leaving a significant amount of the population poor, hungry, and in the dark. We know some areas will not even manage martial law. In these areas it will be mad max law.

  10. rockman on Fri, 15th Aug 2014 12:47 pm 

    There would be no advantage to the govt “taking over the oil industry”. Though I’m not sure what “taking over” means. From an operation standpoint would the govt hire all the existing oil patch hands? If not are they going to hire inexperienced hands to manage an increasing complex system? Safe answer IMHO: no.

    So does it mean they take ownership of the oil industry? What about the tens of millions of citizens (many thru their retirement accounts) who own the vast majority of the US oil industry…does their govt take away $trillions of their assets w/o compensation? Again, I doubt it.

    But there’s an easy way to stretch out drilling activity: don’t collect any taxes (state and federal) or collect royalties from federal waters. Of course the govts would lose income but the object is to get more wells drilled…not generate more income for the govt. This isn’t going to suddenly create tens of thousands of new locations to drill. And then any tax relief can be split between revenue streams of existing production and new drills. But regardless the wells will still cost what they’ll cost and oil will still sell for whatever the price might be.

    And then there’s a completely different approach: subsidize the consumers: the govt pays ExxonMobil $X/gallon of gasoline (or fuel oil or diesel) and then has them charge the public something like 60% of $X/gallon. Of course, the problem there is how do they determine what $X is? Ultimately the only way more wells will get drilled is if someone is paying for the cost + profit margin. And given the non-bipartisan nature of politics these days good luck with coming up with any approach that has a chance of becoming law.

  11. Northwest Resident on Fri, 15th Aug 2014 1:18 pm 

    rockman — I know this is stretching the imagination a little. But in a scenario that Davy contemplates — marshal law in America — that scenario would only come about due to global economic collapse or something very near to it. In that case, all the tens of millions of citizens who “own” the majority of the oil industry through their stocks and bonds will have already lost all their “ownership value”, and with very little chance of economic growth increasing their worthless shares. In this scenario, there is another option — government takeover of the oil industry, retaining all the executives and managers and oil workers in their current roles (under threat of penalty perhaps) — and in this way keeping the oil flowing, more or less. Would that stand a chance in hell of working?

  12. Pops on Fri, 15th Aug 2014 1:28 pm 

    I agree ROCK. I’ve said that capitalism is best on the way up but socialism is better going down – removing taxes that have always been paid is the same as government/society subsidizing the biz.

    Call it a regulated monopoly or whatever makes people happy but a guaranteed return would take away what we might eventually face, which is a abandonment of the biz by investors seeking profits elsewhere.

  13. JuanP on Fri, 15th Aug 2014 1:48 pm 

    Nwr, the way you described it is what I was originally referring to. Take over while leaving all personnel on duty under risk of losing your job, being labelled something or another, and getting sent somewhere if you do not agree until you become more agreeable, or becoming an unemployment statistic in a collapsing economy in a not so bad scenario. All the employees would stay, IMO.
    It was an after BAU collapse scenario in which citizens’ rights would cease to be what they are, the government and in which TPTB will do whatever they feel is necessary to keep some, for them, basic industries like food, energy, and military going.

  14. JuanP on Fri, 15th Aug 2014 1:54 pm 

    Rock, I think that the no tax for energy industries day may come sooner than you imagine. I see it as a previous step to what I was describing above. And forget this political system, it’s broken beyond repair and will be replaced by a command economy of some sort, it’s only a matter of time. I don’t believe democracy has much of a short or medium term future. Free markets, democracies, and globalization are history for a long time or forever, IMO.

  15. Northwest Resident on Fri, 15th Aug 2014 2:01 pm 

    JuanP — I tend to speculate that for America at least global collapse and martial law will go down more or less exactly as you’re saying. I honestly believe that energy companies, utilities, military, police and other critical services/industries already have detailed plans drawn up that specifically outline how they will continue operations in a “disaster” scenario. If they don’t have those detailed plans drawn up, then they are stupid and incompetent beyond description — so stupid that I can’t contemplate that they haven’t already put immense thought and planning into this already. I also believe that in a collapse scenario that marshal law will be implemented and solidly thought out and detailed plans will be put into action to keep critical services going, which include energy, utilities, security and food production. People in those services and industries WILL continue working when they realize that not only their lives and the lives of their loved ones depend on them, but everyone else is counting on them too.

  16. markisha on Fri, 15th Aug 2014 2:14 pm 

    short, thank you on your comments, excellent job

  17. markisha on Fri, 15th Aug 2014 2:16 pm 

    According to recent estimates made by the World Bank and the U.S. Energy Information Administration, nominal crude prices are expected to rise to around $109/barrel by 2025
    and when I see stuff like this its make me laugh

  18. J on Fri, 15th Aug 2014 2:53 pm 

    Yeah it’s insane. You cant rise from $110 in 2010 to $109 in 2025? Someone from EIA please chime in and explain!

    15 years of no energy inflation coming!!!

  19. nemteck on Fri, 15th Aug 2014 4:20 pm 

    I published this before but it may add to your Friday afternoon enjoyment. A forecast to the last Cent.

    EIA Oil price projection in 2004:

    “..Crude oil prices are determined largely in an international marketplace by the balance between production in OPEC and non-OPEC nations and demand. In the reference case, the average lower 48 crude oil price is projected to be $23.61 per barrel in 2010 and $26.72 per barrel in 2025 (Figure 93). In the high world oil price case, the lower 48 crude oil price increases to $32.80 per barrel in 2010 and $34.90 per barrel in 2025. In the low world oil price case, the lower 48 price generally declines to $16.36 per barrel in 2010, then rises to $16.49 per barrel in 2025…”

  20. shortonoil on Fri, 15th Aug 2014 4:21 pm 

    “Do you think some governments will take over the oil industry and operate it at a loss for as long as they can to keep BAU alive at some point, making the ROI less of an issue and leaving dividends out of the picture?”

    In both countries that have privately held oil interests, and NOCs that has already happened to a large degree. To explain: when we first ran our energy to dollar conversion routines we kept coming up some $4.7 trillion per year short. Was the model broken? We sat around frustrated that three years of work was going to get flushed down the toilet! Then some wise guy (Roy) said, “you forgot roads, military, education, judicial costs, education, regulatory control, etc.” A very significant part of producing petroleum, and its products are borne by socialite costs.

    Since sovereign governments, like everyone else, can not continue without oil, yes, they will continue to bear a big portion of the cost of petroleum production. As it becomes more expensive to do so, and oil is a necessity, they will cut costs accordingly. Roads won’t get fixed, support for education will decline, health care benefits will shrink, and on, and on to keep the oil flowing.

    In essence, governments will be existing on the depreciation of the societies’ fixed assets. When those assets no longer become usable things will stop.

    Of course, societies are likely to tear themselves apart before that point is reached. We are now seeing that happening around the world.

  21. radon1 on Fri, 15th Aug 2014 4:27 pm 

    short – rockman estimated in one of the threads on the forum that OROI (oil returned on oil invested) of non-conventional oil resources is about 6 to 10. OROI should be pretty equivalent to EROEI, therefore the energy spent on extracting these resources should be in-between 10-16% of energy received from them. Meaning that we have quite a way to go yet before we get to 50% threshold, even allowing for various error margins.

  22. JuanP on Fri, 15th Aug 2014 4:40 pm 

    Short, thanks for the answer. I am not an expert in this fields like you are, but I understand, and agree 100% with your explanation.

  23. sparks on Fri, 15th Aug 2014 5:48 pm 

    I would not be surprised if the US government devised “gas stamps” to subsidize continuing oil production sometime in the near future. This would be in analogy to food stamps (now called SNAP). So the lower income echelons of the citizenry would get gas stamps so they can continue commuting to jobs and stay in the marginal workforce. This would be a very familiar paradigm for the US government, and would fit nicely with their love of social engineering. In fact, I’m surprised it hasn’t already been done.

  24. shortonoil on Fri, 15th Aug 2014 7:46 pm 

    “Meaning that we have quite a way to go yet before we get to 50% threshold, even allowing for various error margins.”

    You are not including the energy cost of processing, and distribution. The energy cost of extracting a gallon of crude (API 37.5) is about 14,300 BTU/gal. The energy cost of refining is about 52,000 BTU/gal (EIA says 16,300 BTU/ $ of finished product). Distribution of raw, and finished product is 6000 – 7000 BTU/gal. There is 140,000 BTU in a gallon of API 37.5 deg crude. We are over 50%. Go to our site for a fuller explanation.

  25. Davy on Fri, 15th Aug 2014 8:33 pm 

    A few words on my martial law or centralized economic control scenario. This is not at all a preferable economic arrangement. I am not even sure this arrangement can marshal the resources, personnel and capital to manage something as complex as the energy sectors. Yet, it will have to attempt that effort in a collapse. In this arrangement our normal understanding of economy with all its various appendages will be turn on its head. It would be better to look at the military itself to understand the difference. In a time of war especially in a campaign or a battle the costs do not matter as much as the effort at winning the battle. In collapse the authorities will have to make certain industries and personnel essential to the systems survival costs will be secondary. People will be told what they can and cannot do at the extreme. This does not mean success but it does mean action instead of paralysis. The various degrees of authoritarian control is dependent on the degree of crisis and the strength of the centralized authority. I personally feel with our inadequate resiliency and poor sustainability without energy intensity and complexity (BAU) we will see vacuums develop. If there is a centralized authority capable of establishing order it will be natural for it to do so. I also see the population in a state of social and economic breakdown agreeing and desiring centralized control. Democracy and free markets are a luxury we have become habituated to.

  26. Davy on Fri, 15th Aug 2014 8:41 pm 

    Sparks, Bob Hirsch has a great chapter in his book “The Impending World Energy Mess” discussing the various potential rationing mechanisms with their advantages and disadvantages. They all have difficult implementation issues. I am in a state of wonder why we have so few articles here on PO on this subject. I understand why MSM does not talk about it being cornucopian in nature. What could be more important than energy crisis mitigation especially in regards to liquid fuels? A complex society cannot just muddle through a liquid fuel crisis situation.

  27. Makati1 on Fri, 15th Aug 2014 10:18 pm 

    A lot of talk about Marshal Law and continuing some form of demand labor.

    Has any country actually had a total collapse of their currency where it became almost worthless, and also had Marshal Law that worked for decades?

    Because, the BAU system is NOT going to come back like it did in past similar events. We will regress to tribalism, if we survive past 2100.

  28. Craig Ruchman on Fri, 15th Aug 2014 11:06 pm 

    “I agree ROCK. I’ve said that capitalism is best on the way up but socialism is better going down” How true. It’s the lager context and its timing that can determine what is right and wrong.

  29. JL on Sat, 16th Aug 2014 12:25 am 

    Got a way to fix all these price issues…..go hydrogen. They don’t have to worry about high investment costs and we FINALLY get a energy product that cannot be price manipulated and we stop being gouged.

  30. radon1 on Sat, 16th Aug 2014 4:05 am 

    short – thanks for the clarification. Visited your website and recommend everyone to do so.

    Nonetheless, coming back to the point in question:

    Conventional sources may have EROEIs of 100 or higher. Meaning that the energy spent is 1% or lower of energy received. Non-conventional sources, as mentioned, take this to 10-15%. If this is sufficient to take us over the 50% threshold, than the vast bulk of the percentage does belong to refining/transportation/etc., and deterioration of the quality of the reserves is not really that critical. Meaning that we need to optimize refining/transportation/etc. energy spending, rather than deal with the reserves (and PO) at this stage.

  31. Davy on Sat, 16th Aug 2014 6:45 am 

    Radon, great point on reserve deterioration. Our next best hope is efficiencies in those others areas affecting the oil eroi at the very end when we pump it in our tanks. I would be giddy but for one problem and that is diminishing returns are hitting these areas increasingly. Bad news any way you look at it. Is this a new phenomenon the Cornies are experiencing? Diminishing returns of hope and optimism?

  32. shortonoil on Sat, 16th Aug 2014 8:52 am 

    “Meaning that we need to optimize refining/transportation/etc. energy spending, rather than deal with the reserves (and PO) at this stage.”

    As I’ve posted here, and it is in our report the petroleum industry is already operating at close to its maximum theoretical efficiency. It is without a doubt the most efficient industry on the planet. As the supplier of the world’s most important extractive commodity it has had access to a significant portion of the world’s capital inventory, and it has used it well. In essence, there is just not much room for improvement with our present system.

    Our Achilles heel is our reliance on processed, finished fuels. There is some progress being made in that area. Both the Japaneses, and the Saudis are experimenting with burning raw crude to produce electricity. Steam turbines could, theoretically, be built to use raw crude for transportation purposes. GM should invest in our consulting services (lol). But, the problem is what do you do with the immense infrastructure that is already dedicated to utilizing finished fuels. By our calculations that is somewhere in the area of $88 trillion. Scrapping that much invested capital would undoubtedly bankrupt the world’s economy.

    Constructing our entire civilization around one deplete-able commodity has put us into a Catch 22 situation. Humanity is incredibly techno smart; in the common sense arena we have not advanced much beyond our primate roots.

  33. rockman on Sat, 16th Aug 2014 9:34 pm 

    NR – “…martial law…Would that stand a chance in hell of working?”

    Well, back in the 1860’s there was a fairly large group of civilians intent on not letting the federal gov’t call all the shots. The latest estimate is that 750,000 combatants died and an unknown number of civilians perished as well as millions that greatly suffered.

    If a large portion of the populace decided they also wouldn’t accept such an overreach by the federal gov’t today a proportional death toll would be 7 million. And that’s not counting the civilian collateral damage. But we also have much more lethal weapons today so I might expect significantly more casualties.

    And given that such an armed conflict would destroy a very significant portion of the economy I suspect the non-combatant death toll will be even higher.

    Seriously: do you think such a gov’t overreach of power would be accepted? I know I tease about Texas withdrawing from the Union but I can assure you that the feds trying to take control of oil/NG rights from our citizens and the state of Texas would be met with an extreme reaction that would likely destroy the economy of the entire country.

    I almost get the impression that if the feds decide to radically change the constitution some think it would be accepted by the majority of the country. Perhaps you just offer that prospect as some sort of mental exercise. The mental image I develop is very disturbing to say the least.

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