The world faces an oil supply crunch, according to oil services companies who have most to gain from surging prices and the unrest in north Africa and the Middle East.
Ayman Asfari, the chief executive of FTSE 100-listed company Petrofac, said if production were entirely shut off from Libya, only a “very thin” margin of spare capacity to pump more oil would be left.
Saudi Arabia, which holds the majority of the world's global reserve capacity, is already thought to be producing an extra 1m barrels per day (mbpd) to make up for the shortfalls from Libya. On March 8, the Organisation of the Petroleum Exporting Countries (OPEC) was said to be considering whether to hold an emergency meeting to increase the cartel's production. The price of Brent crude fell $2 in the morning to $113 a barrel on the news.
Keith Cochrane, chief executive of oil, mining and power services group Weir, said if OPEC were forced to eat into its reserve capacity by pumping more for a sustained period, members would have to boost capital spending on oil and gas production to restore their capacity margin.
Before the unrest swept North Africa and the Middle East, oil producers — primarily Saudi Arabia — could pump just less than five extra barrels for every 100 they were already producing. Of this 4mbpd reserve capacity, about 1mbpd has been taken out by the fighting in Libya. If Libya's 1.6mbpd production were cut off, it would leave a reserve margin of less than three per cent, which Asfari said was very thin.
Oil services companies are reporting record results and order books. On March 8, FTSE 100-listed Weir Group announced group earnings were up 57 per cent last year, with its oil and gas business more than doubling profits. Orders for its upstream business last year increased by a record 215 per cent. The chief executive of Amec, Samir Brikho, said the recent spike in profits was not a factor. “All IOCs [international oil companies] and national oil companies have announced bigger spending plans in 2011 so far than 2010. It's not a case of companies saying, ‘Libya is burning, so now we increase spending'. When you are spending $20-25bn each year, they have a long term strategy, they have a yearly budget.” IOCs like BP and Shell are selling mature fields to invest in new exploration and production projects, such as liquefied natural gas, coal-bed methane or deepwater drilling as they search for new sources of hydrocarbons. National oil companies are also flush with cash because of high prices, and increased spending by fast growing economies like India and China, who are anxious to secure their own supplies as demand picks up after the global financial crisis.
Analysts from Barclays Capital predicted in December that all oil companies would spend an extra 11 per cent on exploration and production this year compared with 2010. Keith Morris, an analyst from stockbroker Evolution Securities, said oil services companies were better placed to benefit from higher oil prices than international oil companies. “Many IOCs struggle to get access to oil owned by state controlled firms. But oil services companies can work in both camps.” Last year, shares in the oil services sector outperformed the oil majors, who suffered in the wake of the Deepwater Horizon disaster. Morris added that countries with large oil and gas resources also are now more adept at renegotiating production sharing agreements which are over generous to international companies when the oil price rises, so the benefits of soaring prices are increasingly capped for many of the majors.— © Guardian Newspapers Limited, 2011