Drill, Baby, Drill?

>> Sunday, November 9, 2008

It's kind of difficult to flood the US with its own offshore oil when you don't have any spare offshore oil rigs:

Low oil prices and lack of credit are taking a heavy toll on the possibility that new oil production will offset much of the decline from existing oil fields. Last week there was a steady stream of reports concerning delays or cancellations of new oil exploration and production projects.

As many as 20 of the 100 deepwater oil rigs currently on order worldwide may be cancelled due to the unavailability of finance. Many of these rigs, which can cost up to $800 million to build, have been ordered on speculation by smaller under-financed companies. With oil around $60 a barrel, deepwater projects in the Gulf and off Brazil and West Africa are no longer economically feasible with deep-water drilling rig rentals running at $600,000 per day.

Executives from Chevron and ConocoPhillips told a conference last week that project delays should be expected due to low oil prices. The major, well-financed, oil companies have made it clear that they intend to continue with projects currently underway, but are becoming increasing reluctant to undertake new drilling until the global economy and oil prices stabilize.

Also at risk is further development of the tar sands where high construction costs have made new production projects uneconomical below $70-90 a barrel. Shell Oil followed in the wake of several other Alberta sands developers by announcing it was delaying the second phase of its expansion plans. In Brazil enthusiasm for rapid development of the newly discovered offshore fields has disappeared. Even in the Middle East, Saudi Arabia and Kuwait postponed plans to increase production at the Khafji oil field by five years.

As projects of this scale have long lead times, the impact of these delays will not be fully felt for several years. Most forecasts by those who understand peak oil say that world oil production should be clearly past peak and on the decline five or six years from now. If this turns out to be true, world production will soon be declining faster than previously thought.

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