Who's Afraid of the Big, Bad Peak?

Keith Kohl

Updated December 22, 2006

The fact that global demand will rise year after year as our craving for oil continues isn’t questioned. One might assume the natural course of action would be to ramp up exploration in order to meet it, right? 

Apparently that’s not the case for some major oil companies, which are planning to cut spending next year.

According to the 2006 International Energy Outlook report, global demand for oil will reach an alarming 118 million barrels per day (MMbbls/d). And with the world currently producing 85 MMbbls/d, production would have to increase by 33 MMbbls/d just to meet demand.

The simple solution seems pretty easy . . . just go find more.

So why would several of the world’s major oil firms like Hess Corp. cut their exploration spending?

Evidently exploration and development costs are rising to a level that no longer makes it financially feasible to seek out the oil and extract it . . . unless, of course, you are already sitting on it.

But let me come back to that last part.

Three days ago, Hess announced its $3.6 billion capital and exploratory budget for 2007, a 10% decrease from their 2006 budget.

And they aren’t the only ones.

ConocoPhillips, ranked only behind Chevron and ExxonMobil, has cut its capital expenditure spending for 2007 by 25%, nearly $4.5 billion dollars less than this year’s $18 million.

Even the second largest oil giant, ExxonMobil, is expecting only modest growth and will stay near the $20 billion mark over the next five years.

So what has caused this tentativeness in exploration? Do they know we are running out of oil?

Certainly not, and the idea that we are tapping the earth dry is completely absurd.

Modern seismic mapping technology is helping them find the oil.

The problem is extracting it. The deeper they delve into the earth or below the waves, the more dramatically the costs increase. Offshore drilling rigs can cost exorbitant amounts of money to operate.

Drilling costs are expected to rise by 10% in 2007, mainly from labor and material costs.

If you have the bat, you might as well play ball

Stepping up to the plate for 2007 so far is Chevron, which has significantly increased exploration expenditures in hopes of profiting from next year’s possible spike in energy prices.

But then, that isn’t a difficult decision to make when they’re sitting on their potentially huge Jack well in the Gulf of Mexico.

I guess being the big kid on the block is paying off.

The risks are still there, though.

Even a juggernaut like Jack will take time and money to turn around. Oil production isn’t expected for another three to four years, not to mention the costs Chevron will incur to bring the well to fruition.

The fact remains that the cost of developing new oil targets is constantly rising, and as companies like Hess will learn sooner than most, if you can’t dig it, you can’t sell it.

Hopefully this isn’t a signal for the future of oil, because our thirst for energy has to be satisfied somehow.

But that’s a whole new ballgame.

Keith Kohl

Keith Kohl

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