Activities of Oil-Producing Countries Increase the Investment Attractiveness of the Industry

11 april 2017 | Rossiyskaya Gazeta

The rise in oil and gas prices in 2000-2014 has enabled companies around the world to increase the number of projects with higher production costs, including projects for the development of deposits with hard-to-recover reserves, deep-sea deposits, and subsoil resources of the Arctic shelf. As a result, according to the estimates of the International Energy Agency (IEA), the volume of investment in the production segment of the oil and gas industry has grown almost fivefold, although the growth in oil and gas production in this period has accounted to only 25%, Rossiyskaya Gazeta reports, referring to the Energy Bulletin of the Analytical Center "Russian Gas in Eastern Europe: new conditions".

Aleхander Martynyuk
Aleхander Martynyuk
Department for Strategic Studies in Energy

However, with the fall in oil prices, which began in the second half of 2014, the volume of investment in the industry has begun to sharply decline, analysts underline. In 2015, investment fell by 25% compared to 2014, and in 2016 — by another 26% compared to 2015 and amounted to USD 433 billion — the lowest level since 2008.

It is capital investments in geological exploration that fall most of all. The more unpredictable the price of raw materials, the more actively companies restrict investments in long-term projects, trying to support work on projects designed to make profit here and now. According to IEA estimates, last year, exploration accounted for 14% less investment — the minimum of the last ten years.

In addition, oil and gas companies are hampered by a decrease in specific production costs, that is, economic efficiency of resource production is dropping. Over 2 years, this indicator fell by almost a third. Many "unstable factors" have appeared to reduce costs, including a new nature of cooperation between companies that are drifting into the acute phase of competition. Separately, the bulletin mentions currency changes: for the last two years, the weakening of the national currencies of Russia, Kazakhstan, Angola, and Brazil has led to a decrease in the net cost of goods and services produced in local markets in the U.S. dollar equivalent.

OPEC and non-cartel states will probably help restore investment activity in the world and spur further growth of capital investments in Russia in particular, but it is still difficult to assess the potential effectiveness of joint cooperation. "If the period of volatility and low price levels in the oil market will drag on though, it may continue to induce some extractive companies to review, postpone, and in some cases cancel major investment projects in the oil-and-gas producing sector that have long investment cycles," explained the expert of the Analytical Center Alexander Martinyuk in an interview with a correspondent of Rossiyskaya Gazeta. "In the medium term, the accumulated effect of this can potentially surpass the ability of the producing countries as a whole to rapidly replace them."

So far, the most serious reduction in investment has been observed in North American countries (in two years — a 50% drop), although, it was here where investments were breaking records in 2000-2014. The Middle East has reacted less sensitive to the drop in prices for raw materials, since the net cost of production is traditionally low there. Countries of Sub-Saharan Africa has reduced funding for deep-water projects that have been rapidly developing since the beginning of the zero-year period. East Africa has showed slowing the pace of development of deposits, and in the North Sea, investment has fallen by 30-40%, as in China. The described trend is likely to lead to a shortage of oil and gas production capacities in the medium term. Thus, by 2022, the supply will increase by 5.6 million barrels per day, while the demand will grow by 7.3 million, as it follows from the IEA forecast. The situation is not critical, but the imbalance is clearly outlined.

Based on the practice of the last decade, it is possible to talk about the probable rise in quotations due to supply shortages. But even in this case, the consequences are ambiguous: high oil prices exert pressure on demand from raw material importers, they lay the foundations for structural changes in the world energy as well. "On the one hand, energy-saving technologies are developing more intensively in these conditions, oil and petroleum products are more often replaced by alternative energy resources," explained Martinyuk. "On the other hand, countries from all over the world, including oil importing countries, are beginning to get involved in the development of deposits with a higher production cost, and the efficiency of oil production at these deposits will eventually start growing because of the accelerating development of technologies in this industry."

Read more in the Energy Bulletin "Russian Gas in Eastern Europe: new conditions".

Other issues of the Energy Bulletins can be found in the section "Publications".