High Prices in Spite of Shale Revolution? | Wall Street Journal

imageSTAVANGER, Norway—Oil executives, scrambling to squeeze more resources from existing fields and find additional sources of petroleum, are banking on a continued run of high prices to fund future growth.

“It’s tough to imagine the world going back to $50 to $60 a barrel of oil,” ConocoPhillips COP -0.34% Chief Executive Ryan Lance said during an interview at Norway’s Offshore Northern Seas oil conference, on the country’s west coast.

Oil has consistently hovered above $100 per barrel and Mr. Lance is among a collection of industry players here betting that prices can hold up even with new developments on the supply front, such as the shale-oil boom taking place in the U.S.

“Certainly the liquids production that’s come with the shale revolution in North America is starting to have an impact,” Mr. Lance said. “It’s too early to tell how big impact it will have on global oil prices, but as you look out on the future, 30, 40, 50 years, the demand is going to increase substantially.”

Statoil STO +0.84% ASA CEO Helge Lund said the Norwegian oil giant, as it formulates its base business case, assumes oil prices will remain high.

While higher prices can bolster the bottom line, oil executives say they also must fund the costs associated with boosting supply. Technology needed for extracting additional oil from existing fields and developing new fields in remote and hard-to-reach places, such as the Arctic’s icy, deep waters, is pricey.

Mr. Lund said Statoil’s oil fields can be run at a break-even price of less than $90 a barrel, but if prices dip, it may have trouble profitably launching future discoveries. The company earlier this week said it plans to dramatically increase the amount it spends on Arctic exploration.

“The industry is approaching more and more demanding resources, and there I think you may see even higher break-evens than $90 per barrel,” Mr. Lund said.

In a June report, Statoil estimated the current cost of marginal oil barrels to be in the range of $75 to $90, up from just $30 to $35 a barrel in the early 2000s.

Rystad Energy suggests prices must stay above $110 a barrel to keep up with growing demand. The analysis firm, which presented its view at the conference, expects daily oil production to increase by 11 million barrels to 100 million barrels in 2020. That will require new sources.

“To make that possible, we need high oil prices, a lot of mobilization of capital, and mobilization of industrial capacity,” managing director Jarand Rystad said. “That will happen with robust oil prices, $110 to $120 a barrel…[but] as soon as prices point downwards, $90, $80, some of the capital and involvement will disappear.”

One closely watched development is the boom in North American shale oil. Production there is expected to roughly triple by 2020, to 6.5 million barrels a day, from 2 million to 2.5 million barrels a day now, according to Rystad Energy.

Mr. Rystad said the increase in U.S. shale oil has helped cap prices. “It’s been a blessing,” he said. “Without it, we would have had a much higher oil price for the last few years, which would have choked the world economy and set back the development in many parts of the world by several years.”

But some fear the U.S. shale boom could lead to lower prices as more supply comes online.

“Suddenly, Texas’ production is at level with Norway again,” said Torbjorn Kjus, an analyst with DNB, Norway’s biggest bank. He said demand is falling in the U.S. and Europe, leading him to expect global oil prices to ease to $90 by 2020. This could crimp development in the Arctic that is seen as critical to countries like Norway, where production is falling at a rate of 4% to 5% per year.

Oil executives are banking on the opposite.

“What we see now is oil prices above $100 a barrel, and I think that is more like the norm,” said Ashley Heppenstall, the CEO of Lundin Petroleum LUPE.SK -0.45% AB. The Swedish oil company has a stake in the giant offshore discovery Johan Sverdrup in the North Sea, and holds acreage in the Arctic Barents Sea.

He said the company wouldn’t change its Arctic exploration plans even if oil fell to $60, unless it believed the price would stay there. Meanwhile, “any challenges to supply” could lead oil prices to “spike significantly” from where they are today, he said.

“Let’s say the [global production] goes to 100 million or 110 million barrels a day,” Mr. Heppenstall said. “Declines will bring production down to 40 or 50 million. We need to find five or six new Saudi Arabias. We need shale, we need tar sands, we need new discoveries, we need [it] all.”

Source:  http://online.wsj.com/article/SB10000872396390443618604577621323580417332.html

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