Oil firms worldwide plan investments worth $375 billion this year

World's largest national oil companies (NOCs) and international oil companies (IOCs) are planning investments worth more than $375 billion (Dh1,377bn) despite ongoing concerns about oil demand, consultant Ernst & Young (E&Y) said in a report.

The view comes close on the heels of an International Energy Agency (IEA) statement, which warned that upstream oil investments will fall more than 21 per cent this year due to projections of low demand. That would be a reduction of almost $100bn, the IEA said. While Opec has forecasted an year-on-year decline of 1.6 mb/d in 2009, IEA said oil demand will fall by 3.5 per cent this year.

NOCs are on course to invest more than $275bn in the development of their businesses at home and abroad in 2009, E&Y said. Of this almost 70 per cent of total investment would come from NOCs in Asia and South America, the report said.

"Based on the current estimates, by 2015 the largest NOCs would have invested around $600bn in their hydrocarbon sectors," it said.

What's interesting in E&Y's prediction is that prominent IOCs will continue with their investments. "The supermajors have also committed to substantial investment in oil and gas activities this year – around $100bn," the report said.

In what affirms E&Y's views, a senior official of Chevron, the US-based oil major, told Emirates Business the company would spend $23bn to develop oil fields this year. "It will be the same level of investment that we had last year. And most of the projects will be self-financed," said Kurtz Glaubitz, upstream team leader (media relations) with Chevron.

Most of the investment from the company will be made in deep-sea oil fields in Nigeria and Angola. In fact, the company is digging its deepest oil field –which will have the same depth as the height of the Mount Everest – in the Gulf of Mexico this year. The field when brought into operation will produce about 125,000 barrels a day of crude oil, Glaubitz said.

Analysts including Kuwait-based Markaz had earlier said IOCs are expected to suffer this year and drop much of their expansion plans. "The IOCs are expected to succumb to shareholder pressure this year," a senior Markaz official had earlier told this newspaper.

Out of the prominent investments made by NOCs, the UAE is expected to be one of the most prominent investor. According to a recent estimate, the UAE has posted a 30-per cent year-on-year increase in upstream investment. Considering the recent oil and gas contracts announced in Abu Dhabi, the UAE's upstream oil and gas investments have increased from Dh154bn to Dh202bn this year. Minister of Energy Mohammed bin Dhaen Al Hameli said at a conference in Dubai recently that there are no plans to drop any of the country's expansion projects. Al Hameli said the UAE looks forward to having a production capacity of 3.5 million barrels a day in a the near future. "We are going ahead with our projects," he said on the sidelines of the Middle East Petroleum and Gas Conference.

His assertion coincided with Richard H Jones, Deputy Executive Director of IEA's warning the world is awaiting an imminent energy crisis as investment into new oil capacity enhancement project has been severely impeded.

In the GCC there are reports of NOCs making use of a 30 per cent drop in costs both in upstream and downstream investments. The NOCs of Saudi Arabia, Qatar and Kuwait have gone ahead with plans to establish major refineries. In fact, Saudi Arabia has reportedly also shortlisted parties for its Jubail refinery project. Samir A Al Tubayyeb, Executive Director of Saudi Arabian Oil Company Saudi Aramco , had told this newspaper earlier that the company is looking forward to a substantial reduction in costs. The project originally estimated at $12bn is now expected to be completed with $10bn.

Andy Brogan, global oil and gas transaction advisory services leader at E&Y and author of the report, said: "NOCs and supermajors continue to show a real determination to push ahead with their major capital expenditure plans this year, at least for now. The year 2008 was a record year for capital investment by the sector and 2009 is shaping up to be another record year. Companies are wary of finding themselves in a position where they have to play catch-up on investment when the upturn materialises." He said despite IEA current estimates for oil demand, investment is still required in production capacity enhancement projects to offset falling output due to natural field depletion. "Most oil and gas companies have indicated they will spend more than half of their capital investment on upstream operations."

Brazil and China of the Bric economies are emerging as powerhouses for the upstream investments, E&Y said. "The economic slowdown, a dramatic fall in oil prices and investors' flight from risk have left many reserve-rich state-owned oil and gas companies less able to finance projects with surplus cash flows. Some NOCs are looking at cost-cutting measures, while countries such as Indonesia are introducing stimulus packages to aid the sector. Many reserve holders' ambitions to expand overseas are also being scaled back to prioritise domestic projects. However, substantial financial commitments are still being made for oil and gas projects in China and Brazil."

Brazil is set to become a major producer following pre-salt discoveries by Petrobras, which plans to invest $28bn in pre-salt areas as part of its $174bn business plan to 2013 – around 90 per cent of its total investment will be targeted at projects in Brazil, E&Y said. Brazil apparently has also made good investments in developing LNG technology. The country recently introduced a facility where liquefaction of gas into LNG could be carried out onboard a ship. The technology is now reportedly being replicated in Japan – the country which is the highest consumer of LNG in the world.

"The investment allocated by Petrobras for 2009 represents 38 per cent of the planned $91bn expenditure by South American NOCs this year, with Asian NOCs collectively to invest more than $98bn, almost half ($42bn) of which has been allocated by China's CNPC," E&Y said.

By comparison, the combined capital expenditure of NOCs in Africa, CIS and the Middle East is a fraction of their Asian and South American counterparts put together. The report calculated that the NOCs of Africa announced $21bn of investment this year compared to $36bn for the CIS and $29bn for the Middle East.

Don Painter, Leader of E&Y's Middle East Oil and Gas Practice, said: "While public figures suggest the investment Middle East NOCs have committed to this year is below the levels of NOCs in Asia and South America, there is still plenty of cash available in the Middle East for the right type of investment. Cash-rich GCC producers are currently evaluating investment options that match their ROI aspirations. They are still seeking appropriate investment opportunities in the region and elsewhere. The slowdown in their capital expenditure does not reflect their appetite for major investments.''

Interestingly, the IOCs would not only offer technical expertise but also the much-needed access to finances to the NOCs, E&Y said. "When the NOCs had easy access to capital they were in a position to dictate terms with their IOC partners, but the volatility in financial markets means that IOCs with sufficient liquidity will be able to offer potential partners not only technological and operational expertise but also access to much needed capital," said Brogan.

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