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Economy Lab

Oil price won't delay new projects Add to ...

From the FT's Lex blog

Along with other asset values, oil prices have fallen from their spring peak.

The International Energy Agency suggests that an economic slowdown could even create a glut later this year. Should the next worry be that the pendulum will swing too far, as in early 2009, and that promising development projects will be cancelled?

At the current $85 a barrel for WTI crude (let alone $108 a barrel for Brent) the answer is an emphatic “no.” Almost any plan now under consideration should not only be profitable but hit its economic hurdle rate, according to Citi Futures Perspective.

The price would have to fall to $60 a barrel before there would be cancellations of projects currently on the drawing board in the world’s largest marginal supply source, Canada’s vast oil sands. Go down another $5 to $10 and there would be cuts in Venezuela’s even more bountiful Orinoco Belt. Although the offshore “pre-salt” deposits that are set to come on stream late this decade are technologically challenging, the oil price might have to go below $40 before drilling became uneconomical.

The other big expected source of new supply, five million barrels a day or more from Iraq, is politically risky, but nearly price insensitive.

Owners of existing projects or those well under way will keep pumping at far lower prices, but they are less cheery than a month ago. Investors in relatively high-cost projects should still watch the price with above average attention. After all, the higher the cost of production, the bigger the percentage increase in profits from each buck added to the oil price.

As happy as a Middle Eastern oil sheikh was at the tenfold rise in oil prices over less than a decade from trough to peak, he never had to consider shutting off the spigot. An owner of oil sands, by contrast, went from watching a useless hole to a marginally profitable project to a bonanza.

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