Oil fields of plenty?

At Shell, production is falling, by about 1 per cent last year and, by Mr van der Veer’s estimation, around the same this year and the next until some very large projects, such as Sakhalin 2 in Russia and the massive Pearl gas-to-liquids project in Qatar, begin operating. Most of its big projects will not begin to bear fruit for five or seven years yet and will require a huge amount of cash to get off the ground.

Since the company’s reserves debacle in 2004, it has shifted into high gear to rebuild its reserves and resource base. Last year it received approvals from governments around the world to explore for new fields. Mr van der Veer confirmed that he has been in contact with Iraqi ministers about a range of onshore oil and gas projects there but until the country’s new law governing the industry is passed, no final decision will be made. “We have to know the rules of the game,” he said. The company’s final decision to invest in a gas project in Iran meanwhile has been put off by “political considerations”.
Yet as the industry struggles to keep up with rising demand, the cost of increasingly scarce essentials such as oil rigs, not to mention the people who operate them, has soared. Costs have doubled since 2000. The chief financial officer Peter Voser said that cost inflation last year alone hit more than 10 per cent. In 2000 the company devoted about $10bn to capital expenditure, or money spent on developing new projects. That figure last year was $23.8bn, and could rise to $25bn this year.

In light of such mammoth investments, Mr van der Veer questioned the idea of the windfall tax. “I don’t see the logic,” he said. “Yes we are making large profits, but with the investments we need to make, if it’s all taxed away I don’t have a clue about how we’re supposed to finance these huge projects.”

The spending increase is indicative of a fundamental shift affecting the entire industry. According to research from Deutsche Bank, oil companies spent a combined $250bn to produce 30 million barrels of oil per day in 2002. By 2006, the industry spent $550bn to get just 20m barrels per day. While part of that change can be explained by cost inflation, the fundamental reason is that most of the easy oil – close to the surface and relatively straightforward to extract– has been found.

Independent