Oil and gas good if prices remain

AD200810010670878AR

Investment in Abu Dhabi's oil and gas infrastructure is mostly insulated from the credit crisis unfolding across world markets, analysts say, but a move to curb oil output to cater for a reduction in oil demand could lead officials to put off expansion projects. Easy access to credit is not especially important for national oil companies and the international oil majors, which have recorded large increases in revenues in the past several years and now have ample cash reserves, according to Robin Mills, the petroleum economics manager for the Emirates National Oil Company in Dubai.

The most direct effect of the crisis would come in the form of lower oil prices - a result of falling oil demand in a global economic recession - which would immediately affect the revenues of the Abu Dhabi National Oil Company (Adnoc) and the Government in general. Analysts said significantly lower oil prices would also affect the economics of some alternative energy projects, although such projects in the UAE have never been conditional on making a profit in the short term.

A substantial fall in prices would affect oil investment around the world, as companies suspended or cancelled projects to produce high-cost oil, such as investing in facilities to convert natural gas or coal into liquid fuels. But Abu Dhabi's oil is some of the cheapest in the world to produce, meaning even the most difficult fields would still be profitable, with substantially lower oil prices, said Raja Kiwan, an analyst at PFC Energy in Dubai.

"It's going to take serious declines in prices to make them not viable," he said of fields in the region. "The Gulf still has the lowest production costs on a per-barrel basis." Mr Kiwan estimated that it cost national oil companies in the region between US$2 (Dh7.4) and $4 to extract each barrel from the ground. However, Mr Mills noted that falling prices may have a more indirect effect on investment decisions.

Amid a sustained fall in prices since a record high of $147 a barrel on July 11, Opec member states have been making noises about cutting output. The group announced last week in Vienna that it would cut production by about 520,000 barrels per day, but the move had little effect on prices, which slumped close to $90 a barrel earlier this week after massive sell-offs in oil futures by institutional investors.

If prices fall much further, Opec is likely to slash production to buoy prices. Substantial output cuts would reduce the incentive for Adnoc to go ahead with projects to bring the country's total production capacity up to 3.5 million barrels per day (bpd), with a view towards eventually increasing production to four million bpd. "I think you'd expect that target to slip or be pushed back," Mr Mills said.

In interviews this summer, Adnoc officials expressed interest in developing smaller reservoirs that were passed over when prices were low and the country's most famous wells were still young. But Mr Mills said a decision by Opec to curtail member states' production would slow Adnoc's interest in the smaller fields. [e-mail]