High-Cost Projects to Struggle at $80-$85 Crude, Oil Search Says

Image (c) Shutterstock/muratart
Image (c) Shutterstock/muratart

By James Paton

Oct. 23 (Bloomberg) — High-cost energy projects globally will struggle to stay profitable if crude oil prices stay around $80 a barrel to $85 a barrel and some proposed developments may be shelved, according to Oil Search Ltd.

“The bottom line is that much of the industry around the world needs $80, $85 consistently to provide returns,” Managing Director Peter Botten said today in an interview in Sydney. “If it stays at that level, marginal projects will struggle, and eventually production will adjust.”

Weakening global demand and a supply glut in the U.S. drove Brent crude down to as low as $82.60 a barrel last week, the cheapest since 2010. Oil Search, Exxon Mobil Corp.’s partner in a $19 billion liquefied natural gas project in Papua New Guinea, is considering adding capacity in the country.

“We’re well-situated to compete in a $80-to-$85 oil price environment,” Botten said. “There would be a range of other LNG projects, and LNG expansion projects, that would stop before” Oil Search’s plans to expand, he said.

Brent was at $84.86 a barrel as of 5:04 p.m. Sydney time, and has fallen 23 percent this year.

A price around “$85 a barrel is something that’s going to be pretty realistic over the next few years,” Botten said. “Marginal projects, high-cost projects, will be progressively shelved.”

Four out of 11 unnamed LNG plants in Australasia that have been approved or are under development need an LNG price of at least $12 per million British thermal units to break even, according to an Oil Search presentation earlier today, citing estimates from energy consultants Wood Mackenzie Ltd. The PNG LNG project needs a price of less than $8, the figures show.

Asian LNG prices may “settle” at $12 to $14 per million British thermal units for supply between 2020 and 2025, the company said.

Copyright 2014 Bloomberg.