International Oil Industry: Exploration and Production will Likely Drive Prices Up

Barclays Capital, the research arm of the investment bank, has just issued two reports on international oil industry. They forecast international oil Exploration and Production (E&P) in 2011 will increase 11%, to about $490 billion. The five major international oil companies will increase E&P 17%.

The real issue is not the increase in E&P, it is how many barrels will be discovered at what cost and what will they be received for the crude oil.

Currently the world consumes about 1 billion barrels of crude oil every 12 days. The oil industry is not replacing its quality reserves. The “elephants,” the giant undiscovered oil fields are most likely in deep offshore areas. The issue is once a field is discovered what are the reserves and what are the costs to lift the crude oil, including security, taxes, etc.

For example Mexico taxes the national oil company PEMEX 91% for 37% of the federal budget. In a few years Mexico will switch from an oil exporter to an oil importer. That will eliminate 37% of the federal budget and create increased turbulent times.

Barclays is looking for a higher price of crude oil in 2011. In 2010 the average was $70.16 a barrel and in 2011 they look for an average of $85 a barrel with spikes perhaps to $100 a barrel.

What must be appreciated is that costs of E&P have escalated especially in deep offshore areas. The elephants are in the deep offshore areas. Expect increased restrictions and costs for the deep, often distant offshore areas, to increase substantially.

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