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Investments in oil exploration and production to fall in 2016

By David Mugabe

Added 25th February 2016 10:21 AM

Elly Karuhanga, chairman of Uganda Chamber of Mines and Petroleum (UCMP) conceded that it is a very difficult time for oil and gas companies but it is a good time for non- oil producing countries who are buying oil more cheaply.

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Elly Karuhanga, chairman of Uganda Chamber of Mines and Petroleum (UCMP). Photo

 

Global investment in oil exploration and production will fall by a further 17% in 2016 from 24% last year, the International Energy Agency (IEA) has warned.

For Uganda, this would present another unpredictable year in terms of changing timelines for production and first oil.

Elly Karuhanga, chairman of Uganda Chamber of Mines and Petroleum (UCMP) conceded that it is a very difficult time for oil and gas companies but it is a good time for non- oil producing countries who are buying oil more cheaply.

“Uganda has strong oil companies here-Tullow, Total and I am sure they will be able to stand the storm (on lower oil prices),” noted Karuhanga resting his hopes that by the time the refinery and pipeline works begin, oil prices should have picked up and Uganda will produce at a lower cost.

In a global trading statement and operational update in 2015, Tullow oil which has operations in Uganda announced a slash in its global capital budget to $200 million from $300 million.

In a BBC report, IEA has warned consumers not to let cheap oil lull them into a false sense of security amid forecasts of a price spike by 2021.

IEA said it expects prices to start recovering in 2017. But it forecasts that will be followed by a sharp jump in price as supply shrinks following under-investment by struggling producers.

Brent crude touched a 13-year low of $28.88 a barrel in January but it has since picked up rising by 4.9% to $34.62, but is still far below a high of $115 in June 2014.

 

Uganda is trying to launch almost three projects simultaneously. These include the refinery, pipeline and kickstarting commercial production- projects that will require about $20b in investments.

Even if the production licenses were issued, there remains a lot of work including engineering design, wraps construction and drilling. Then there is the final investment decision or financial closure before the Uganda project is signed off as a bankable project that has commercial value and overrides other risks.

Tullow which is one of the partners in the joint venture with Chinese firm CNOOC and Total has already invested $3b in Uganda’s oil and gas industry. Both Tullow and Total are awaiting issuance of production licenses. CNOOC already acquired a production license.

Fatih Birol, executive director of the IEA, said: "It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future."

IEA expects global oil supply will grow by 4.1 million barrels of oil per day between 2015 and 2021, down from an increase of 11 million barrels of oil per day between 2009 and 2015.

The IEA said: "Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices when the market, having balanced, then starts to draw down those stocks."

Global markets have been awash with oil following the boom in shale energy production in the US. That has spurred the Opec oil producing nations, led by Saudi Arabia, to leave oil output unchanged to drive the price of crude down and put pressure on its American competitors.

An economic slowdown in China has also adversely impacted demand for oil.

 

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