unconventional projects such as Canadian oil sands or shale, which became more economically viable. It is reasonable to suggest that if the higher oil price is sustained for the next year, investment in alternative sources of energy will gradually resume. Evidence is available of the significant market pickup in the latter half of 2009, with rig utilisation rates approaching levels seen before the credit crisis, a good indication that the oil and gas business has rebounded strongly. The more conservative approach to finance in businesses has also been reflected in dividend payout policies, with companies not paying out dividends in order to keep cash reserves where possible. We expect to see a larger number of mergers and consolidations towards the latter half of 2010, with companies acquiring resources to keep the reserves replacement ratio healthy and production numbers up.
DAILY RIG NUMBERS 1975-2009
6,000 5,000 4,000 3,000 2,000 1,000 0 1975
Average daily rig numbers
Doubling of oil prices to USD 35 in 1981
Brent hits high of USD 147 in 2008
The increase in the oil price is particularly important given the gradual increase in operating costs. When the oil price decreased there was only a marginal decrease in costs so profit margins were still constricted. Other pressures include changes in the contractual environment, with the application of service contracts in new areas such as Iraq, and moves from governments to change current production sharing contracts to alter the split between government and oil companies – generally to the advantage of the host government.
3,000 2,500 2,000 1,500 1,000 500 0 J F
DAILY RIG NUMBERS 2009
Average daily rig numbers
As easily accessible or economically viable reserves become scarcer, the relationship between oil companies, National Oil Companies and governments becomes more important as it defines access to those reserves – but it is also important to note that as a result of a more competitive environment and the scarcity of opportunity the value of those reserves and therefore the value of the industry as a whole has increased. The past year has shown that the oil and gas industry is not dependent on western demand to the same degree as in the past - demand from emerging markets has fuelled the increase of the oil price to almost pre crisis levels. Future growth of demand in markets such as China, and the steps that are being taken to increase supply sources will ensure the growth of the industry for years to come.
U.S. Canada Far East Middle East Africa Europe Latin America No China or Russia available
Source: Baker Hughes
Lundin Petroleum ANNUAL REPORT 2009