Oil industry more upbeat, but challenges remain

An oil pump is seen on the shore near Santa Cruz del Norte, Cuba June 5, 2008.

LONDON (Reuters) - The oil industry is benefiting from higher prices and global consumption as the economy recovers, but faces little or no demand growth in developed markets and a weak outlook for the refining business.

Hundreds of oil executives and traders are in London for the annual IP Week gathering on Feb. 15-17. The event includes a conference and lunches, as well as evening receptions held in upscale districts like Mayfair.

On the face of it, the industry has much to feel better about compared with a year ago. Oil prices at $77 a barrel are more than double those of last year, thanks in part to supply curbs by big oil exporting countries.

"Oil and gas are the fuels that will drive the global economic recovery, as well as power the world for decades to come," said Andrew Moorfield, head of oil and gas at Britain's Lloyds Banking Group.

Although global oil demand is expected to resume growing in 2010 after declining in 2009 because of the financial crisis, all the growth is expected to come from emerging economies such as China.

Many forecasters believe the recession, and efforts to use cleaner fuels, have entrenched oil demand losses in developed markets such as Europe, Japan and the United States.

That means, for one thing, that the immediate outlook for the oil refining industry is not rosy.

"We expect this year to be quite challenging. We don't see a significant improvement in refining margins on 2009," said Richard Hookway, the chief financial officer for oil refining and marketing at BP Plc.

BP expects there will be a need for consolidation in the refining industry.

REVISITING SPENDING PLANS

French oil major Total SA wants to close or sell refineries in Europe due to oversupply and poor profits, a prospect that has angered staff.

Workers at its six French refineries and 15 oil depots went on a two-day strike on Wednesday, protesting over the prospect that the firm will permanently close the 137,000 barrels per day (bpd) refinery at Dunkirk.

Some companies are putting spending plans under scrutiny.

Hungarian refiner MOL is "revisiting" its investments in its Danube refinery, the head of its downstream development unit, Artur Thernesz, told Reuters on Wednesday.

Oil executives generally deride the idea of peak oil -- where supply will soon reach a high point and fall due to insufficient resources left in the ground -- but it is becoming harder and more expensive to tap new supplies.

The cost of discovering each new barrel of oil and gas has risen threefold over the last decade as technology has pushed the frontiers of exploration into ever-more remote areas.

Even so, some companies are still expecting to boost supply from mature areas such as the UK North Sea, where oil output overall peaked a decade ago.

TAQA, the UK arm of Abu Dhabi National Energy Co, was steadily increasing output from UK oil and gas fields bought from other firms by raising recovery rates and efficiency gains, Managing Director Leo Koot said.

"We entered 2010 around 40,000 barrels per day and will exit around 54,000," Koot said. "Production will peak in 2012 and we expect production then to be between 60,000 and 65,000 barrels per day."

Higher spending on oilfield services is good news for some, such as Aberdeen-based oil services firm Petrofac, which expects growth this year and is planning hundreds of new hires.

Norwegian oilfield service providers put a brave face on 2010 on Wednesday, saying tendering activity was picking up from lows even though revenues and margins would remain pressured.

An informal gauge of the mood at IP Week this year might be the busier social backdrop. In the aftermath of the financial crisis, some firms decided not to host receptions at last year's event to cut costs.

"It's been fairly busy actually," said a dealer with a trading house referring to the week's parties. "But my head and stomach don't think it's been fun."

(Additional reporting by Christopher Johnson, Ikuko Kao and David Sheppard; Editing by Amanda Cooper and James Jukwey)