Oil companies plan on higher crude prices

By Alex Lawler - Analysis

LONDON (Reuters) - Oil firms are using higher price assumptions for planning their businesses, making a greater range of projects viable and a sign that the floor for prices in the long run is moving up.

Companies such as BP Plc (BP.L: Quote, Profile, Research, Stock Buzz) and Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research, Stock Buzz) have been nudging up the prices they use for planning, although they remain lower than the current price, which hit a record near $130 a barrel on Tuesday.

"They are gradually starting to move up," said Peter Hitchens, oil analyst at Seymour Pierce in London.

"BP is using $60 -- they have moved up the threshold. Shell must be using something higher because of higher costs coming in," he added. BP's Chief Executive Tony Hayward gave that figure in a February 27 strategy address.

Just a few years ago companies assumed long-run prices around $25.

"Given the very conservative nature of price assumptions for planning, typically the increase would imply that the higher price environment will be reasonably sustained over the life cycle of the project considered," said Harry Tchilinguirian, oil analyst at BNP Paribas in London.

Costs are rising because of higher prices for materials and services, chiefly steel and rigs. A growing part of new supply is also expected be of more costly non-conventional oil, such as crude extracted from tar sands.

Italian oil firm Eni SpA (ENI.MI: Quote, Profile, Research, Stock Buzz) signed an accord with the Republic of Congo on Monday to tap oil from tar sands in the African nation.

Such ventures need a higher oil price to make money, analysts say, but represent a large source of new reserves open for foreign investment outside the volatile Middle East.

"The companies need to be factoring in quite high prices to make these kinds of projects work, certainly over $85," said Kevin Norrish, oil analyst at Barclays Capital.

SUPPORT AT $60

Oil firms were slow to move their price assumptions higher as oil began to rally after a crash to $10 in 1998 that analysts say hindered investment in the early part of this decade.

"Over the last five years, the trend has been steadily upwards and it seems likely that prices will be supported at higher levels on the downside of the cycle than in the past," BP's Hayward has said.

Higher price assumptions help to make a greater range of projects viable for investment.

Shell is already spending billions of dollars on non-conventional oil. It is tapping crude from tar sands in Canada and building a plant in Qatar, Pearl GTL, to turn natural gas into liquid fuels.  Continued...