Abstract.

Much has been said in recent years about a capital shortage facing the world petroleum industry. The industry is often viewed as being 'opportunity long but capital short'. New areas are now becoming available for exploration and exploitation in countries which have previously been hostile to private sector investment but now welcome and encourage foreign capital. Oil company internal resources appear to be insufficient to meet these investment needs unaided. This problem is also exacerbated by the apparent unwillingness of financial institutions to provide the substantial funding required for countries with problematic financial profiles, since many banks lost large sums of money lending to less developed countries in the 1970s and 1980s.

Furthermore, as excess world oil production capacity is absorbed, some commentators also fear that insuficient new investment is being deployed to create additional production capacity. The low oil price environment since 1986 has depressed capital spending and stimulated demand growth to such an extent that there are fears of a potential Third Oil Shock in the late 1990s.

The paper will discuss the extent to which capital shortage is impacting the industry, in the context of the profound shift in investment patterns away from mature areas such as the U.S. and North Sea, into areas of higher growth potential and lower cost. The contrasting roles of internal funding from corporate cashflow, and third party external financing will be highlighted, particularly in the areas where risk profiles are unfamiliar and availability of financing is unclear.

1. INTRODUCTION
1.1. Capital needs-overview

Global oil production capacity has been growing more slowly (on average) than oil consumption for over a decade, as shown in Fig. 1. The material reduction in capital investment since the 1986 oil price collapse has caused a reduction in the rate of reserves replacement and production capacity expansion. Upstream capital investment during the late 1980s and early 1990s therefore cannot have been sufficient to sustain long term oil production supplydemand equilibrium, at least if the current geographic distribution of supply is to be maintained. A period of under-investment was of course necessary to correct the imbalances and excess production capacity caused by earlier over-investment. However, the pendulum should swing back in the other direction at some point to restore production capacity and demand growth to parallel paths.

The long lead times inherent in the major project developments generally required to provide significant production increments mean that even if investments were started today in anticipation of such needs, the new capacity might only become available five to ten years in the future. Suc

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