As if the recent oil price dive to the lowest level in six years wasn’t enough to keep industry nerves on edge, the current price volatility is proving just as hostile to producers as sliding margins.
After bottoming out in late January at $45/b, NYMEX crude had recovered to $60/b by May, in a correction now widely seen as premature as it was overcooked. Bears pointed to the stubborn and growing glut of global oil supply hanging over the market.
If the rebound was quick, the subsequent fall has been just as dramatic and the double-dip in oil prices has been more severe than many predicted.
Buoyant US oil stocks and OPEC’s policy to keep pumping in the hope of forcing more costly barrels off the market have helped. Now fresh concerns over the major pullback in Chinese economic growth are spooking global markets.
Lest we forget, China — the world’s second-largest oil consumer — accounts for about 15% of global GDP. Last year it made up a fifth of global oil demand and almost half of incremental demand.
Lifted by positive US data, oil jumped by the most in six and a half years on August 27, a move at odds, seemingly, with a building consensus that the current downturn is going to be a protracted, multi-year phenomenon. So how can hard-pressed oil producers navigate the unpredictable?
Scale helps. BP’s chief executive Bob Dudley in February referred to the price rout as “turbulence” in “a return to business as usual.”
But price volatility plays havoc with costing and investment planning, forcing some oil companies into a holding pattern in the hope of greater certainty over future returns. Skittish prices also suck the life from merger and acquisition plans, making it tough for buyers and sellers to agree on asset values.
Blog post continues below…
|
|
||||
| Request a free trial of: Oilgram Price Report |  |
|||
 |
Oilgram Price Report is a daily report that covers market changes, market fundamentals and factors driving prices. Oilgram Price Report also brings a vast array of Platts international prices for crude and products, netback tables, and market critical data. | |||
 |
||||
|
|
||||
Despite predictions at the time, Shell’s April $70 billion acquisition of BG has yet to spark a wave of mega-mergers in the oil sector outside of some notable exceptions in the oil-services sector. Shell’s deal, for example, is based on oil prices rebounding to average $90/b in 2018, a target some might see as optimistic.
Self help
The industry is already struggling to move to a lower, more sustainable cost base. Staff cuts, project deferrals and exploration cutbacks have been in the headlines since late 2014 but many operators want and need more baked-in savings if they are going to make money at $40/b.
From standardizing wellhead equipment, renegotiating contract terms and tweaking procurement processes, oil companies have been chasing a multitude of marginal gains to help turn the tide on costs.
Larger operators are also changing the way they engineer projects, spending longer on front-end engineering and design ahead of final investment decision in the hope of lowering future operating costs and boosting reliability.
Those with bigger self-help potential are larger companies with greater potential for further cost-cutting. Strong balance sheets and diversified upstream portfolios provide valuable flexibility to revisit budgets, improving their economics and benefit from deflationary supply chain pressure.
Of the global oil majors, Statoil is seen among the most able to mitigate the pain of low prices due to its exposure to further offshore cost falloff and a gas-rich portfolio.
In a recent study, CitiGroup ranked Statoil and France’s Total as the most likely to benefit among Big Oil, both seen with a potential for 16% cuts to upstream costs. Italy’s Eni, on the other hand, is seen faring less well with its focus on turning around its downstream business.
For smaller companies exposed to higher levels of debt, the low oil price is only going to create even more strain on their finances. As credit agencies and banks crunch the numbers on their assets values, the ability of oil companies to raise cheap money will only fall as credit rules are tightened.
Companies with a lower production cost-base than their peers are clearly in a stronger position to ride out the downturn while adjusting to slimming margins. As assets in themselves, a low-cost portfolio of production and reserves will be viewed as enviable by suitors with deeper pockets.
Back to balance
Prudent operators of any scale will need to hope for the best but plan for the worst as rebalancing the oil market may take some time. Data from US shale plays seems to suggest that, even at lower prices, US production can continue to grow thanks to efficiency gains. Production has come down in some shale basins but shrewd hedging by US tight oil producers has allowed many to remain above water.
A pause in US production growth should be enough to bring the global market back into balance from next year, according to UK-based Energy Aspects.
“So when does this rout stop?” the analysts asked this week. “We need prices to stay low through Q3 ’15 and perhaps even Q4 ’15. But a few months of $40 oil will take a deeper toll on supplies, forcing a rebalancing in 2016.”
Uncertainty over prices is nothing new, but a speedy industry shift to a lower cost base while growing reserves at the same time makes it all the more pressing.
“This is a damn tough market, one of the toughest ones that I ever been through,” Halliburton Chief Executive Officer Dave Lesar said during an earnings call at the end of July. “I don’t believe anyone on the call can accurately predict when commodity prices will rebound and rig counts will recover … and neither can I.”
All blog comments are moderated before being published.