Oil Majors Resigned To Lower Oil Price Environment

The leaders of BP appear to have joined their counterparts at Royal Dutch Shell in concluding that oil prices will stay low for longer than anyone had previously expected.

BP’s outlook springs from the second-quarter beating it reported July 28. The British energy major reported a loss replacement cost, or a loss in net income, of $6.27 billion, a far cry from the $3.18 billion profit it recorded in the same period of 2014.

Much of that, of course, can be attributed to the huge costs arising from the 2010 Deepwater Horizon spill in the Gulf of Mexico, which so far has cost BP almost $55 billion. The company is still facing several lawsuits, but its tentative $18.7 settlement with the U.S. government and five states, reached July 2, covered the largest claims.

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So far, BP has had to sell more than $40 billion in assets to help cover the costs arising from the spill, and the company has been cutting spending in general. “The external environment remains challenging, but BP moved quickly in response and we continue to do so,” CEO Bob Dudley said.

The company’s chief financial officer, Brian Gilvary, agreed. “We can see clear progress in our capital program and from our work to reset and reduce cash costs,” he said. “Our focus remains on rebalancing the company’s sources and uses of cash.”

But while it appears the company is on its way to putting the Deepwater Horizon spill behind it, Dudley still sees trouble in the future: unremittingly low oil prices. There was a slight price rise early in the second quarter, but it’s moved back lower, in large part because of the July 14 nuclear deal with Iran that is likely to add even more oil to an already over-saturated market.

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Dudley has already warned that he expects oil prices, which began their descent in June 2014, to remain “lower for longer,” and his chief financial officer, Brian Gilvary, used the same words the day BP reported the second-quarter loss.

Gilvary pointed to Iran’s expected return to the oil market, which isn’t expected until sometime in 2016. “We haven’t yet seen the full effect come through,” he said.

If you think you’ve heard all this before, you have. In an interview published July 14 in Oil & Gas Technology, Shell CEO Ben van Beurden said that “prices could stay low for longer” unless energy producers cut supplies and if demand doesn’t grow.

Van Beurden noted that prices started falling a year ago because of the oversupply of oil caused largely by a boom in shale oil in the United States. They stayed low because OPEC, led by Saudi Arabia, decided not to cut production to support prices but instead to fight shale producers in a price war, hoping that keeping prices low would make shale extraction, already costly, unprofitable.

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But van Beurden said that if shale producers manage to reduce production costs enough to keep output high, “[w]ith moderate economic growth, prices could stay low for longer.”

The Shell CEO stressed that “I can’t predict the future,” but Andy Brown, the company’s director of oil and gas production outside America, gave a more specific view of Shell’s expectations in a separate interview with Reuters, published July 16.

Brown said Shell sees no quick rebound in oil prices, but only a gradual recovery over the next five years. He attributed this sluggishness to a slowdown in China’s economy, leading a drop in demand for fuel and the continuing oversupply of oil.

By Andy Tully of Oilprice.com

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