Low oil prices are expected to continue through much of this year and next, but as companies shelve plans for new drilling, they are setting the stage for a significant rebound in prices in the years ahead.
There are plenty of reasons to think that oil could stay “lower for longer,” as both OPEC and non-OPEC production remains elevated in the face of low oil prices, and global economic uncertainties (see: China) raise questions about demand.
Low oil prices will have to force an adjustment in production, as high-cost producers put off projects. But it will happen slowly as existing wells will keep on pumping. Some oil companies are starting to see oil prices dip below their operating costs, particularly in Canada where oil sands have higher production costs and sell at a discount to WTI.
A new report from TD Securities Inc. finds that some Canadian companies are losing money even on existing projects. “Every single SAGD/CSS player [is] bleeding cash on every barrel of bitumen produced at the current WTI” prices, TD Securities concluded. SAGD is steam-assisted gravity drainage, a process to produce heavy oil sands. Related: An Oil Price Spike Could Be Nearer Than You Think
But they will keep on pumping because shutting down can be expensive and restarting later is also costly and not easy to do. So even though they will lose money on each barrel, they have little choice but to keep going and hope for better times.
If existing projects are facing financial pressure, drilling new projects are wholly out of reach for much of the industry. As companies are forced to retrench, cut costs down to the bone, and hope to survive the downturn, new oil fields won’t get drilled, especially not the multibillion dollar projects, such as deepwater drilling.
For example, the U.S. federal government held an auction on August 19 for offshore oil fields in the Gulf of Mexico, and the results were not good. Only five companies submitted bids and only 33 leases were sold, the worst showing in three decades for the Western Gulf of Mexico. BHP Billiton Petroleum was the largest bidder, spending $16.3 million on 26 tracts.
“While disappointing, the results of this lease sale are not surprising and accurately reflect the current environment of low commodity prices and increasing regulatory changes and uncertainty. The entire oil and natural gas industry, particularly the offshore segment, is understandably being very cautious about spending money,” Randall Luthi, the President of the National Ocean Industries Association, said in a statement. Related: Low Oil Prices Could Break The “Fragile Five” Producing Nations
A July report from Wood Mackenzie estimated that 46 large oil and gas projects, that would require around $200 billion in spending to develop, have been indefinitely postponed. Those projects amount to 20 billion barrels of oil equivalent in reserves. Canada could be hardest hit, with projects totaling 5.6 billion barrels of reserves seeing delays. The list of deferred or cancelled projects will no doubt continue to grow as oil prices remain depressed.
These big-time oil fields that aren’t being drilled – offshore Gulf of Mexico, offshore West Africa, and Canadian oil sands, for example – take several years to develop. Most weren’t expected to come online this year or next, but several years in the future at the earliest.
This year and next will likely remain “wastelands of low oilfield cash flows, spending and general activity levels,” analysts at Raymond James concluded in a new report. But after that, oil prices could strongly rebound. “While it’s still far away, 2017 appears to be setting up for a significant recovery year,” Raymond James wrote, predicting oil could rise above $70 per barrel by then. Related: Fresh Sell Off For Oil. Bear Market Here To Stay?
Beyond that, the market could tighten even further. Mature oil fields suffer from natural decline, at a rough average of around 5 percent per year. That means that new fields must come online just to replace old ones. But outside of North American shale, the world wasn’t achieving a whole lot of gains in oil production even before prices crashed last year. Most new projects were merely keeping up with decline.
But now, with so many of these large-scale deepwater and oil sands projects delayed or cancelled, that means a significant stream of oil will not come online in the early part of the next decade. And with global demand continuing to grow year after year, a price spike could hit the market by the end of the decade when the shortage of new oil really starts to be felt.
By Nick Cunningham of Oilprice.com
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