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OPEC’s strategy of keeping oil prices low appears to be having the cartel’s desired effect, at least on oilfield services companies such as Halliburton Co. The company has posted a third-quarter loss of $54 million and will lay off 2,000 more employees because drillers in the United States can’t afford the expense of fracking until the cost of a barrel of crude goes back up.
The average global price of oil has been falling for over a year from its high of more than $110 per barrel in June 2014, led largely by prodigious output in North America. Most of the U.S. oil was extracted by the relatively expensive practice of fracking.
OPEC, led by Saudi Arabia, decided not to cut production to shore up prices, but to maintain levels at 30 million barrels per day to keep oil so cheap as to make fracking in non-OPEC countries unprofitable. Saudi Oil Minister Ali al-Naimi, who devised the strategy, said the aim was to recoup the cartel’s lost market share.
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Ever since then, some North American drillers have managed to get by, but lately the decline in rig counts in the continent, particularly in the United States, has taken its toll as energy companies have slashed $100 billion in spending for 2015. Fewer rigs means less drilling, and less drilling means less need for the oilfield services that Halliburton provides.
Already this year Halliburton, based in Houston, has laid off 18,000 workers, and the furloughs of 2,000 more simply confirms the bind the company is in. It announced its third-quarter loss on Oct. 19, three days after its larger rival, Schlumberger Ltd., announced that its third-quarter profits fell to $989 million, 49 percent lower than the $1.96 billion reported in the same period of 2014.
Halliburton is the world’s largest provider of fracking services, so it has been losing money in the United States as many drillers suspend fracking. In a statement, CEO Frank Lesar noted that the practice accounts for fully 70 percent of the cost of operating an average well in the United States. As a result, that practice is the first to be cut.
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“That’s naturally where customers have gone in terms of the pressure to reduce costs,” Lesar said.
Still, the company’s leaders expect to see relief in the second half of 2016. Halliburton President Jeff Miller said he believes that the market will bottom out during the first half of the year, then the industry will eventually feel the effects of the drillers’ annual spending budgets, which will include new wells requiring Halliburton’s help.
“The pumping business in North America is clearly the most stressed segment of the market today, but it’s also the market we know the best,” Miller said in a conference call with analysts. “This is the segment that we expect to rebound the most sharply.”
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Miller’s outlook contrasts sharply with that of Paal Kibsgaard, Schlumberger’s CEO, who said he feared a recovery of the price of oil won’t come before 2017. Kibsgaard, too, previously forecast a rebound as early as the end of this year, but now his view has become more pessimistic.
“The market is underestimating how long this period is going to take,” Kibsgaard said in a conference call with oil analysts last week. “Just the fact that the industry is looking to again reduce investments when we have this significant pending supply impact coming shows we have an increasing challenge.”
Whenever oil prices recover, Lesar said he believes they will recover strongly. “[W]e are not going to try to call the exact shape of recovery, but we expect that the longer it takes, the sharper it will be,” his statement said. “Ultimately when this market recovers, we believe North America will respond the quickest and offer the greatest upside, and that Halliburton will be positioned to outperform.”
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com