November 2014

First oil

How to hold up the sky

Pramod Kulkarni / World Oil


“The sky is falling!”—Chicken Little.

Oil and gas being commodities businesses, we should be accustomed to the cyclical “up” and “down” swings. With the current “up” cycle lasting more than four years, and with oil prices above $100/bbl, many of us have forgotten how to hold up the sky through a downturn. So, here’s a handy tutorial on how best to survive this latest nosedive.

Don’t panic. Against the backdrop of rising shale oil production from the U.S. and weakening global demand, Saudi Arabia lowered its crude price to Asian markets by $0.75/bbl, and both Iraq and Iran followed suit. Oil traders interpreted these moves as OPEC defending its markets, instead of protecting their high prices. In a panic of sorts, the spot price traders traded down the prices of both Brent and WTI by more than 20%.

While $80/bbl oil may put some oil sands and heavy oil projects on tenterhooks, the break-even point for most conventional and shale E&P activity is much lower. Large offshore projects cannot react to short-term price swings, and so will continue, as will activity in the major U.S. shale plays—Bakken, Eagle Ford, Marcellus and the Permian. While some oil companies, such as ConocoPhillips, have announced a re-think on development plans, the upstream companies should aim for a reasoned approach, rather than reacting in panic by stacking rigs or reducing head counts.

Bright prospects. Over the long term, our energy business has exceptional growth opportunities. As Statoil V.P. Helge Hove Haldorsen explained during his inaugural speech as the 2015 SPE president in late October, the world population will reach 9 billion by the year 2040, an addition of 1.7 billion people. By 2040, renewable energy will be able to supply only 5% of the world’s demand. “Every hour, the world is adding 20,000 new energy consumers. Which industry can boast of such tremendous growth?” Haldorsen asked.

Quantitative easing from the oil industry. The U.S. Treasury has just terminated its quantitative easing program to provide an economic stimulus. However, the 20% drop in oil prices has injected an economic stimulus of $1.1 trillion into the world economy. There is a yin-yang relationship between the world economy and oil prices. Oil prices above $100/bbl have stimulated E&P activity, but have had a depressive effect on global economic growth. Lower oil prices, and consequently lower fuel prices, should spur the world economy.

It’s the exports, stupid. While long-term demand growth assures a bright future, what about the dreary present? Political strategist James Carville helped Bill Clinton win the U.S. presidency by focusing on the economic issue. “It’s the economy, stupid!” Carville insisted. The oil and gas industry can grow out of a possible slowdown through the export of U.S. shale liquids and natural gas. So, exports should be our industry focus. The export of LNG from the U.S. to Europe, Asia and South America should boost these economies by lowering gas prices. Meanwhile, the gas price at the Henry Hub should firm up, to serve as an incentive for gas-directed drilling. We should also export NGLs and condensates. Industry organizations should lobby the Congress and the Obama administration to lift the ban on crude oil exports. Without the ability to export, shale operators now have to sell light crude to U.S. refineries at a discount of as much as $12/bbl.

Recovery through innovation. The drop in oil prices should serve as an opportunity for the oilfield companies to help operators improve their margins. Recent technology improvements, such as pad drilling, have yet to percolate through the industry. These innovations should make economic some marginal fields.

If all else fails. If oil prices continue their downward spiral to $70/bbl or even, God forbid, $60/bbl, I invite you to join Chicken Little and myself in assuming a fetal position to survive the falling sky. wo-box_blue.gif 

About the Authors
Pramod Kulkarni
World Oil
Pramod Kulkarni
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