Declining world oil and gas prices are already starting to impact drilling contractors, service companies and equipment suppliers. Oil and gas companies have been cutting back on drilling budgets for 2015. Of course, none of this is news to Australian operators that have weathered industry downturns before.
Wood Mackenzie analyzed 2,222 oil producing fields in its global database and determined three oil price points with various impacts on oil production. At US$50/bbl Brent, only 190,000 bbl/d of oil production is cash negative (0.2 per cent of global supply), with the main contributors being the U.S. and U.K.
Some 400,000 bbl/d is cash negative (0.4 per cent of global supply) at US$45 crude. Half of this is from U.S. conventional onshore production. At $40, 1.5 MMb/d is cash negative (1.6 percent of global supply). Tight oil production only starts to become cash negative as Brent oil price falls into the high US$30 range.
“Being cash negative simply means that the production is more costly than the price received,” said Robert Plummer, corporate research analyst, Wood Mackenzie. Being cash negative is when operators have to start deciding whether or not to shut in volumes or to continue producing for cash flow.
In a 7 January presentation, Helmerich & Payne noted that spot pricing for its FlexRigs is down 10 percent and the company expects to see 40 to 50 rigs idled in the next 30 days. Another rig contractor, Pioneer Energy Services said it will get about US$17 million in termination payments for four rigs cancelled this quarter.
Given the cyclical nature of the oil and gas business, many of the officers of these companies have been through the “bust” cycle. They were very aware prices would not stay high forever. Because of that, many companies were more cash-conscious this time around. Companies with cash reserves can pick up some bargains for very cheap reserves.
Therein are some opportunities for Australian companies, too. Imagine being able to buy drilling rigs and pressure pumping equipment at bargain-basement prices. That would allow Australia to boost the number of walking rigs available for horizontal drilling in shale plays. Those same company executives also know that oil prices won’t stay low forever and taking advantage of lower costs will put them in beneficial positions for the coming uptick in oil prices.
One of the problems facing Australian companies is high costs. Although it may be too late, for example, for LNG projects currently under construction to benefit from cost cuts, some projects that were put on hold might become viable once again.
On the drilling and production side, there will be downward pressure on service companies to trim prices as these companies compete for smaller budgets. One way to cut costs would be to drill and complete more wells from a single pad. Crews likely will be assigned to various operators to insure availability.
Barclays issued its “Global 2015 E&P Spending Outlook” on 8 January. Based on a survey of 225 companies in mid-December that assumed oil prices would average US$75/bbl Brent in 2015, the companies were planning to reduce spending by 8.8 per cent globally. In North America, Barclays expects spending to decline as much as 30 per cent if 2015 West Texas Intermediate prices hold around US$50/bbl.
About 40 percent of the American E&P companies surveyed expect drilling and completion costs to decline more than 10 per cent. International service costs appear to be more stable with 70 per cent of the companies expecting costs to remain largely flat. E&P capital spending in the India, Asia and Australia region is expected to decline 6 per cent. International spending is expected to remain stronger because NOCs are not reducing budgets as much as IOCs.
In every storm cloud there is a silver lining. Preparing for the next upturn in oil prices could turn that silver lining to black gold.
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