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Survival is the name of the game for hard pressed oil players

Eithne Treanor gives us her insider's view on the outlook for the oil industry, which is approaching an interesting and, some would say, crucial cross-road.
Nodding donkey used to extract oil in profile against sunset
The US oil industry is continuing to feel the pain.

Despite a sense of stability in the oil market at either side of US$40 a barrel, the oversupply remains the problem.

The International Energy Agency echoed industry sentiment about the dangers of cutting investment and the rig count in the US fell to its lowest in six years.

Low priced stability or simple market stagnation? Either way uncertainty rules the day.

Crude inventories took a hike this week and now around 523 million barrels, three times higher than market expectations.

While oil drillers in the US cut an additional 15 rigs this week to a total of 372, many industry experts at the Offshore Technology Conference (OTC) in Kuala Lumpur dismissed the impact, saying rigs are more technologically engineered and the existing ones are producing more oil.

US well costs to fall

A recent study by the international consultancy group IHS claims that well costs in the US shale regions will decline by up to 5% as operators build in greater efficiencies. The surprising flexibility and nimbleness of the surviving shale operators was discussed in depth at OTC this week.

The lack of investment in new oil and gas projects is a major concern for the market and could reverse today’s oversupply situation in a couple of years.

The head of the International Energy Agency’s oil industry and markets division, Neil Atkinson, was speaking at an industry event in Singapore this week and said: “There’s danger as we are reaching a point where we are barely investing upstream.”

He added that if investment doesn’t resume in 2017 and 2018, “we can see a spike in oil prices as oil supply can’t meet demand”.

It’s estimated that more than US$100 billion worth of investment has been rescheduled or cancelled.

Projects cancelled rather than deferred

Speaking on my panel at OTC this week, Dan Young, Wood Mackenzie’s head of consulting for Asia Pacific, said he feared this low price environment could mean further delays in new energy projects.

He estimates that deferred capital expenditure could reach “half a trillion dollars this year”.

He says what he fears in this low oil price environment is that “more and more people talk about project cancellations rather than deferrals".  

Young said he sees some strength coming back to the market. He warns it will be a slow recovery throughout the year as the market gets tighter.

Demand should increase by around a million barrels a day in 2016, according to Wood Mackenzie, lower than IEA and OPEC expectations

This week’s commodity report from Capital economics sees the lack of investment in the energy sector as a symptom of a risk adverse market.

“Changes in oil prices seem to be currently driven by changes in investor sentiment towards riskier assets generally,” the report said.

“This can be seen clearly in the close correlation between oil prices and global equities.”

Will Doha meeting help?

The market has been encouraged by the prospect of some major oil producers meeting in Doha mid-April.

Atkinson says while the “gesture” is welcomed, he fears the impact on supply will be “none whatsoever”.  

The United Arab Emirates and Iraq have said they will attend the meeting and while many headlines seem to suggest this is an OPEC-arranged meeting; it is not.

It is an initiative led by Doha as the country holds the OPEC Presidency this year. Saudi Arabia and Russia and not all OPEC member countries have confirmed their attendance.

Meanwhile, Iraq’s oil minister Adel Abdul-Mahdi has temporarily withdrawn from the government in an effort to calm the “anxiety and chaos” surrounding a proposed cabinet reshuffle.

The deputy oil minister, Fayyad Naama is currently managing the ministry.

No one can say where the price will go in coming weeks and months, but the mood at OTC in Kuala Lumpur was one of cautious optimism.

As the industry continues to downsize, survival is the name of the game for oil and gas sector players in the months to come.

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