It goes without saying that Art Berman with Labryrinth Consulting Services has a belief about oil prices that is likely not shared by many in the oil and gas industry: Berman believes the prices should be lower.
“Prices have to fall further,” he told an audience in Houston last week. “We’re below US$40/bbl now, the whole key here is to change investor/producer behavior.”
Berman (pictured, right) was one of three speakers gathered for a special breakfast on 3 December in advance of AtComedia’s (OE’s parent company) Petroleum Exhibition & Conference of Mexico (PECOM) show on April 5-7 held annually in Villahermosa, Mexico.
Berman showed the audience a slide with historic oil price averages, saying that long-term oil prices since 1950 have averaged US$45/bbl in 2015 dollars. Before 1974, oil prices averaged around $23/bbl. Berman says price trends will not increase until the surplus is reduced. Currently, he says, the US crude inventories amount to 122 MMbbl above five-year average and 104 MMbbl above five-year maximum. And demand is weak, but still growing at around 1.6 MMb/d a year, he says.
So what caused the oversupply?
Berman blamed the oversupply on “cheap money”— caused by interest rates that have been kept artificially low.
“Cheap money creates a problem for investors who are looking for a better yield,” he says. And those investors looked to the oil market, and specifically the US shale/tight oil plays, which Berman says were produced at barely break-even prices when oil was high. “Tremendous amount of capital for marginal investments. We created a bubble.”
And certainly investor pressure when oil was high led most North American companies with global assets to turn their focus on “easy oil” coming from the US shale plays. Famously, in 2014, Apache Corp. was one of those companies that quickly shed offshore assets to appease investors who wanted to switch directions, urging the company to walk away from capital intensive LNG projects offshore Australia. Apache eventually exited its Australian offshore business altogether back in April.
But, Berman says the current downturn is a larger market issue. “The price collapse is nothing more than a devaluation of a market that was too high,” he says. “High price and low demand leads to oversupply.”
Yet, there are bigger implications than just the price of oil. Berman showed the breakfast crowd that high energy costs have resulted in a low economic growth. “High prices kill demand,” he says. Berman’s chart showed rising gross domestic product (GDP) correlates with low or falling oil prices, but flat GDP correlates with a high oil price.
“Energy is what links the entire global economy,” Berman says. “Much lower oil prices, are the only reasonable path to return the world economy to high growth and higher demand and have a balanced oil market.”
Berman says that oil prices will recover faster than what most forecasts have predicted, but he says, the best hope for price recovery is to let OPEC hold the line and to let the market correct itself. He expects to see the beginnings of a price recovery in 2016.
“High costs are not sustainable”
Mike Haney, director of Douglas-Westwood’s Houston office, reminded the crowd that higher oil prices came with increased project costs, eating into profits. Haney notes that spending soared 237% in a 13-year period.
Haney (pictured, right) told the breakfast crowd there was some potential good news: The downturn has led to some operators and service providers to find new ways to deal with rising costs.
“It’s been a painful process,” he says, citing how supermajor Shell managed to reduce costs related to its deepwater Appomattox, in the US Gulf of Mexico, by some 20%. But, Haney says that international oil companies need a new business model because, he says, oil prices would need to be around $105/bbl to meet planned spending. While $55/bbl is considered the breakeven cost for deepwater.
Ultimately, Haney shared Douglas-Westwood’s forward view, which is still positive for the offshore industry. “We have downgraded our drilling expectations, but we still expect growth,” he says, stating that the industry will still drill more wells offshore than ever each year, with some 17,000 offshore wells to be drilled by 2020.
With regards to subsea, Haney says Douglas-Westwood expects annual subsea tree installation to grow 7% per annum over 2014-2020.
However, the floating production systems (FPS) market has been hit considerably by spending cut backs. In 2010-11, FPSO orders averaged 20/yr, but in 2015 there have been only three orders. Long-term, Haney expects 74 FPSO installations from 2015-2019. Yet, he cites that $59 billion of spend required to complete these installs amount to 81% of total FPS sector spend, with most projects ending up about 40% over budget.
With those results for the FPS market, the industry needs to come into alignment on both reasonable cost and time expectations for project delivery.
Implications for Mexico
While the opening of Mexico’s oil and gas sector has been historic, many have viewed the timing to be unfortunate as the first bid round (Ronda Uno) followed the crash in oil prices. But, despite the doom and gloom in the industry, the view in Mexico is actually quite positive, according to Oscar Roldan (pictured right), head of the National Data Repository for Mexico’s regulator, Comisión Nacional de Hidrocarburos (CNH).
Roldan told the breakfast crowd that, ultimately, Round One (Ronda Uno) was a success for Mexico because “it happened, and it was transparent.” And for a country that is noted for its corruption, that is a true success.
Additionally, the country was able to learn from criticism during the first phase of Round One. This led to Mexico’s Ministry of Finance to realize that the minimum bids it had set were too high, Roldan says. And the Ministry sought to make the terms more attractive by the time phase two of Round One, which featured more established shallow water plays, took place.
However, for Roldan, the round has been a success in another way: the low oil prices have helped Mexican startups succeed.
“The oil price was the best opportunity to invest in Mexico (for the smaller Mexican companies) because the big guys had to hold off,” Roldan says. “The newly created Mexican companies weren’t selling oil, so they benefited from the low oil price. They didn’t have the same problems of the other established companies.”
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