Oil price uncertainty looms over industry

US$75-80 barrel oil price will be the new norm, industry commentators predicted Tuesday morning. But how long it will take to get there is the greatest uncertainty. Elaine Maslin reports.

Uncertainty around how long oil prices will remain around US$50/bbl and, more crucially, what prices might look like in the future, post-recovery, is weighing heavily on offshore operators and contractors globally.

With predictions swinging wildly between BP CEO Bob Dudley’s (pictured, right) prediction prices will remain low for three years and Eni CEO Claudio Descalzi warning of $200/bbl in a few years, uncertainty is the name of the day.

According to Mike Beveridge, managing director of Simmons & Co, the reality is likely to be somewhere in between – around $75-80/bbl – but that it could take 12-15 months to rebound.

Speaking yesterday (Tuesday) morning at the Society for Underwater Technology’s (SUT) Aberdeen Global Market Outlook breakfast seminar, Beveridge says the pressure on costs was already visible, with operators globally announcing capital discipline measures (with dividend protection trumping production growth), pushing capex budgets for 2015 down 20-30%, before oil prices started to fall last summer.

“Then the oil price fell,” says Beveridge, putting further pressure on budgets. “There’s one story I’ve heard about an IOC which rebudgeted 10 times over four days over the Christmas period. Any budgets put out today are still probably very indicative.”

“We had all become very used to range of oil prices at $85-115,” he says. “That was the ‘new norm’ for many of us, we had long term stability and could plan for the future. It’s clear we are in a different world from the one we thought we were a year ago.”

The fall in oil price has been driven by weaker demand, very few geopolitical events and additional supplies, creating ‘a perfect storm,’ with speculators, hedge-fund driven, driving oil prices down to today’s levels, says Beveridge.

“This downturn is supply led, not demand led,” he says. “The problem is about over supply, unlike previous corrections in the last 15 years. 1986 is probably the last time we had a wall of supply hitting the market.”

Saudi Arabia, which could potentially influence the market by reducing production, seems more concerned about protecting long-term demand, not just for itself but for oil per se, as efficiencies, climate change and renewables increase, says Beveridge, citing a Saudi oil minister who, about 30 years ago, said the Stone Age didn’t end for lack of stones.
The market has already started to correct itself, he says, with US activity already falling (the US rig count fell by 70 in the last week and has fallen from 1859 in November 2014 to 1579 on 23 January 2015) and demand for oil is picking up again.

“Our view is that the current down turn is of quarters, not months or years,” says Beveridge. “2015 will be fundamental to addressing the oversupply issue.”
The pain is being felt acutely in the North Sea, where, even before the oil price started to fall last summer, the industry was feeling cost pressures, despite record high-spending in 2014. Subsea companies are also feeling pain. The likes of Oceaneering was trading at a 11x multiple of its earnings in December 2013. By 2014 it was down to 7.5x. Others have been equally penalized.

“2014 was about growth and the need for skills. Now there’s an elephant in the room and there’s no getting away from it,” Neil Gordon, Subsea UK’s CEO (pictured, right), told the SUT event.

“We have been through this cycle before, but we cannot just sit back and wait. We need to be getting ourselves in to a fiscally and commercially competitive place,” he continues. “We realized last year, as a basin, the UK was becoming an expensive place to do business, but also production rates were going down. This was compounded by the drop in the oil price. Work is ongoing, looking at why the costs are so high.”

Beveridge says: “Fundamentally it’s about reducing costs. I think we got ahead of ourselves and the North Sea can work in a $75-80/bbl environment, but not $50/bbl. But is need the cost base to be addressed. It needs standardization. There are new technologies which could be used. New business models with a focus on life of field are coming through. Use of data and monitoring could also help, but it is challenging selling to the operator.”

The UK government is also starting to play its part in the basin’s recovery. A new regulator, the Oil and Gas Authority, has been created and is due to officially launch 1 April this year. The UK’s Department of Energy and Climate Change (DECC) has a number of projects to try and boost exploration rates in the North Sea – which slumped to just 15 in 2013. It is assessing failed exploration wells, particularly in the Outer Moray Firth and central North Sea, considering blanket seismic campaigns in under-explored areas, such as west of the Hebrides, the edge of the central North Sea and northern southern North Sea, and looking at the potential in the lower Paleozoic layers in the basin.

“2015 is re-group, re-focus, look at budgets, costs, resources, and be prepared that it could be for a while,” concludes Gordon. “We have to be lean and competitive and attract investment.”