We all need to remember, but often choose to forget, that the oil & gas exploration and production is a highly cyclical business. There have been seven significant price cycles since 1970 and also a few minor ones between times, so yet another should come as no surprise.
The real surprise is that no one ever seems to build the probability into their business planning!
The reasons for the fall in Brent crude prices from $115 in June to below $71 following November’s OPEC meeting are well documented, as is the realisation that Saudi Arabia is now defending market share, rather than a minimum price.
70% of the additional oil production in recent years is unconventional. Much of this is from US shales and is not cheap oil, much needing prices of $60-80 to be commercially viable. What is more, well decline rates are rapid, without ongoing drilling the current production capacity will be quickly eroded.
By comparison, most deepwater production needs about $80 oil.
Big oil needs big projects and with the Middle-Eastern NOCs dominating onshore production, deepwater remains one of the few places the IOCs can make major finds.
Also, the largest offshore projects are not greatly influenced by today’s oil prices, but views of prices in the decades ahead –many expect oil prices to again average $100 in the medium-long term.
Considering the lead times of large offshore projects, there is less potential to revise near-term development plans, and as a result capex tends to be less subject to short-term hits than onshore spends, such as US onshore drilling.
Yes, there will be significant spending cut-backs as higher cost more economically marginal offshore projects are postponed and exploration spend will also be reduced if exploration and production companies decide to wait for rig rates to fall further.
However, it is likely that deep water, despite its costs, is one area that will suffer less than others. So we feel confident about the long-term prospects for associated areas such as subsea production, floating production, etc.
It’s likely that more than 80,000 development wells were drilled onshore in 2014 and some 2,500 offshore.
Looking ahead, even greater numbers will be needed as present low oil prices begin to drive growing oil and gas consumption, boosting the demand for oilfield services. Furthermore, we believe that the annual total will need to grow to exceed 100,000 by 2020.
Both high and low oil prices present opportunities for well-managed, well-financed companies that have a long-term view – the oil and gas industry is not a short-term game. But the window of mergers and acquisitions opportunity may well be very short before the next cycle begins.
John Westwood is chairman of Douglas-Westwood, the international energy business research & consulting firm he founded in 1990. In addition to oil companies, contractors and financial organisations, John has acted as an advisor to government agencies and presidential offices in six countries.
