Modest recovery World Oil Price: Job and deepwater cuts continue
WILLEMSTAD - Over the past five months oil markets have bounced back considerably since Brent crude hit a low of $28.43 a barrel in mid-January. While there was a similar recovery over the same period in 2015, this was not sustained and prices began falling again later in the year. This week Brent crude crossed the $50/barrel threshold for the first time in several months.
Several international factors appear to be moving the price of Brent and other crude benchmarks forward. A fall in output in the United States has seen prices rise, while supply disruptions in Nigeria (militant attacks) and Canada (wildfires) also limited output. At yesterday’s meeting in Vienna, OPEC again failed to cap production. Currently, the group does not have a formal production ceiling to cut, so output will remain at near record levels.
How long the current price revival can be continued is unknown because global oil market remains substantially oversupplied. Storage levels worldwide are at their highest levels in decades, though they are being slowly lowered. The US Energy Information Administration (EIA) forecasts global petroleum and other liquid fuels inventory levels to continue to build through 2016 at an average of 1.0 million barrels/day, but gradually fall to 0.2 million barrels/day in 2017.
If global demand continues to improve this could give further strength to the price of a barrel. As the surprise outages in Nigeria and Canada make clear, unexpected events could tighten markets further. Such fluctuations may however be short-lived, and the effect of stronger USD may outweigh bullish sentiment. However, most observers think it will be years before oil returns to $90 or $100 a barrel, a price that was pretty much the norm over the last decade.
Meanwhile, at the sharp end, job losses in the oil and gas sector continue to be slashed. A new industry report released in early May, puts the number of jobs lost worldwide at more than 350,000 since oil prices began to slump in mid-2014. This is broken down further into oil field services at 152,000 (which represents a massive cut of some 43% of the global market), exploration and production at more than 80,000 layoffs, followed by the drilling sector with more than 52,000 job losses.
In the US, the report shows nearly 100,000 people lost their jobs in oil and gas, of which more than half were in Texas. In the UK North Sea job losses for 2016 are predicted to be as high as 45,000, which is on top of 65,000 jobs lost in 2015. According to industry group Oil and Gas UK, there were about 440,000 employees working in the industry at the beginning of the crash, which fell to 375,000 in late 2015, and could fall to about 320,000 in 2016 (or by a total 27%).
Similar numbers of record layoffs are echoed around the world. In Canada job losses of up to 24,000 are estimated for 2016 on top of 28,000 in 2015. In Norway the oil crisis has presently led to the loss of 35,000 jobs (or 11% of the market, in a country with generally very low average unemployment rates of below 4%). The merger of Royal Dutch Shell with BG Group (formerly British Gas) is forecast to lead to the loss of over 10,000 jobs alone (or about 10% of the combined work force), while Shell’s earnings plunged 58% in Q1 compared to the same period last year in 2015.
Oil prices may be up, but continued rationalization of projects and, in particular, those in frontier hydrocarbon regions continues, which is especially important to Curaçao’s oil and gas exploration aspirations. Deepwater and ultra-deepwater exploration and production activity continues to suffer as operators transfer deeper water investment to lower cost, more flexible, operations onshore. Boardrooms are delaying final investment decisions, especially for high Capex, long cycle greenfields projects into which exploration offshore Curaçao would fit.
According to industry analysts Wood Mackenzie, deepwater reserves of 16 billion barrels of oil equivalent (that is combined oil and gas) will be left undeveloped by 2025. Oil companies will spend less than USD 20 billion on deepwater projects in 2016, down from an all-time Capex high of USD 38 billion in 2014. Of this 38% (or USD 7.6 billion) will be spent on exploration and appraisal drilling. Another interesting fact is deepwater discoveries entered negative territory from 2013 onwards, that is, the value of these discoveries was less than the spending they entailed.
Thus even prior to the oil crisis, after a five year burst of exploration of deepwater frontier basins, some oil companies were realizing that the higher exploration costs combined with higher infrastructure costs were not justified by the volumes discovered, meaning that the business case could not be made from moving discovered resources to reserves. With increased spending generating lower volumes, companies cut back exploration to mature basins having lower project breakeven prices versus deepwater.
Wood Mackenzie estimate that deepwater spending will only recover slowly, with the recovery in number of wells drilled taking even more time. The industry has increasingly faced challenges in deepwater projects despite spending increases. These challenges include rising water depths and greater geological complexity of untapped deepwater opportunities. Other factors such as frontier exploration without material discoveries, more natural gas discoveries, higher development costs, and now low oil prices, have contributed to value destruction in deepwater.
Modest oil price increase therefore does not significantly change the predicament our national oil company KPG finds itself in attracting international oil companies and new investment to explore Curacao’s frontier territorial waters. With breakeven costs for deep and ultra deep water regions of greater than USD 60-80/barrel offshore Curaçao is regarded in most boardrooms as simply too expensive in the short to medium term.
However all is not pessimistic. Despite the oil price, a small number of international oil companies remain committed to deepwater exploration and production. For these operators the deepwater business has always been a long-term game. With the industry close to but not yet producing in more than 3,000m of water, one operator is talking about achieving field development in up to 4,000m within the next 10 years.
The challenge for KPG is to determine a business model that could attract the interest of such companies in an otherwise undesirable market place.
By Dr. John Wright
Dr. John Wright is a retired consultant geologist with over 30 years experience in natural resource exploration.