DISTRESS signals are being emitted - and - all around!
Glut is the name of the game. Oil prices have lost more than half their value over the past year, shedding more than $10 a barrel over the last month only.
Industry is reacting; battering seems set to continue - for some time to come. Markets responded negatively to the statement in Moscow last week by Abdullah Al-Badri, secretary-general of the Organization of the Petroleum Exporting Countries, after meeting the Russian Energy Minister Aleksandr Novak, indicating that no output cut was in the offing. "At the last meeting, in June, we agreed that we will not reduce (OPEC) production quotas. It is 30 million bpd, and will remain so,” said El-Badri, responding to a question on output.
Analysts are taking cue. Dutch Bank ABN AMRO last week lowered it price forecast for Brent to average $65 in 2016 from its previous forecast of $75.
Jeff Currie of Goldman Sachs is setting a $45 a barrel target for West Texas Intermediate crude oil in near future, saying that supplies were outstripping demand. "I think the downside risks are substantial," Currie told CNBC last week.
The prospect of oil prices falling below $40 receded earlier this year amid a crude rally, but with futures sliding again, investors shouldn't rule out a three-handle, John Kilduff of Again Capital was reported as saying on Thursday.
"Christmas time we'll probably be rebounding off new lows off of the mid to low 30s," he told CNBC's "Squawk Box." "We have a lot to go. We're going to take out the March lows of $43 and trade down to the 30s in my view." A growing global glut of diesel fuel could be the next catalyst, he said, noting that Saudi Arabia and China have ramped up their refining capacity and are now flooding the Asian market with diesel.
Oil majors are keeping a close eye on all this. And are adjusting to market realities. Consequent to this, some $200 billion projects have been shelved, in recent months. The plunge in crude prices since last summer has resulted in the deferral of 46 big oil and gas projects with 20bn barrels of oil equivalent in reserves - more than Mexico's entire proven holdings - Financial Times said quoting a report from the consultancy Wood Mackenzie. Among companies postponing major investment plans are BP, Shell, Chevron, Statoil, and Australia's Woodside Petroleum. Earlier in May, Rystad Energy, a Norwegian consultancy, reported $118bn of projects being put on hold. However, the Wood Mackenzie study shows the toll is now much greater FP underlined.
More than half the reserves put on hold lie thousands of feet under the sea, including in the Gulf of Mexico and off west Africa, where the technical demands of extracting crude and earlier inflation have pushed up the cost of projects. Deep-water drilling rigs cost hundreds of thousands of dollars a day to hire.
Major North American Sand Oil producer, Canada appears to be a big casualty of the emerging syndrome. Development of some 5.6bn barrels of reserves, almost all oil sands, having been deferred, the study reported.
“The upstream industry is winding back its investment in big pre-final investment decision as fast as it can,” Wood Mackenzie said in the report. The report underlined the number of major upstream projects, expected to be fully approved during 2015, could probably be counted “on one hand”.
Royal Dutch Shell and British Gas-owner Centrica are also cutting, between them, 12,500 oil exploration and production jobs in the face of a pricing downturn that could last "for several years".
With Shell insisting the price may remain low "for several years," it announced cutting 6,500 jobs, scaling back on new projects rendered unprofitable by languishing prices. Shell investment spending was hence set to fall by around $7bn this year.
The Financial Times says the job losses include previously announced reductions in countries such as the US, UK, Canada, Norway and Nigeria, while the investment reduction is more than double the $3 billion forecast in April. Shell reported a 37 percent fall in second-quarter earnings to $3.8 bn on a current costs basis, down from $6.1bn in the same quarter last year but ahead of analyst expectations.
As for Centrica, a BBC report said it is set to axe 6,000 jobs as it moves away from oil and gas exploration and production to focus on its customer-facing British Gas business, as its profits fell three per cent to £1bn despite earnings at British Gas almost doubling to £528m.
News of the latest cutbacks follows similar announcements by BP and Norwegian Statoil. BP, one of the world's biggest oil companies, announced last week a second-quarter replacement cost loss of $6.3 billion, warning the low oil prices are here to stay.
The "external environment remains challenging," Bob Dudley, chief executive of the oil major, said in a statement emphasizing that "in the past few weeks oil prices have fallen back in response to continued oversupply and market weakness and the recent agreements regarding Iran."
With the crisis in Libya continuing, oil majors also had to write off major investments in the post-Qaddafi, war- torn country. BP has just announced taking an impairment of almost $600 million in the second quarter as fighting forced it to suspend an oil exploration campaign. “It's just hard for us to get something done there right now,” Dudley told reporters in London. BP is aware that other oil companies have written off their Libyan assets, while “some of them haven't,” he said.
Total also announced writing off $755 million from onshore assets n Libya, some three months back. That's an ominous sign for firms including Eni SpA and Repsol SA, which have yet to mark down the value of their investments in the country.
Libya has been in chaos since the Revolution, producing less than 400,000 barrels a day as compared to the 1.6 million barrels a day, it was producing in Qaddafi era.
The mid- to long-term scenario is getting murkier. Investments are a big casualty. What if the global demand continues to rise - as per some projections? With global energy horizon in flux, that remains a big if - with very few, if any - in position to handle the query. This is scary!
