These are bleak times for oil producers, as crude explores lows last seen a dozen years ago. But throughout this remarkable down-cycle in oil prices, voices from the sidelines have been telling of how quickly the situation could turn, and events this week demonstrate why.
Too low for too long and decisions that seem necessary now — cutting capital expenditure, retaining cash and other belt-tightening measures — could turn this great supply surplus into a tight little squeeze at short notice. Prices would react in an upward motion every bit as violently as they have dipped, providing respite for chief financial officers and central bankers alike from Caracas to Moscow.
The argument goes that projects are being postponed or cancelled out of necessity now that would otherwise go some way toward meeting the IEA’s forecast for oil demand growth of around 1.2mn b/d a year out to 2020.
This week was a case in point. The European industry has appeared to be managing the downturn relatively well, at least in comparison with the US oil and gas sector, where the best business is in bankruptcy law.
But BP’s plans to cut 4,000 jobs from its upstream business forced a swift reappraisal of the situation — this is a big player making a big call. Which bit of E&P will be hit hardest? There’s little reason to cut back on production, so might it be exploration that suffers?
Bank UBS says sub-$50/bl Brent just isn’t adequate when it comes to investing in essential future supply growth — while oil demand grows by around 1pc/yr, the bank says, existing capacity falls by 3-5pc/yr. Sharply higher prices will restore balance once the lack of green-lit projects starts to filter through.
The Swiss bank looks to 2018 and beyond for these effects. Crude projects are not, with a few notable exceptions, quick moving — as UK independent Tullow reminded this week. It says a final investment decision on its Lake Albert project in Uganda — with a potential 300,000 b/d — will be made in 2017, almost seven years after it first dangled the prospect of development there.
The Uganda project was not easy — it has been beset by war, border disputes, tax bills, refinery wrangles and disparate pipeline plans — but some of the best prospects are in the most difficult places. When the giant Johan Sverdrup field, offshore Norway, comes on stream in 2019 it will mark the end of a five-year process. First oil from the deepwater Sea Lion prospect, offshore the Falklands islands (Islas Malvinas), has been put back a year.
The oil industry might not like very low prices — nor very high prices either, what with the demand erosion that comes with them — but it does appreciate consistent prices. Steady prices are good for producers, consumers and investors, as Saudi oil minister Ali Naimi used to say. It may be a while before he can say that again, at least with a straight face.