Syed Rashid Husain Concern is engulfing every one – and all around! World oil prices have fallen too far, Saudi Aramco CEO Khalid Al-Falih said at the Global Competitiveness Forum 2015 in Riyadh last week. “It's too low for everybody, consumers too would suffer in the long term.” Collapsing markets have forced Aramco to tighten its belt. It plans to renegotiate some contracts and postpone some projects due to falling oil prices. “We will have to adjust to the realities of today. We will push some projects into the future, we will stretch some of them, we will renegotiate some contracts,” Al-Falih added. “I think we got spoiled with $100 oil and we were focused on building capacity and we lost focus on fiscal discipline.” The ongoing shale revolution in the US is also under gathering clouds. Oil producers in West Texas and North Dakota “can't drill for $45 oil,” energy investor Boone Pickens said on CNBC's “Street Signs.” Collapsing crude prices are confronting scores of smaller US oil producers with the grim choice of either shutting older high-cost wells or burning through cash in the hope of riding out the downturn. Now, operators are closing some small old wells, known as strippers, and tens of thousands of similar wells are on the verge of losing money. A further slide could, by some estimates, idle an equivalent of up to 2 percent of US supply, slowing overall output growth more than expected or even leaving it flat. “We've identified about 20 of our wells that are not economic at these prices,” Ray Lasseigne of TMR Exploration Inc in Louisiana was quoted as saying. Leslie Tipping, a longtime member of the oil industry profession known as “landmen” who broker mineral rights, told the press that some marginal wells have already been closed. “There have been some wells that have been shut in already,” she said, adding, “there's concern.” Tipping expects well closures at higher-cost fields across much of North America, including older parts of North Dakota's Bakken, and areas where the geology is difficult, such as the Anadarko Basin in Kansas and Oklahoma. There are about 400,000 stripper wells in the United States, most with operating costs of between $20 and $50 per barrel, according to analysts at Wood Mackenzie. The cheapest ones are in locations where there is little underground saltwater. Strippers often produce just a few barrels a day, but together they account for up to 1 million barrels per day, a ninth of US output. Breakeven levels for drilling new wells in most US shale oil fields range between $50 and $80 per barrel - well above operating costs for existing shale wells, resulting in a slowdown. This slowdown in domestic oil drilling is spilling over into the Marcellus Shale natural-gas region too. Several large drilling companies have announced plans to reduce 2015 capital-spending plans in Appalachia in response to low energy prices. Range Resources Corp. announced that it will cut its capital spending for 2015 to $870 million from $1.3 billion. Range spends 95 percent of its budget in the Marcellus. “Capex (capital expenditure) programs have declined fairly significantly here in the first quarter. I think that's going to continue for a while,” David J. Spigelmyer, president of the Marcellus Shale Coalition told media. Producers in the “wet gas” areas of Western Pennsylvania, West Virginia, and eastern Ohio too have announced big reductions in drilling plans. They chiefly target natural-gas liquids such as propane, butane, and ethane, whose prices move largely in conjunction with oil markets. As prices slumped, oil drillers have also reduced the number of rigs operating in the US to the lowest in two years, according to data from Baker Hughes Inc. released on Jan. 23. Companies idled 49 US oil rigs last week, bringing the total to 1,317 in the seventh weekly decline, it said. The count has fallen 165 in January, the biggest three-week decline since 1987. In a research note, Standard Chartered said last week rig counts in the four major shale plays, Eagle Ford, Permian, Bakken and Niobrara, have dropped 84 in the past two weeks and are just 125 above the level that should signal the start of declining US output. “We believe the sharp falling away of US drilling activity and the rapid cuts across the world in non-OPEC supply suggest oil prices have fallen far below any sustainable level,” the report said. Canadian energy sector is seemingly worried. The Canadian Association of Petroleum Producers said last week oil production nation-wide is expected to drop by more than 100,000 bpd because of the slumping oil prices. Canada's second-largest oil producer, Cenovus Energy, said last Wednesday it was cutting its capital expenditures for 2015 deeper than originally planned. The company in December said it was trimming its capital spending plan by 15 percent to $2 billion. With oil prices off roughly 30 percent since then, the company said last week it was cutting the projected spending again to around $1.5 billion. But like every story with a flip side this is also not without! Investment in oil production will fall by $100 billion, or 15 percent, this year compared with 2014, Fatih Birol, the chief economist at the IEA, said at the World Economic Forum in Davos, Switzerland. This means oil at $45 a barrel will be a temporary phenomenon, he said. “If we cut production then there will be spare capacity and producers will not invest, or postpone projects. The market will rebound back higher than the $147 we saw in 2008,” OPEC Secretary General Abdullah Al-Badri warned in an interview with the Telegraph newspaper. “He is raising a valid concern that falling investments due to the current price collapse may leave us with little oil coming out of the ground in a few years time,” Ole Sloth Hansen, an analyst at Saxo Bank A/S in Copenhagen was quoted as saying. Claudio Descalzi, chief executive of Eni too is saying oil could hit $200 a barrel by the end of the decade if the energy industry continued to cut investment and capital expenditure. Bob Dudley, the head of BP is of the view that low oil price would mean falling investment in North Sea oil. BP's two large North Sea oil projects are “challenged” by the price fall, he added. Markets seem now rushing to strike a delicate balance - between ‘efficient and inefficient' sources. And until the search is on, flux is set to continue ruling the energy markets.
