A report from auditors PricewaterhouseCoopers (PwC) has revealed that oil prices are unlikely to climb back to the $100 level, and will have a limited rise from the current spot price to between $60 and $70 per barrel over the next few years.
The rise, which would pull oil prices up from the below $50 per barrel mark where it has sunk since late October, should facilitate a rise in capital expenditure (capex), PwC argued.
The report highlights the precipitous decline in global upstream capex, where some commentators have said that there has been a 40 percent reduction in this genre of spending, compared to the highs of 2014.
Oilfield service companies have also been battered by a broad decrease of drilling activity, and operational costs. For example, there has been a 30 percent decrease in the day rates for drilling ships this year, compared to two years ago.
In a chilling statement for oil companies, the report concluded that there is no longer a ‘ceiling’ of $100 barrels of oil that there used to be, before prices started to slide in the second half of 2014.
Research and development is also an area that has been badly hit, with oilfield service companies spending less, a significant trend as they spend more as a percentage of sales compared to the major oil companies.
A lack of innovation could be costly to competitiveness in some areas, such as the North Sea in the UK the report opined.
New technology is essential to allay the lack of attractiveness of the zone, due to the high costs of production.
Adrian Del Maestro, PwC’s director of research, opined: “If you look at the forecast for global upstream oil and gas capex, it is likely to remain flat for next year and then will gradually rise, as market fundamentals begin to balance and the oil price picks up.”
“Over the last twenty years or so we have seen shifting patterns in supply and demand. The 1990s broadly saw supply and demand rise gradually in tandem, leading to a fairly stable oil price.”
He continued to say, that in the “early 2000s onwards there was a strong increase in demand mainly from China, with supply struggling to meet this demand. As a result, we witnessed oil prices escalate rapidly. Then of course the global financial crisis saw prices collapse.”
“More recently we see an oversupplied market with flattish demand and prices subsequently suppressed and volatile. Overall the industry is struggling to find stability against the current supply and demand fundamentals.”
“We envisage that over the next few years an equilibrium is likely to be found between supply and demand but the mantra “lower for longer”, is now perhaps “lower forever”, with business models operating on that premise.”
“You can never fully predict the oil price, nor can you say ‘never again’ on oil prices, but to reach a sustained $100 per barrel is unlikely, as there is so much oil, and potential oil, on the market, especially given the role of U.S. shale oil producers.”
“Conversely that does not mean that there is no risk of oil price peaks. Increasing oil price volatility means we can still witness temporary spikes.”
“I think the bulk of current capital spend in oil and gas will continue to be focused on conventional areas, such as onshore North America oil and with shale oil investment.”
“We are unlikely to see major capital investments in more technically challenging frontier plays, as in the past. Arctic ventures for example, are being scaled back, as it is hard to justify any substantial outlays for these projects against the backdrop of weaker oil prices in an oversupplied market.”
Research firm Wood McKenzie have also published figures that would cause concern for the volume of capital expenditure in the oil industry.
They said that the continued collapse in crude oil prices has the capacity to result in a one trillion retrenchment for the industry, since 2014 virtually every oil producing country in the world has pulled back on capex spending.
Tom Ellacott, senior vice president of corporate research at Wood Mackenzie, reflected on the PwC report: “I would say that oil prices bbl of between $60 and $70 would trigger a rise in capital spending. Overall, a price of $55 to $60 dollars is needed for an economic quarter or two, on a sustained basis to boost investment.”
“There have been patterns where there has been a number of players which have released increases of their spending plans for next year, this has been the case for some of the independent companies in the United States.”
He added: “It’s a bit of a mixed picture of the moment, the ones with the most advantageous portfolios are the ones that are know the most aggressive.”
As for the smaller fishes in the oil pond, the realities are that they will be concentrating on deleveraging, conserving capital, and ensuring that international projects are robust, which might pave the way for a greater investment process.
Although Ellacott expects that it would be a long shot to reach $100 bbl, but Wood McKenzie is also bullish that prices will steadily rise.
To meet the higher costs of supply and the rise in demand that they believe will arrive come 2020, there needs to be a rise in prices, at the higher end of the development scale oil needs to be $55 to $60 per barrel.
On the current capex trends, Ellacott continued: “The first big one is the delaying of the pre-sanctioned oil projects, for existing projects cost deflation is also a factor, outside of the United States there have been a lot of efficiency gains.”
“Another major issue is the huge cutbacks that have been made in North America, with some companies slashing their spending budgets by 80 to 90 per cent, it’s a matter of survival out there.”
“As for new projects, they are being re-scoped, from a lot of the more attractive oil reserves, cost deflation has again been a problem in the United States, with a 30 to 40 per cent reduction.”
“On the flip side to that there has been some current risk of cost inflation in some projects in the United States as inflation start to gather pace.”
By Peter Taberner for Oilprice.com