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More woes for the oil industry

Optimism that oil prices would rise above $50 per barrel has been dashed in recent weeks.  Supply disruptions in Canada, Nigeria and Libya have come to an end, while OPEC has increased its output.  The earlier glut in crude oil has now translated into a global oversupply of refined products.  The result has been a fall in prices toward $40 per barrel with some commentators anticipating a fall to $35 per barrel.

The fall in oil prices since June 2014 was already taking its toll on the oil industry.  For example, BP has reported a 44 percent fall in profits in the second quarter of 2016:

“The group has been slashing costs and axing thousands of jobs, cutting around 10% of its workforce to offset tough trading. BP is planning to invest about $17bn this year, compared with $27bn 2013.”

The high cost of developing new oil fields has led to significant disinvestment over the past two years.  So much so that, along with the other Big Oil companies, BP sees its future in gas and renewables.  Gas accounts for 52 percent of BP’s current business, and this is expected to rise to 60 percent by 2020.

Nor will any increase in oil prices alter this situation… at least in the short-term.  As Ed Crooks in the Financial Times reports, the oil industry is notorious for under-estimating the cost and duration of new developments:

“A study of 365 oil and gas “megaprojects” by Ernst & Young, the professional services firm, found 64 per cent faced cost overruns and 73 per cent were behind schedule.  Of the 20 largest, only seven were being delivered in line with the budget approved when the final investment decision was taken. Three were running 75-100 per cent over their initial budget, and the average cost overrun was 23 per cent.”

Investors – already chastened by two years of low prices – are unlikely to put money into further large-scale projects; at least until high prices have been restored for a year or more.  One result of this is that relatively small onshore US shale (fracking) companies are far better placed to ramp up production in the event of the world burning its way through the current glut of oil.

All of this makes for particularly grim reading in Britain.  North Sea oil is particularly expensive to recover.  Not only have oil companies been cancelling new North Sea development, but they are now scaling back on existing operations – effectively bringing forward the decommissioning date for many wells and fields.  Worse still, attempts at cutting costs have provoked the first strike in the North Sea in 28 years, as workers attempt to challenge plans to bring in longer hours and lower pay.  Further industrial unrest is inevitable for an industry that looks to be in terminal decline.

Potential UK shale drillers will also be looking on anxiously as oil prices fall back toward $40 per barrel.  Despite the obvious enthusiasm of the British government for fracking, there has been little zeal on the part of the fracking companies themselves to get started – unlike their American counterparts, these companies are in no particular hurry to bankrupt themselves pumping $100 per barrel oil (or its equivalent in gas) that has to be sold for $40 or less.  Indeed, the only fracking operation to be given the go-ahead since 2012 involves the much cheaper operation of fracturing an already completed well.

It may well be that oil prices will spike up again sometime in 2017 or 2018; assuming the world doesn’t go into recession again.  However, by the time this happens, the global oil industry will have written off much of the exploration and recovery that might allow it to respond to shortages.  This will allow us to find out whether Richard Heinberg at the Post Carbon Institute is correct to say that “Goldilocks is dead” – that the price below which oil companies cannot turn a profit is still higher than that price at which demand is destroyed.

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