Despite some indications that, as the CEO of Halliburton said, North America is turning, we do see some continuing indications that companies are moving more production offline. (to see what the CEO of Halliburton said, read our article Major Oil and Gas Service Companies Release Earnings.
As we mentioned in our previous article about the price that is needed for recovery, many companies in the UK North Sea area find projects unprofitable even when Brent is $60 a barrel. These projects are actually being abandoned even before they were originally scheduled (See our article So – What Does the Price of Oil Have to Be to Turn This Around?)
But this week, we saw notable indications that projects other than those in the North Sea were also being canceled or scaled back. According to an article published by Bloomberg on July 15, 2016, and later republished by Rigzone.com, China’s crude output dropped 4.6 percent to 101.59 metric tons in the first six months of this year. http://www.bloomberg.com/news/articles/2016-07-15/china-s-oil-coal-output-slides-in-sign-of-more-imports-to-come . Several major oil producers shut unprofitable fields. According to PetroChina, the nation’s largest producer, it expects oil and gas output to fall further as it shuts fields that have “no hope” of turning a profit. Cnooc Ltd sees output dropping by as much as 5.2% next year.
Similarly, in an article also published by Rigzone.com, BHP Billiton announced plans to cut CAPEX to $1.44 billion next fiscal year (starting July 1), a 44% reduction compared to last year. Interestingly, BHP plans to allocate $800 million to conventional petroleum plays; $600 million of which will be onshore in the U.S. (depending on market conditions). BHP further forecast a decline of 200 to 210 million barrels of oil equivalent in Fiscal Year 2017. (To learn more and read the original article: http://www.rigzone.com/news/oil_gas/a/145729/BHP_Billiton_Cuts_Petroleum_CAPEX_by_44_in_FY2017_to_14B
I didn’t tell you this to give you bad news; but rather, to suggest that contrary to some expectations, I believe we are increasingly working towards that convergence of the supply and demand curves that is so important for recovery. What is becoming clear to me is that, as discussed in an earlier article, More Good News On Long-term Outlook for Oil Prices! is that the market might, in fact, be overcorrecting - canceling more and more production. While these announcements on their face indicate less spending on development which would seem to indicate less demand for our products, the upside appears to be strong as older and less viable fields go offline to make way for newer and more profitable fields – which will require new equipment.
This is particularly true in light of our earlier article on the price we need to see recovery, Cost Savings May Be Here To Stay and Shell’s announcement a few weeks ago that they can make a profit at $40.00 per barrel in certain U.S. and Canadian plays.
BHP’s announcement that a huge portion of their budget (despite how diminished it is), coupled with the increasing announcements that shale plays in the U.S. are profitable at lower oil prices, bode well for my customers that have a strong U.S. presence. I also believe that, at least for the next few years, it seems to signify an acceptance by big oil that the United States is, in fact, the new swing producer.