Good Morning Al Kooheji PetroGlobe followes and Readers

The decade leading up to the 2014-2016 collapse should go down in history as the oil industry’s renaissance period. Monumental leaps in technology, capacity, and reservoir knowledge brought vast hydrocarbon resources into reach for the first time.

From shale gas to tight oil formations, and from deepwater to Arctic environments, never before have so many prolific E&P prospects been accessible. Yet never before have so many viable opportunities been out of the money either.

Today, the O&G industry sits in the undesirable position of being opportunity-rich technically, but opportunity-poor economically. Only a few elite new projects are being funded at today’s crude oil strip.

Adequate returns on complex and remote hydrocarbon deposits were predicated on $70+ crude oil prices. In fact, WTI spot prices averaged $80 for the decade preceding the 2015 downturn. Simply put, at $20-$40/barrel the cash flow just isn’t available to fund development. Thus the modern O&G industry’s know-how, technology, and project pipeline are just one big out of the money option.

With the call on non-OPEC production in decline as OPEC output rises and global stocks build, a desperate race to the bottom on cost/barrel is underway. Make it work at sub-$40 oil or go under; that’s the new, high-stakes game operators are playing as long as oil prices remain near current levels. Costs have come down across the entire O&G value chain, but that alone isn’t enough. Meanwhile, the industry’s access to financial, human, and physical capital risks extensive damage in a protracted downturn – damage that could push some complex resource plays out of reach again for years to come.

This week, several companies offered forward looking data-points contextualizing the out of the money trend:

FMC Technologies CEO John Gremp said of 2016 subsea orders: “The issue is going to be around large projects. We don’t see any mega projects on the horizon. Those aren’t even on the radar screen. We have a list of projects that are being tracked. But the ability for those projects to get through the cash flow hurdles and make it into 2016 is limited.”
Nabors Industries recently surveyed 25 of its Lower 48 customers (that comprise 35% of US drilling activity) about rig count direction. Only 1 of the 25 expected to increase activity in the next six months, while 19 expected activity to fall further and the rest expected flat activity.
Marine contract seismic tendering and sales leads are a bleeding edge cyclical indicator, acting as a barometer of operator appetite for new projects. Tendering and sales leads are sinking to 12-year lows according to Petroleum Geo-Services (see slide 23).
It’s nice to have options, but not if they can’t be exercised. The only thing that will move many new O&G development projects back into the money is a significant and sustained oil price recovery, and that may lie beyond the expiration date for some. — Rashid Al Kooheji Managing Director – KPG