Shale gas companies and oil majors seeing profits eaten away as crude prices dip to $80 a barrel
By Will Nichols 29 Oct 2014 More from this author View Comments
Plummeting oil prices are threatening to undermine the fracking boom in the US, according to new industry figures.
Shale gas and oil were seen as accelerating the country’s recovery from recession as US producers overtook Saudi Arabia and Russia this year as the world’s largest producer of oil and natural gas liquids. Replacing coal with natural gas and renewables also helped to force down US emissions, providing a major boost to President Obama’s climate change strategy.
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But after oil futures traded in New York dropped by almost $20 a barrel in recent weeks, frackers are now warning they are already scaling back investments as low prices serve to make new projects uneconomic.
“Certainly people will start adjusting right there on projects they don’t have to do for a while and our company has done the same thing,” Harold Hamm, chief executive of Continental Resources, which has large stakes in the North Dakota and Montana shale fields, told Platts Energy Week. “We are hurting, but not at the point where we are shutting down.”
Earlier this year, Goldman Sachs warned many US shale projects start to become uneconomic at $75 a barrel, just below the current price of around $80. The company forecast on Sunday that oil will average $85 a barrel in the first quarter of next year, downgrading its earlier prediction of $100 and presenting fresh challenges for fracking companies.
While the US Energy Information Administration (EIA) forecasts US shale oil production will rise from the current rate of eight million barrels a day to 9.6 million by 2019, this prediction has been labelled “overly optimistic” by climate change think tank the Post Carbon Institute.
However, last week, Stephen Chazan, chief executive of Texas-based Occidental Petroleum, which also has operations in North Dakota, told analysts the company would face dwindling margins if prices continued to fall. “We think there’s a lot of economic oil at $75, economic meaning we earn 15 per cent, 16 per cent, 17 per cent returns,” he said. “Do I think there’s a lot of economic oil at $50? No, I don’t.”
The threat of falling oil prices will no doubt also give cause for concern in the UK’s nascent shale gas industry, which is not initially expected to be able to extract oil and gas as cheaply as in the US – although this has not stopped one fracking firm applying for permission to drill three blocks of land in London running from Harrow to Merton.
Meanwhile, research by Carbon Tracker Institute (CTI) suggests conventional fossil fuels are equally at risk from falling oil prices as frackers, with oil majors planning to spend $548bn to 2025 on projects that require a market price of at least $95 a barrel, such as hard-to-reach resources in the Arctic or Canada’s tar sands.
Today, oil and gas producers BP, BG Group and Total reported profit falls, which in part they blamed on falling oil prices. “This is prompting the whole sector to consider the implications of a sustained period of lower oil prices,” said Brian Gilvary, BP’s chief financial officer.
BG’s interim executive chairman, Andrew Gould, warned the company might be forced to delay future investments if the oil price continues to fall. “As the price goes lower, so we look at our debt coverage and need to reduce spending in the future,” he said.
And Total said a $10 drop in Brent crude prices translates into a $1.5bn drop in profits. Patrick Pouyanné, who took over as chief executive of the French firm after the death of predecessor Christophe de Margerie in a plane crash in Russia this month, added that the price falls would likely mean more cost cutting. “The recent decrease in the price of Brent highlights the importance of the programmes we launched to reduce costs and control investments to strengthen the resilience of the group,” he said.
However, BP’s Gilvary recognised that there may be some benefits in a lower oil price, potentially cutting the cost of acquisitions and leasing rates for rigs. “I think a period of $80-$85 a barrel offers more opportunities for us than threats,” he said.
However, the relatively low oil price raises a raft of complex questions for oil firms and their investors. Could a sustained period of low prices proceed a price hike if tight profit margins undermine investment in new capacity? Or could drastic improvements in efficiency and a switch to alternative sources of energy mean low prices are here to stay? Moreover, could climate legislation further restrict demand for fossil fuels putting yet more downward pressure on prices? The continuing volatility of the oil market means each of these questions are likely to remain unanswered for some time yet.