Crude price war producing victims

February 11, 2015 09:11 AM

‘Biggest Impact’

“Everyone is looking at the U.S., at when the lower U.S. rig count is going to feed through into lower production,” said Seth Kleinman, head of European energy research at Citigroup Inc. in London. “But probably the biggest impact on supply is going to come from” maintenance reductions in other parts of the world, he said.

Chevron lowered its 2015 capital-spending target, the majority of which is dedicated to supporting existing production, by 13% to $35 billion on Jan. 31. BP expects to cut spending to $20 billion this year, compared with previous guidance of $24 billion to $26 billion.

Lower spending on maintenance of existing oil fields can accelerate the decline in production by 1 or 2%, Kleinman said. Add this up across all the affected regions and “you’re talking about losing a million barrels of oil in 12 months.” That’s roughly equal to the global supply surplus, he said.

‘Top Loser’

“Russia, facing a perfect storm of collapsing prices, international sanctions and currency depreciation, will likely emerge as the industry’s top loser,” the IEA said in the report Tuesday. Its production will fall by 500,000 barrels a day to 10.4 million in 2020, the biggest drop of any nation, the agency said.

Projects in the North Sea, Latin America and Canadian oil sands require oil prices above $60 a barrel, according to Energy Aspects Ltd., a consulting company based in London.

The North Sea is under a lot of stress, with current prices potentially shortening the economic lifespan of oil fields and affecting how soon they will be decommissioned, BP Chief Executive Officer Bob Dudley said in an interview with Bloomberg Television Feb. 3.

Brazil’s oil supply growth will dwindle to below 100,000 barrels a day this year, less than half the rate of 2014, Energy Aspects estimates. The country’s deep-water offshore projects require an oil price of more than $80 a barrel to cover costs, according to BNP Paribas.

When oil prices eventually recover, shale producers will bounce back first because they need to spend less money upfront and can move more quickly from starting drilling to receiving production, said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas. Offshore fields or oil sands projects, which have high upfront capital costs and can’t scale up so rapidly, will suffer more, he said.

“Unlike U.S. shale, conventional production elsewhere has high upfront capital costs, is slow to start up and will be the main victim of OPEC’s decision to keep output steady,” he said.

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