As the oil patch grows accustomed to a new world of $50 to $60 crude, it’s now looking ahead to a different but equally daunting sort of cliff.
Oil companies are warning there will be a price to pay -- a much higher price -- for all the cost cutting being done today to cope with the collapse in the crude market. Big projects intended to start pumping oil and natural gas 5 to 10 years from now are being canceled or put on hold as the price crash forced $114 billion in spending cuts on the industry.
Energy giants from Exxon Mobil Corp. to Royal Dutch Shell say they’re taking a much more cautious approach to approving projects that cost billions and take years to complete. That’s setting the table for a future oil-price shock when a growing world population drives higher demand, said oil executives and financiers at the IHS CeraWeek Energy Conference in Houston.
“What we decide today will have an effect on the future,” Patrick Pouyanne, chief executive officer of Total SA said Tuesday during the event. Postponing spending on mega-projects that usually deliver significant quantities of oil or gas “will have an impact. This could affect supply in three or four years.”
Demand has already begun to show signs of strength. The Paris-based International Energy Agency last week raised its forecast for 2015 demand, projecting that the world will consume 94.7 million barrels a day of crude in the fourth quarter, a potential increase of almost 1 million barrels over the same period in 2014.
U.S. output in shale formations is expected to fall as soon as next month, according to the U.S. Energy Information Administration. Oil production decreases due to spending cuts and decline from aging fields, combined with demand growth, are likely to push prices higher in the next six months to two years, said Ralph Eads, vice chairman and global head of energy investment banking at Jefferies Group Inc.
“I don’t see how the market isn’t going to be in an undersupplied position,” Eads said in an interview. “If you look around the world, where’s the deliverability going to come from? That’s the head scratcher. You just don’t know. It’s hard to make the math add up.”
Eads, who as a deal-maker helped give rise to the shale age, is among many in the industry who have begun to point to a growing risk of diminishing spare capacity, the amount by which existing wells can increase global output if pumped at full speed.
It’s a closely watched figure in oil markets because it represents how much supply can be turned up to meet disruptions or demand increases. Continued Saudi production increases may “significantly” reduce spare capacity “at a time when oil markets will be tighter and geopolitical risks to supply are growing,” Pira Energy Group wrote April 14.
Not everyone is anticipating higher prices soon. BP Plc CEO Bob Dudley and Exxon Chairman and CEO Rex Tillerson said Tuesday that they see oil staying lower for years into the future. Dudley said “lower for longer” has become the company’s mantra.
Elsewhere, crude traders and hedge funds are beginning to see oil turn a corner. Prices can’t drop below $50 for sustained periods because that’s below the cost of supply, Ian Taylor, the CEO of Vitol Group, the world’s largest independent crude trader, said in an interview at the FT Commodities Global Summit in Lausanne, Switzerland on Tuesday. Andy Hall, CEO of commodities hedge fund Astenbeck Capital Management LLC, has also told investors that prices can’t stay low for long.
Beyond demand, supply outside of OPEC is one of the most important reasons for that. The collapse in crude prices has been so steep and so dramatic that most of the 200 major international oil and gas projects scheduled for final investment approvals in the next two years are susceptible to cancellation or postponement, said Nick Lowes, vice president of oil and gas consulting at IHS Inc. Sixty-six percent of those projects aren’t economical at current prices, he said.
In the long term, as further industrialization takes hold around the world and the global population swells to about 9 billion, energy consumption is expected to surge more than 50 percent in the next 20 years, according to BP.
Outside of some producing countries that limit access to their reserves, the industry has failed in recent years to find enough oil to replace lost production. Last year, the companies only struck enough oil for about 50 days of global consumption, said Tim Dodson, the executive vice president for exploration at Statoil ASA.
“The industry is struggling big-time to replace their oil resources and reserves,” Dodson said.