High-cost production set for deeper cuts as oil prices remain low

LeAnne Graves

Deepwater drilling may be up next for big cuts as Opec weathers the oil glut to maintain market share.

At the Opec meeting on Friday in Vienna, the 12-member group announced that it would keep its oil output levels of 30 million barrels per day (bpd) despite the saturation driving market prices down. Brent crude stood around US$63 at close on Friday, still down from the highs experienced last June at $115 a barrel.

"Opec members are in this for the long-run," said Amrita Sen, chief oil analyst from UK-based Energy Aspects. "They know that prices need to stay low longer to get the high-cost producers to react and slow their production."

In a draft report ahead of the Vienna meeting, Opec said that it was surprised by the resilience in shale developments. The organisation did not believe that the high-cost shale sector would be able to withstand such low oil prices.

Opec had banked on the shale producers being unable to afford the high prices to drill these unconventional resources. However, it revised its outlook by saying that it didn’t foresee a cut in North American shale production for another two years.

But it isn’t just the high-price shale producers, according to Ms Sen. “The reality is about any high-cost producer, which includes deepwater and for us, that’s really the thing that falls off next year.”

Matthew Vellacott, associate director of UK-based consultancy AMR International, said that the industry was seeing an overall shake-up. “The trend that is obvious is a shift in the market landscape with smaller independents more inclined to pursue the shorter cycle, lower initial cost shale developments and the oil majors firmly involved in shale but equally strategic about the longer term potential of deepwater development,” he said.

Ms Sen said that costs were very high across the board for both shale and deepwater drilling. “Deepwater [costs] take time, but we’ve already seen many projects delayed,” she said. “Pretty much all deepwater drilling is expensive, and I think that’s the stuff that’s going to start falling quite quickly.”

This has been seen with some UAE-based oil services companies such as Petrofac and Topaz Energy and Marine. Both companies reported losses for the first quarter, blaming the challenging oil market for a lacklustre need for offshore drilling rigs.

Topaz said that it was revising its strategy to be more conservative with its cash, resulting in postponing of non-essential fleet upgrades and refinancing a portion of its debt.

Ms Sen said that unlike shale, deepwater is not a “turn on turn off” application and it takes time. “The problem is once it starts falling, prices can whiplash higher because of the sudden huge tightening in the market,” she said.

There are still some winners that could emerge from the market volatility. Technology will play a larger role to optimise drilling and to decrease costs.

“Cost reduction through automation, size and weight reduction and reduced maintenance are all key themes,” said Mr Vellacott.

Booz Allen Hamilton said that oil and gas companies in the Middle East were being urged to utilise the competitive advantage of big data to create operational efficiencies and increase oil well production by up to 8 per cent.

Atif Kureishy, principal at Booz Allen Hamilton Mena, said that less than 1 per cent of the data currently available on a modern oil rig is currently being captured and analysed. “This means extractors and producers are leaving themselves increasingly vulnerable to low oil prices and a skills shortage,” he said.

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