Oil Prices: What Lower For Longer Means

Companies that have been through the brutal downturn in oil are coming to realize that what we thought would be a boom is sounding more like a pop.   Even though we are clearly in a recovery, prices have been stuck in a narrow range (low-to-mid $50’s for West Texas Intermediate) for more than three months.  The slogan has become Lower for Longer and industry needs to think through what that means, including safety departments.

A couple of very good articles in Oil & Gas Financial Journal look at why oil is where it is and what the will mean for industry.   The first is by Ernst & young, LLP, and it argues that shale oil has changed the economics of production so much that prices will stay within a tight range for the near term.  They point out that:

  1. The U.S. offers unique incentives to rights owners, making drilling more attractive.
  2. The entry cost of drilling is low, about $5 million a well.
  3. Cycle times are short, possibly two months from start of drilling to production and even 20 days in some cases.
  4. It takes about 1.5 years for a well to achieve payback.

The point of the article is that shale drilling can expand so quickly that supply will keep pace with demand, meaning prices will hold in a narrow range unless outside forces change the dynamics.  Don’t look for change until at least the end of 2017.

A second article, this one by the consulting firm, Rystad Energy,  looks at what that price means for who drills, where they drill and what that does to service companies.   According to Rystad, breakeven  prices at the wellhead have fallen by an average of 55% since the oil downturn.  in the five main shale plays, breakeven prices at the wellhead are between $29-39 a barrel.  But when they factor in the other costs associated with getting that oil to market, the breakeven prices jump:

When they estimate breakeven prices for the different producers, the picture of who is winning and losing becomes clearer:

Now, these projections are from consultants and a lot of consultants have been dead wrong about this downturn.  However, if there projections are true, there are some lessons here:

  1. Cost control will continue to be savage.  Much of the drop in breakeven prices has come from the blood, sweat and tears of service companies.  If prices are not projected to rise, at least through 2017, and oil companies still need to cut their breakeven prices, service companies should expect more work, but not much relief on payments.
  2. This has implications for safety departments.   Most have already been cut to the bone.  However, in a high-hazard business like drilling, we can’t ignore safety.  A big incident will put companies that are stretched out of business. Successful companies in this environment will be the ones who can cut ineffective programs, work on a shoestring and adopt lean practices.
  3. Oil companies will focus on one or two major areas instead of scattering their projects around the country.  Drilling is becoming more like mining, fast, efficient and focused on one location.  That will limit the number of people they need to add to their operations.
  4. The majors still have a long way to go to take advantage of shale plays.  They have a lot of legacy costs that will be hard to cut and their cultures still support complex processes and higher overhead.   They are run by smart people and they can adapt, but there will still be a lot of pain to come for their workforce.  The old “that’s not the way we do it here” mentality won’t work in this environment.

Are the costs of your safety program where they need to be?  Lifeline Strategies is a lean organization and we focus on finding cost-effective solutions for company problems.   Let us help you identify what works, what doesn’t and where you can improve safety and training without increasing costs. Contact us at info@lifelinestrategies.com.

 

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