A?t NAPE last month, people said for now they are “dog-paddling, treading water, sitting on their hands.” Sanguine upstream players are waiting to see where commodity prices settle and when A&D markets loosen up.
“The industry right now is like a waterflood,” said Tom Coffman, a former head of the Texas Independent Producers and Royalty Owners Association (Tipro). “You do something and then you have to wait and wonder if it’ll make money.”
Drilling costs haven’t fallen enough yet, said several independents, so they will wait until April or May to start drilling. “The problem is, you can’t time the market. When drilling costs do come down, the big operators like Chesapeake will jump back in and little guys like me won’t be able to get a rig or the better crews,” said one operator.
Another complained that currently, no single play in the Rockies is economic. With natural gas under $5 and oil below $40, rigs are coming down all over the U.S., in the Bakken oil-shale play, the Permian Basin, the Barnett shale—everywhere except in the hot Haynesville play.
How frustrating and ironic. Just when the industry has rejuvenated itself by unlocking the key to the best development plays the U.S. has seen in years, creating a long-term production-growth platform, it has to dial back its drilling action.
There is some good news: Energy capital markets are thawing out, albeit financings come with higher interest rates. Since the first Monday in January, 18 energy deals have raised $14.8 billion, reports Credit Suisse. Only two were for common or convertible preferred stock. The coupon on the 16 debt deals ranged from ConocoPhillips’ 4.75% to Petrohawk Energy’s 10.5%.
Private equity is poised to facilitate plenty of transactions this year. Big capital raises may be off limits for now and capital calls to existing limited partners are on hold, but private-equity-backed E&Ps could be the only buying group for a while.
Most people expect A&D activity to start in the second half of the year. There is a lot of pent-up demand for deal-making. But the dynamics have changed. Buyers no longer want to pay as much for proved undeveloped reserves as they did last year. E&P firms will have to drill up a higher percentage of their PUD locations before thinking about an exit.
Thinking about the future occupied every speaker at CERAWeek 2009, the annual showcase for consulting firm CERA held in February in Houston.
“Basically, just write off 2009,” agreed four top economists speaking on two panels.
Seldom have we seen such candor and outright gloom from speeches, reports or press releases as we’ve seen in the past 60 days.
The industry forgot that the extraordinary markets of 2008 were not unstoppable, but rather, unsustainable, pointed out Saudi minister of petroleum and mineral resources Ali Al-Naimi in his keynote address. Our understanding of market forces remains imprecise at best, he added.
Like other speakers, he called for oil-market stability. That, he said, rests on a price that is low enough to foster global economic growth, yet high enough to give producers a sufficient return on their investment.
At the same time, it must be high enough for oil consumers to become more efficient, and high enough to encourage production from marginal fields, unconventional sources and renewables. A tall order for conflicting needs.
In a report, John Waterlow, Wood Mackenzie principal demand analyst, says the forecast of global oil demand has changed radically and fairly quickly. “Just four months ago, demand had already suffered the effects of a prolonged high oil price and then the economic crisis hit, which led us to say that, for the first time since 1982, global oil demand would drop.
“Global oil demand is now forecast to be 84.3 million barrels a day, a decline of 1.7%, or 1.5 million barrels, from 2008. The changes to 2010 are bigger still, with world demand now expected to be only 84.9 million a day. We still expect some modest growth in 2010 of 0.7%, or 0.6 million a day,?but the forecast is a significant 2.1 million barrels lower than we were expecting in October 2008.”
WoodMac also looks for lower U.S. oil demand for the next two years. It forecasts 2009 daily demand will drop almost 700,000 barrels, “where we anticipate the recession will be longer and deeper than previous estimates as the crisis worsens. We believe the chances of anything more than a very slight recovery in 2010 are remote.”
The doom and gloom is enough to make you fear spring won’t arrive on time this year. But it will. As in the past, savvy companies with a strong balance sheet and the appropriate strategy will weather this and take advantage of the opportunities that arise.
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