In downturn, majors abandon costly offshore in favour of cheaper shale

Working oil pump jacks on a oil field
Source: DollarPhotoClub

While low crude and gas prices bite ever harder, some majors, such as Chevron, ConocoPhillips and Hess Corp, are seen to move away from costly and long-term projects – such as offshore – and towards “short-cycle” alternatives like shale gas and oil, Reuters reports.

“Companies want to strike a balance between long and short-cycle investments while maintaining a robust balance sheet to fund their way through the down cycle,” BMO Capital analyst Brendan Warn told Reuters. “Focusing on a specific set of expertise and geographies allowed them to offer investors a “unique value proposition”, he added.

While shale production has garnered some bad press for being expensive, it is still much cheaper than offshore and with a shorter development cycle and lower execution risks, the companies can see the rewards much quicker.

“In terms of longer-cycle projects, we aren’t initiating. We aren’t initiating any … You are going to see us preferentially favor short-cycle investments, and if they don’t meet our hurdles, we won’t invest,” Chevron Chief Executive Officer John Watson said in an analyst call.

A similar shift towards exploring the Bakken Shale rather than their offshore deposits has been seen also by ConocoPhillips and Hess.

This may be a glimmer of hope in an industry otherwise suffering from a dearth of good news. According to data from Baker Hughes, drilling has ground to a halt in two gas basins in Oklahoma, along with the Fayetteville reservoir in Arkansas and the Niobrara formation in Colorado and Wyoming, as the number of operating rigs plummets to 1990s levels.

Despite that, in a tendency carried from the previous year, output from shale formations shows no signs of abating.

“The decline in rigs is really accelerating, especially in some of these marginal plays where prices aren’t high enough to justify production,” John Kilduff, a partner at Again Capital LLC in New York, told Bloomberg. “Drilling is still profitable in other areas, though, so it may be a while before a recovery really takes hold.”

Current hardships not withstanding, shale gas and oil is not likely to go away. In its annual Energy Outlook released Wednesday, BP projected shale gas production around the world will grow 5.6 percent a year, and by 2035, half the growth in shale energy will come from outside the United States. BP expects China to overtake the United States as the biggest factor behind shale gas production growth by 2035, after U.S. shale resources reach their peak.

Far from losing heart, BP has actually grown more enthusiastic about shale since its previous report in 2013. Then BP believed U.S. tight oil would peter out at less than 4 million barrels a day by the end of the decade. Now, domestic tight oil is expected to rise to about double that by 2035.

“We’ve been repeatedly surprised by the strength of U.S. shale,” BP Chief Economist Spencer Dale said in a webcast on Wednesday.

While U.S. shale oil has declined by half a million barrels a day since April last year and continues to slump, Dale believes a rebound is on its way. “But as the oil market gradually rebalances, and prices eventually firm, we expect U.S. tight oil to increase by almost 4 million barrels a day … and account for almost 20 percent of total U.S. production (over the years),” Dale said.

USA has already taken a tremendous amount of pain, with more then 50 oil companies having gone bankrupt worldwide (many of them in America) and another 150 oil producers, in the U.S. and elsewhere, likely to be forced into bankruptcy if oil prices don’t recover, based on when their debt comes due and their financial health – according to Bob Fryklund, chief upstream strategist for IHS.

“This process of bankruptcy is needed to clean out the system, and then we can continue with the recovery,” Fryklund told Houston Chronicle. “It’s picking up.”

What’s more, even if the market recovers to levels where shale exploration becomes again profitable, the longer the downturn lasts, the more time it will take to bring production online. Unused equipment breaks down and redundant workforce might be difficult to re-employ at moment’s notice.

“Once we reach the point where the industry needs to start attracting and enlarging the labor pool significantly, that’s going to take time,” said Bill Herbert, an analyst at Simmons & Company International in Houston. “The ability to grow production significantly over time is still there because the resource base is still there, but the ability to grow over a short period of time is diminishing on a daily basis.”

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