Jobs cuts and cancelled projects mean that oil prices could bounce back harder and faster than before

Is the return of $100 oil just around the corner?

Just over a year ago, Peter Voser, in one of his last speeches as chief executive of Royal Dutch Shell, warned about the catastrophic consequences that could arise from the energy industry failing to invest in providing the world with enough oil and gas to meet global demand.

Mr Voser told an audience of senior oil and gas industry executives gathered in London:

“Our first priority must be to invest heavily in new supplies, and to maintain it through economic and political turbulence. Failing to do so would be a sure path to another crunch and major price volatility.”

On the day Mr Voser spoke in London a barrel of Brent crude was trading at $107 per barrel, the same barrel is now worth under $50.

It can take a decade to discover a major oil field and bring it into production, and most oil majors have been basing their long-term forecasts for such projects on the assumption of $80 oil.

Failure to ride out the bumps in oil prices along the way can lead to even bigger shortfalls in supply further down the track. The risk in the current market is that oil companies will cut back too hard, too fast, setting the world’s consumers up for another shock that will see the price of a barrel of crude trade well above $100.

Instead of heeding Mr Voser’s advice and forging ahead with new investments to boost capacity by pushing the search for new resources in the frontiers of the Arctic and offshore Africa, oil and gas companies are now looking inwards by aggressively reining in capital expenditure.

Oil majors like Shell are forensically evaluating their project pipeline to filter out schemes that may not make sense in a supposedly new era of low oil prices, which some pessimistic pundits have predicted could fall to as low as $20 per barrel. The Anglo-Dutch company and its partner Qatar Petroleum this week shelved its first major development this year when it decided not to go ahead with a $6.5bn petrochemicals plant near Doha. Its reason for cancelling the project was simple: the scheme, which probably started as a concept in a world of $100 oil, no longer makes commercial sense with the current economic circumstances weighing on the energy industry.

More energy projects are expected to be placed on ice as companies prioritise short-term shareholder returns ahead of long-term strategic planning to meet future demand. According to estimates made by Wood MacKenzie, in Europe and the UK around £55bn-worth of oil and gas developments are under threat while prices remain at their current levels. Most of these projects are centred around the North Sea, one of the world’s most expensive operating areas.

The first wave of cutbacks spreading across the industry started to hit the UK this week. BP announced plans to shed 300 workers from its North Sea operations, where the company employs 3,500 people. The BP announcement was followed by news that US oil giant ConocoPhillips plans to trim 230 staff from its UK workforce of 1,400 people. These cuts followed similar moves in the North Sea by Chevron and Shell last year. Oil and gas contractor Schlumberger, which has a significant presence in the UK, then said it will have to cut 9,000 jobs to remain profitable.

More jobs cuts are expected across the industry both among engineering contractors and operating companies. The Telegraph revealed this week that Tullow Oil plans to shrink its number of staff as the company said that it would have to write off $2.2bn as a direct result of the oil price collapse. Oil industry veteran Sir Ian Wood has warned that 15,000 jobs could go in the UK’s offshore oil and gas industry.

The problem is that the current fall in oil prices has been artificially engineered by Saudi Arabia and its close allies within the Organisation of the Petroleum Exporting Countries (Opec). They are determined to win back lost market share from US shale oil drillers at any cost, and are keeping their spigots open with the knowledge that prices will whiplash back even higher. The latest data released by the International Energy Agency (IEA) and Opec’s research office prove that this strategy is already working after only a few months.

The IEA now predicts that oil supplies from producers outside Opec will grow at a much slower rate this year than it had previously forecast. The Paris-based watchdog has revised down its estimate by 350,000 barrels barrels per day (bpd), which is roughly equivalent to six “Elephant” scale oil fields worth of output. It now expects non-Opec countries to produce an additional 950,000 bpd this year, bringing total production excluding the cartel to 57.5m bpd in 2015. Opec’s secretariat has also made a similar call and now sees US frackers under severe pressure from falling prices.

In the current rush to predict a floor to the oil prices it is easy to forget that over the next 25 years rising populations and economic growth will require significantly more energy. Demand for energy will double over the next 50 years but the IEA still forecasts that crude oil output from wells producing in 2011 will have dropped by almost two-thirds by 2035. Opec itself expects oil prices to be somewhere in the region of $177 per barrel by 2040 as the world will require 111m bpd of crude, up from just over 91m bpd at present.

Irrespective of the final outcome of Opec’s oil price war with US shale drillers in North Dakota and Texas, the next 20 years will continue to see a historic shift in the world’s economy. This will see billions of people in China, India, Southeast Asia and possibly Africa emerge from poverty, increasing demand on the world’s finite resources.

Don’t get too used to the price of petrol at pumps falling; it could be shooting up again all too soon.

Source: Telegraph