Oil’s Slow Motion Trainwreck
February 11, 2016
With 200 nations having declared that the age of fossil fuels is coming to an end, the costs of using less energy thru efficiency almost zero, and the price of renewable energy continuing precipitous drops – the message to markets is becoming increasingly clear.
The fossil fuel industry has entered a period of instability and turbulence that will precede a general stagnation, and in coming decades, a contraction.
MIDLAND, Tex. – On the 15th floor of an office tower in Midland looms a five-foot-long trophy black bear, shot by the son of an executive at Caza Oil & Gas.
But it is Caza that has recently fallen prey to a different kind of predator stalking the Texas oil patch: too much debt.
While crude prices have dropped more than 70 percent over the last 20 months, a reckoning in the nation’s vast oil industry has only just begun. Until recently, companies were able to ride out the slump using hedges to sell their oil for higher than the low market prices.
In recent months, however, most of those hedges expired, leaving a number of oil companies low on cash and unable to pay their debt. More broadly, energy executives and their lenders are realizing that a recovery in oil prices is at least a year away, too long for many companies to hold out.
Energy executives and their bankers are bracing for a prolonged downturn that could remake the energy industry in a way not seen since the turmoil of the late 1990s gave rise to mega-mergers like Exxon Mobil.
If prices hold at such low levels — oil traded near $28 on Tuesday — as many as 150 oil and gas companies could file for bankruptcy, according to IHS, an energy research firm.
While that represents a relatively small slice of the overall industry, there are hundreds of other companies that had piled on debt to grow from tiny start-ups into significant players in the nation’s shale oil boom. Now they are likely to be acquired or their assets sold off. As much as a third of the oil industry could be consolidated as a result of the downturn, according to one estimate.
The world will store unwanted oil for most of 2016 as declines in U.S. output take time and OPEC is unlikely to cut a deal with other producers to reduce ballooning output, the International Energy Agency said.
The agency, which coordinates energy policies of industrialised countries, said that while it did not believe oil prices could follow some of the most extreme forecasts and fall to as low as $10 per barrel, it was equally hard to see how they could rise significantly from current levels.
Oil prices collapsed over the past 18 months to below $30 a barrel from as high as $115 as OPEC opened its taps to drive higher-cost producers such as U.S. shale companies out of the market.
Low oil prices have spurred global demand but it was not enough to absorb all crude produced. As a result, unwanted oil went into storage, leading to record global stockpiles of over 3 billion barrels.
U.S. shale oil output has started to decline because of low prices and OPEC has said it sees the market rebalancing sometime later in 2016 when demand finally meets supply.
But the IEA said supply may still exceed demand throughout the whole of 2016 and added it saw non-OPEC output falling by just 0.6 million bpd in 2016.
“The number could be higher of course and many senior international oil company figures have said so but there is a lingering feeling that the big fall-off in production from U.S. shale producers is taking an awful long time to happen. Perhaps resilience still has some way to go,” the IEA said.
The agency also said it saw the dollar remaining strong as it benefits from its safe-haven status, meaning more downward pressure on oil prices.
A Canadian company’s efforts to produce oil sands in the United States are not dead, but thanks to crude oil prices that have dipped below $30 per barrel, they may be in critical condition.
U.S. Oil Sands, the Alberta-based company working on a project slated to produce crude oil from oil sands on public lands in Utah, is slowing its PR Spring oil sands project to nearly a halt amid a lack of labor and low oil prices.
Tar sands are rare in the U.S., but companies have been trying for decades to produce tar sands oil in eastern Utah, where the country’s largest deposits are locked deep beneath the desert. With oil prices dropping to below $30 per barrel, however, the outlook for U.S. Tar Sands’ operations is uncertain.
Snarr said crude oil prices will matter the most later this year after construction at PR Spring is complete. Oil prices need to be between $40 and $45 per barrel for the project to break even, and U.S. Oil Sands is confident prices will average higher than that by the end of 2016, he said, citing U.S. Energy Information Administration data.
But the EIA’s latest oil price forecast, released Tuesday, says that oil prices are likely to average $38 per barrel this year, swinging wildly from $21 to $58 per barrel throughout the year.
“Oil companies everywhere are slashing projects as oil prices remain depressed,” said Jennifer Spinti, an associate chemical engineering professor focusing on tar sands and other unconventional fuels at the University of Utah. “The fact that an exploratory, capital-intensive project gets shut down is not surprising, especially if key contractors have backed out.”
North Dakota’s oil boom has gone bust, leaving the state government with a gaping $1 billion hole in its two-year budget.
Plunging oil prices are a massive problem for a tiny state like North Dakota. The shortfall, released in new budget estimates on Monday, represents more than 20% of its tax revenues for the budget cycle that started last July. The state is scrambling to come up with spending cuts, and dipping into savings in order to keep its government up and running.
More than 200 oil rigs were up and running in North Dakota during the boom times a few years ago. But that figure has dwindled to just 44 rigs operating today, and that’s been a huge drain on the state’s sales tax revenue.
WILLISTON, N.D. — The “man camps” sprang up from the prairie, rows of trailers and modular steel boxes that housed thousands of workers chasing their fortunes in North Dakota’s oil fields. But these days, the man camps are missing something: men.
Roughly eight years ago, at the peak of the last recession, oil drilling began to transform these remote corners of the plains into an economic beacon, attracting billions of dollars in new investments and thousands of workers in search of good-paying jobs and an escape from America’s economic pain. But now, as oil prices have skidded to $30 a barrel, new drilling has dried up here, and the flood of wealth and workers is ebbing.
“We’re overbuilt,” said Marcus Jundt, a businessman who followed the boom to Williston and owns several restaurants here, including the Williston Brewing Company, the place that serves the rib-eyes and brownies. “We have too many hotel rooms, too many apartments, too many restaurants. People are going to go broke. People are going to lose their jobs. It’s going to be painful.”
The slowdown has hammered governments across North Dakota, forcing some to cut spending or dip into reserves. Williston expects $151 million in revenue this year, down about 23 percent from two years ago. Real estate prices have come down, giving a welcome break to many renters, but agents say there is a glut of about 300 to 400 homes for sale, with more being built. At the State Capitol, Gov. Jack Dalrymple last Monday ordered 4 percent budget cuts and tapped $497 million from a rainy-day fund to close a $1 billion budget shortfall.
Rural towns that spent the past years building, spending and taking on debt are now facing grim realities. Williston, for one, has taken on $215 million in debt, and governments around the region are spending to build infrastructure, including a sewer plant and recreation center for the growing population.