Arabia has insisted that OPEC will
keep oil production at 30 million barrels per day no matter the cost
of crude, but even the world's biggest oil exporter has a limit, the
CEO of Breitling Energy told CNBC on Friday.
think the panic button is at $40," Chris Faulkner said in
"They can say whatever they want, but at the end of the day,
they can't just bleed out money forever."
deficit for 2015 projected to reach $50 billion—the official figure
is $39 billion—the country's leaders will face challenges in
maintaining its subsidies, he said. Young people will not stand for
planned wage cuts, either, he added.
crude and West Texas Intermediate (WTI) fell 2 and 3.3 percent
respectively to start the week and Saudi
Arabia is prepared to go much lower in a bid to trim the fat. Oil
Minister Ali al-Naimi said as
much in an interview with the Middle East Economic Survey on Monday.
Naimi defended the Saudi position and made clear that OPEC nations
will not cut production at any price. His comments dismiss any notion
of collusion with the United States and spell trouble for producers
its November meeting, OPEC production has remained relatively steady
while trending upward. Libya
has had a few slip-ups and Venezuelan production is hurting, but the
12-member cartel exceeded their
collective target for the sixth straight month, pumping 30.56 million
barrels per day (mbpd). The price however, has fallen roughly 20
percent in that period and shows no sign of returning to its June
its part, Saudi Arabia accounts for nearly one-third of current OPEC
production, orapproximately 9.86
mbpd in the month of November. Still,
production capacity is nearing 12
mbpd and Naimi suggested the oil-rich nation might put it to use
sooner rather than later. It’s all part of a plan to demonstrate
that high-efficiency producing countries deserve the greatest market
share – an idea Naimi describes as the operative principle of all
capitalist countries. OPEC produces around 40 percent of global
output, but non-OPEC production is projected to
grow 2.3 percent next year after a 3.5 percent expansion this year.
argument obviously ignores the significant geopolitical factors
present in oil trade, but is nonetheless a worthy defense. Among
the non-OPEC low-efficiency producers, Saudi Arabia aims to squeeze
out Russia – who they mentioned specifically – and particular
plays across North America, where non-OPEC growth has been most
Russia, President Vladimir Putin and Rosneft head Igor Sechin project
calm despite the downward march of nearly every significant indicator
of economic health. As
the government searches for solutions to the ruble’s disastrous
final quarter, Russia’s five leading oil exporters are
under orders to
sell part of their foreign exchange revenues in the next few months.
The EIA predicts Eurasian
production will see a drop of approximately 100,000 barrels per day
(bpd) into next year. Energy Minister Alexander Novak has yet to
revise his production outlook, but admits oil
exports will decline by 4.3 percent in 2015.
North America, efficiency is not really the name of the game. In
2013, US shale accountedfor
approximately 20 percent of world oil investment while supplying only
4 percent of global production – numbers Naimi would deem unworthy
of a market share, even if that market is domestic. The side effects
of oil’s decline are less evident to date, but that is not to say
they have been completely absent.
Despite overall growth, the EIA has
lowered its expectation for US production in 2015 by 100,000 bpd.
Layoffs are already underway at
Halliburton and more areexpected elsewhere.
In all, US exploration and production spending is projected to
fall by more than 35 percent if WTI averages $65 per barrel or below
of the border, Canada believes it can weather the storm. The oil
sands, while more capital intensive up front, operate on much longer
timelines than shale projects and those already online
can breakeven at
$40 per barrel. Even so, a handful of Canadian oil companies
are slashing their
2015 capital budgets and reducing output forecasts.
unclear whether or not OPEC and Saudi Oil Minister Naimi are simply
trying to put a scare into markets long enough to defend their market
share – and if they can even keep up in this game of chicken – but
the scare is there and the advantage is theirs.
Cutbacks Mean Service Companies Forced To Scrap Rigs
the decline in oil prices, the U.S. is expected to boost production
by 300,000 barrels per day in 2015,
up to a yearly average of about 9.3 million barrels per day,
according to the most recent government estimates.
the number of oil and gas rigs in operation is already beginning to
the week ending in December 19, the
rig count dropped
to 1,875 active rigs, down from 1,893 a week earlier. The fall off is
an indication that exploration companies are beginning to pare back
investments. Pulling back on drilling may result in a lower future
production, which could hurt the growth prospects of some oil firms.
the slowdown in drilling activity is having a much more immediate and
acute effect on a separate set of companies – those supplying the
oil contractors such as Halliburton or Transocean have seen their
share prices tank worse than exploration companies because their
revenue comes from being paid to drill, not necessarily from oil
production after wells are completed.
That means that when drilling
slumps, their profits take an immediate hit. Even worse, exploration
companies may see rising profits from existing production as oil
prices rebound, but drilling service companies don’t benefit if
their drilling contracts had been put on hold or cancelled.
problem is compounded by the fact that a slew of new
offshore oil rigs are
set to come into operation – an estimated 200 over the next six
these new rigs will mean there could be a surplus of about 140 rigs,
meaning offshore oil contractors will have to scrap that many to
bring new ones online.
oil prices stay where they are now – in the neighborhood of $60 per
barrel – a deep contraction in shipping rig supply will be
2015, spending on offshore exploration may be slashed by
15 percent, which will mean taking a deep knife to companies
providing rigs and contracting. Transocean has already announced that
it is idling seven deepwater rigs, along with several other
the shakeout may take some time because offshore contractors can
resort to using older rigs in order to bring down the rates they are
charging, essential to maintaining market share. In order to entice
exploration companies to keep up the drilling frenzy, older ships can
keep costs lower.
that may not be a tenable prospect since offshore contractors will
feel compelled to put the new and more state-of-the-art rigs into
operation. That will force companies with older fleets to start
discarding the most dated drilling rigs.
already took a $2.6 billion impairment
the third quarter of this year, due to a “decline in the market
valuation of the company’s contract drilling services business.”
By scrapping more ships, it expects to write down at least $240
million in the fourth quarter. More may be in the offing –
Transocean released an update on
the status of its fleet in mid-December, confirming its plans to
scrap 11 ships. The statement also added that “additional rigs may
be identified as candidates for scrapping.”
it is Seadrill, another offshore drilling services company, that has
taking the worst of the oil price downturn. The company decided
its dividend in
November amid falling oil prices, a move that sent its share price
tumbling downwards. Seadrill has seen its shares lose almost 75
percent of their value since July.
with the rest of the industry, the fortunes of offshore drilling
services companies depends on the price of oil. However, unlike the
oil majors, which have more diversified interests both upstream and
downstream, offshore contractors take it on the chin first when oil
prices go down.