North Sea oil industry 'close to collapse'

JoeCivvie

ADC
RIP
Nothing new, I used to recruit design staff for on-shore and off-shore projects in the late 70's. When the spot price of Brent crude dropped below US X (I can't remember the actual figure) all new development would stop and people would be laid off.
 
Treat it as a buying opportunity. Even if "only" 20% depressed, it's an easy win once the Saudi's change their political stance and allow the price to rise once more.

The more interesting question, to my mind, is WHY the Saudis are doing this. Is it to weaken Iran, to punish Russia for supporting Assad or a pre-emptive strike against the emerging fracking technology?
 
The missus does a lot of work with the oil and gas industry. She says it always ebbs and flows. And it does. It'll drop again, then will take a sharp rise all over again. She's predicted another rise will happen soon. She's normally right about this stuff.....it's very feckin annoying!
 
Are the Saudis just flexing a bit of muscle to remind the world who has the most oil?

It's countries like Venezuela and Nigeria who will suffer the most. And of course we can see the effect it is having on Russia. Things will straighten out before it gets much worse, because it's not in the Saudis interest to completely destroy the oil economy.

As a side, I bet Salmond is breathing a huge sigh of relief!
 
The more interesting question, to my mind, is WHY the Saudis are doing this. Is it to weaken Iran, to punish Russia for supporting Assad or a pre-emptive strike against the emerging fracking technology?
All of that but mainly to maintain market share. For sure they're using it politically but in the past when they've cut production they've felt that they have been shafted by OPEC.

The most likely reason for the Saud's refusing to cut production:
http://www.reuters.com/article/2014/10/14/us-saudi-oil-policy-analysis-idUSKCN0I229320141014
That it suites their local and strategic aims is a bonus which makes it more attractive.

Reckon they've thought about this long and hard for a year or so and it has all come together now so they've made their play.
 
Treat it as a buying opportunity. Even if "only" 20% depressed, it's an easy win once the Saudi's change their political stance and allow the price to rise once more.

The more interesting question, to my mind, is WHY the Saudis are doing this. Is it to weaken Iran, to punish Russia for supporting Assad or a pre-emptive strike against the emerging fracking technology?

All of the above.....
 
All of that but mainly to maintain market share. For sure they're using it politically but in the past when they've cut production they've felt that they have been shafted by OPEC.

Reckon they've thought about this long and hard for a year or so and it has all come together now so they've made their play.
The Saudis were negotiating with the Russians to include them in a deal for everyone to take a production cut, but the Russians turned down the offer. The Saudis were determined to not be the only one who cut back production and lose market share this time. Since the Russians are such a big producer, leaving them out meant that plans for coordinated cuts were doomed. I'm not sure the Saudis weren't just going through the motions though, as previous OPEC production cutbacks just resulted in the Saudis doing the cutting while everyone else only pretended to while pumping just as much as always.

The oil industry is cutting back investment world wide, not just in the North Sea. One pretty strong reason for this is they simply don't have the cash flow to fund the spending right now.

All resource industries tend to be boom and bust. Mining goes through cycles like this as well and are also seeing a downturn at this time.

Demand in China has really dropped, now that economic growth is down to "only" 7%. They're also going through a change in their economy where services rather than manufacturing and construction are becoming much more prominent. That means they will in future need fewer natural resources per unit of GDP growth, which has left a lot of excess capacity in resource industries.

Most sources that I've seen are predicting oil prices to average $70-80 per barrel next year as demand picks up on the US and the EU, and as high cost marginal producers shut down. The fracking industry in the US is particularly vulnerable, as they need continuous investment to keep production levels up. Oil reservoirs in places like Saudi Arabia tend to last a lot longer, so they can cut back on investment for years while making little difference to their production capacity.

However, oil prices have currently declined a lot further than most experts predicted, and some sources are talking about 18 to 24 months for the market to recover.
 

ACAB

LE
As I understand it OPEC are on board in order to shaft Fracking in the US, the production cost is average $80 pb. Once the investors pull the plug as it is no longer financially profitable OPEC will wang the price up again.
 
@terminal To my mind, you have quite succintly described the "WHAT" aspect.

The Saudis were negotiating with the Russians to include them in a deal for everyone to take a production cut, but the Russians turned down the offer. The Saudis were determined to not be the only one who cut back production and lose market share this time. Since the Russians are such a big producer, leaving them out meant that plans for coordinated cuts were doomed. I'm not sure the Saudis weren't just going through the motions though, as previous OPEC production cutbacks just resulted in the Saudis doing the cutting while everyone else only pretended to while pumping just as much as always.

The oil industry is cutting back investment world wide, not just in the North Sea. One pretty strong reason for this is they simply don't have the cash flow to fund the spending right now.

All resource industries tend to be boom and bust. Mining goes through cycles like this as well and are also seeing a downturn at this time.

Demand in China has really dropped, now that economic growth is down to "only" 7%. They're also going through a change in their economy where services rather than manufacturing and construction are becoming much more prominent. That means they will in future need fewer natural resources per unit of GDP growth, which has left a lot of excess capacity in resource industries.

Most sources that I've seen are predicting oil prices to average $70-80 per barrel next year as demand picks up on the US and the EU, and as high cost marginal producers shut down. The fracking industry in the US is particularly vulnerable, as they need continuous investment to keep production levels up. Oil reservoirs in places like Saudi Arabia tend to last a lot longer, so they can cut back on investment for years while making little difference to their production capacity.

However, oil prices have currently declined a lot further than most experts predicted, and some sources are talking about 18 to 24 months for the market to recover.

...however @ACAB has offered a "WHY" opinion with his post..

As I understand it OPEC are on board in order to shaft Fracking in the US, the production cost is average $80 pb. Once the investors pull the plug as it is no longer financially profitable OPEC will wang the price up again.
.

So, any other budding geo-strategists out there in Arrseland who have an opinion as to WHY the Saudis are acting as they are? "All of the above" isn't really an answer, @TheHatsRevenge, unless substantiated with a more comprehensive statement.
 
As I understand it OPEC are on board in order to shaft Fracking in the US, the production cost is average $80 pb. Once the investors pull the plug as it is no longer financially profitable OPEC will wang the price up again.


Fracking is much more expensive to extract when compared to traditional wells (both on and off shore) but is attracting a lot of investment because it offers a much quicker return, although a lower %, on a much lower initial investment than developing a new subsea field for example.

As for when the price will pick up again, fhark knows but I think we will need to see some of the more expensive producers (shale gas and, sadly for us, some North Sea producers) go out of business or shut down ops for a period of time as I can't see demand increasing rapidly any time soon.


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@creppello - because they can? They have significant competitive advantage; volume and very low lifting costs. Additionally they don't have "the street" on their back.

UK industry: I think this time will be different. This is not the usual ebb and flow. Why?
1) in general the industry needs massive process reform to reduce costs. The traditional model of squeezing supply chain doesn't work and won't again. There's no where for the supply chain to go due to market pressures.
2) hire fire cycles are fine if you can hire people again - the industry can't man itself as it is.
3) chronic lack of strategic management at UK gov level
4) we can't get away from the fact we are a very mature basin - at some point the costs just get too high - see point 1 for longevity options.
 

NSP

LE
Treat it as a buying opportunity. Even if "only" 20% depressed, it's an easy win once the Saudi's change their political stance and allow the price to rise once more.

The more interesting question, to my mind, is WHY the Saudis are doing this. Is it to weaken Iran, to punish Russia for supporting Assad or a pre-emptive strike against the emerging fracking technology?
I've been in the industry for seventeen years now. There was a similar slump just after I started and then a smaller one about seven years later. There's definitely a cycle to it, so this one is a couple of years late, as it were.

From my point of view as a contractor it is a double-edged sword. As the oil companies cut investment and inspection to the bare legal minimum so the survey companies cull their staff. Stiff shit for them but when the next boom hits as the price goes up and the producers play catch-up on inspections and explorations the survey companies suddenly have more work than bodies, as the people they laid off have found new jobs elsewhere having seen little point trying their hand at freelancing in a dead market, and so they 'phone the agencies who then gouge the dayrate up even higher and ring the 'phones of the likes of me off of the hook. The other side of the coin is you need to look ahead and bank your cash to live on during the slump. The eighteen-month prediction in the article is a bit strong, though. Fingers crossed for Buggrit's missus still being clairvoyant, then!!

As to the Saudi's driving the price down. I can see two possible scenarios there, one slightly tinfoil hattish. One, the bin Saud's best buddies, the Yanks, have had a conflab and decided it's the best way to knacker Putin and get him out of Ukraine whilst curbing any other expansionist ideas he might have and the Yanks will quietly prop up their frackers. The added bonus is it will also reduce Iranian revenues, too.

Two, [TFH] even though the bulk of their output is exported elsewhere, the Saudi's don't like the Yanks moving towards hydrocarbon independence through fracking, with enough reserves that the Septics might start selling it in competition with the Saudi's to help rescue the US economy, and so have got together with their OPEC mates and driven the price down below the cost of extracting a fracked barrel. OPEC also includes Iran and Venezuela, neither of which like the US very much.[/TFH]

I must be one of the few people in the country who didn't really mind petrol hitting £1.30/l.
 
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@terminal To my mind, you have quite succintly described the "WHAT" aspect.

...however @ACAB has offered a "WHY" opinion with his post..

So, any other budding geo-strategists out there in Arrseland who have an opinion as to WHY the Saudis are acting as they are? "All of the above" isn't really an answer, @TheHatsRevenge, unless substantiated with a more comprehensive statement.
The "why" is pretty much as ACAB has said. The oil industry spokesmen here (Canada) have been saying that it's an attempt by Saudi Arabia to maintain market share by driving the higher cost producers (especially the oil frackers in the US) out of business, and to make them more cautious of making big investments in future.

This is mainly driven by Saudi Arabia, not the rest of OPEC. Venezuela and Nigeria are not happy, since they don't have the big financial reserves that Saudi Arabia has to carry them through.

Traditionally, when OPEC has cut back prices to maintain production, Saudi Arabia has been the main one to cut, while most of the rest have cheated and not gone through with production cuts. The Saudis have decided that enough is enough, and they are going to make this as painful as possible for everyone else to drive home a very sharp lesson.

Low prices also crimp the cash flow of oil companies, cutting the amount of money they have for investment. Saudi oil fields can go for a number of years without much new investment without hurting their production capacity. Fracking in particular requires continuous new investment because the fracked wells run out very quickly (production tails off dramatically after a year).

High cost conventional wells (e.g. offshore) and tar sands don't have the problem of rapid tail off of production, but low prices will limit new investment and therefor new capacity. The Saudis are counting on rising demand to gradually lift prices again.

There's another angle which I haven't seen discussed, so I don't know how much it plays a part. Iraq was planning on big investments to raise output very significantly. This will cut in to their cash flow (already strained by the war) and perhaps convince them to shelve those plans.
 
Fracking is much more expensive to extract when compared to traditional wells (both on and off shore) but is attracting a lot of investment because it offers a much quicker return, although a lower %, on a much lower initial investment than developing a new subsea field for example.
Fracking is also popular because it's something that smaller oil companies can get into. It wasn't the oil majors that pioneered the technology and drilled all the wells. It was the companies that were too small to go abroad or offshore. A number of those companies are expected to go under, and the more profitable assets will get snapped up by the oil majors.
 

chrisg46

LE
Book Reviewer
I did read somewhere that we hit "peak oil" some time ago - peak oil meaning that all, or most of the oil that can be got efficiently has been got, and all that remains is in the most inhospitable parts of the world and will therefore be more expensive to access..
This might have been on a tin foil website....
 
Well with any luck, the pound will weaken, thus making exports cheaper on the international stage, and the oil economy can be dispensed with in the UK. Fewer chavs going on holiday to Disney will keep the money in the UK (albeit to be spent on huge TVs at ASDA) and the dross out of Florida. Parochially, it will also make my child support costs more affordable. So bring it on.
 

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