Turbulence as oil price war dislocates markets

Oil is acting up. The fall in its price has been more abrupt and precipitous than anyone could foresee. Lower oil prices are good for industry and consumers, but the market does not like surprises, whether good or bad, and there is no denying that the unexpected fall has caused widespread dislocation. This article examines the strange new oil and gas landscape and asks what has changed fundamentally and how suppliers can best position themselves.

By James Chater

The Sleipner A platform in the North Sea. Photo: Øyvind Hagen / Statoil.

[ Oil & Gas ]

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First money, now oilIn a race to the bottom, several countries have been cutting their interest rates in an effort to stimulate demand and grow their economy. Some countries have even introduced negative interest rates, so that costumers have to pay the bank to hold a deposit account! Normally, when interest rates are this low, this would trigger massive inflation. But demand is so weak that this has not happened yet, with few exceptions. And now it’s oil’s turn. Economic growth for 2014 has turned out to be lower than it was projected to be two or three years back, when the investment decisions affecting today’s projects were made. At the same time, oil and gas output has increased thanks to US shale. The resulting supply-demand imbalance triggered a drop of over 50% in the oil price, taking the WTI price from USD 110 a barrel in mid-2014 to USD 48 per barrel in January; now it is around 50. Normally, OPEC would have cut production to correct the imbalance, but these are not normal times. To maintain market share (at any price!) and probably for political reasons as well, the Saudis vetoed a production cut at the OPEC meeting in November. Oil producers are hurting, but so too are the Saudis, who need oil at USD 93 per barrel in order to balance their books (other OPEC members need more!). Who will blink first?

Effect on oil producersMeanwhile there is pain down on the oil patch, and no one can say for sure how long it will last. The oil glut is squeezing producers of shale oil and gas (mainly concentrated in the United States), of heavy oil (Venezuela) and of deepwater oil (Brazil). Drilling in deepwater or shale is scarcely profitable with oil at USD 50 (table). Small, specialized drilling companies are suffering the

most, but large, vertically integrated companies, especially those with refining or petrochemical interests, should survive. Oil service companies are laying off employees. Halliburton, Baker Hughes (recently acquired by Halliburton), Schlumberger and Weatherford are all cutting their work force, while globally as many as 100,000 workers are thought to have lost their jobs. Even in Norway, companies are cutting oil projects by 14%, and 10% of oil-sector employees – about 10,000 people – face redundancy. What of the future? Current projects are likely to be unaffected, as it is cheaper to operate wells at a slight loss (at least for a time) than decommission them. It is on future projects that the axe will fall, and some petroleum companies –

among them ConocoPhillips and Shell – have already announced cutbacks in exploration & development. Fewer projects will be planned or initiated until producers can be sure of a higher price, and this will happen only after demand once again surges ahead of supply. And this is where oil differs from money. Whereas governments can print as much money as they please, trashing their currency for short-term political gain, the amount of oil in the world is finite, meaning that the current imbalance will correct itself, sooner or later, though we do not know when. The danger lies in over-correction, that there will then be too few oil companies, workers and projects, leading to shortages and high prices.

The Johan Sverdrup project. Photo: Øyvind Hagen / Statoil ASA

Table. Price below which oil production is unprofitable (US dollars per barrel of Brent crude)

Oil type or region USD

Arctic 78

Canadian oil sands 74

US shale (Bakken and Eagle Ford)

70

Middle East <30

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pipeline has been delayed indefinitely. And many must be wondering whether Shell will feel confident enough to start drilling in the Arctic this summer, assuming it gets permission. (Economic factors apart, there is considerable pressure from environmentalists.) That said, the “low-hanging fruit”, whether in Saudi Arabia or elsewhere, is fast depleting, so the expertise acquired in tight oil should stand North America in good stead in the long run, placing them ahead of their competitors. One way or another, North America will be self-sufficient in oil before too long. It is also only a matter of time before the current ban on US exports is lifted. The need to cut costs is driving the search for more efficient technologies. A word one hears more and more frequently is “refracking”. Rather than moving to a new well, producers are saving money by giving fracked wells a second pass. This can be done at about 25% of the cost of developing as new one and, as technology evolves, costs could come down even further (see box).Recent developments in Brazil make a stark contrast. Petrobras, apart from being mired in a kickback scandal, finds it cannot develop its recent oil finds economically with oil prices this low. So on 26 February 2015 it announced divestments amounting to USD 13.7 billion. This did not prevent it from announcing a new monthly oil production record for January, of 669 thousand bpd for the Campos and Santos Basins pre-salt basins. (This output does not include the natural gas volume.) In addition, it is

Uncertainty for suppliersSo we are faced with a volatile supply-and-demand yo-yo, in which dearth of demand leads to reduced supply, after which a dearth of projects will trigger a resurgence in oil prices. These wild oscillations make it difficult for suppliers to anticipate the demand for materials and equipment. How many valves, pipes etc. will be required in oil and gas fields one year from now? How many oil companies will be left to buy them? Nobody really knows.We can, however, provide a few pointers. The glove that the Saudis have thrown down has the word “costs” clearly written on it. Producers will turn to technology, especially automation and robotics, to replace the workers they have laid off. For instance, unmanned wellhead platforms have already been used on the Danish and Dutch continental shelves, and will soon be used by Statoil on the Oseberg Future development. Rather than starting new projects, companies will tweak existing projects to improve productivity and cut costs. Storage will also assume greater importance, as oil producers need somewhere to put their excess production.

The AmericasThe United States is one of the countries most affected by the drop in oil prices. Small shale producers, which have borrowed heavily to finance expensive well drills, are feeling the pinch. Given current circumstances, perhaps it is a good thing that the Keystone XL

RefrackingAt a time of falling prices, refracking existing wells rather than drilling new ones is a natural way to save money. As many as 50,000 wells may be candidates for refracking. Companies are improving their ability to pump fracturing fluid down horizontal wells and identify the spots that need to be blasted. In 2014, Consol Energy employed Halliburton to refrack some natural gas wells drilled in 2009. Halliburton shot more holes in them and produced more gas than the wells produced before. Other companies using similar procedures are Marathon Oil (13 re-fractured wells completed), EQT and Pioneer Natural Resources (re-fracking well in the Eagle Ford basin). Crescent Point Energy will begin refracturing its Alberta Bakken wells in 2015.

Russian gas pipelines.

A shale well in cross section. The shaded blue areas are old fracks, plugged by a biodegradable material produced by Halliburton that seals off existing pathways. That lets pressure build in new areas, creating other pathways for gas to travel to the wellbore. Image: Halliburton.

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acquired Petrobras’ assets in Peru, and CNOOC has a portfolio as extensive and varied as CNCP. In 2013 it acquired Nexan and entered the UK North Sea.

Sino-Russian gas dealsChina is not greatly endowed with oil and gas resources, so it is natural that it should turn to its resource-rich neighbour to the north to cater for its demand, a process that tension between Russia and the West will merely accelerate. Russia has been exporting to China for quite a few years, and the process has recently been stepped up with the signing of two important contracts. On 21 May, CNCP signed a 30-year deal with Gazprom that will see 38 billion cu m of gas a year go to China between 2018 and 2047. On 9 November CNCP signed a second agreement with Gazprom for gas imports along a more eastern route. Lower prices mean that the final details have yet to be worked out, but Gazprom hopes to ship an additional 90 billion cu m of gas a year to China. This development will lessen its dependence on European markets. In response to sanctions, Russia is reducing its dependence on western markets. The Russia-China energy block provides an eastern counterpoise to the Canada-USA block in the west.

Stainless steelIn recent years it appears that oil producers are depending more and Welding on a Gazprom pipeline.

The Christina Lake oil sands project is located around 75 miles south of Fort McMurray, Alberta, Canada. Currently, there are five producing phases at Christina Lake, of which this photo shows the last, Phase E. The project is operated by the FCCL Partnership, a joint venture between ConocoPhillips and Cenovus Energy.

using an array of advanced technologies to extract oil at great depth. These include riser-free drilling, nanoparticles to facilitate drainage of oil from rocks, autonomous underwater vehicles and installation of separators on the seabed, which in some cases avoids the need for platforms.Low oil prices are also impacting oil sands projects, perhaps even to a greater extent than shale oil and gas. Total, Statoil and Cenovus Energy have all postponed projects; now Shell has shelved its Pierre River project in Alberta, Canada, preferring to concentrate on boosting the profitability of its existing operations.

Far EastA measure of how the world has changed is the growing importance of China as a market. There, oil and gas companies have been diligently buying up assets all over the globe. The national petroleum company CNCP has operations in 37 countries, in Africa, the Americas, Europe, Central Asia, Russia and Australia. In the last few months it has signed agreements in Russia, South Sudan, Myanmar and Australia, where it has acquired Arrow Energy. Its affiliate, PetroChina, has

Fracking bombsThis April marks the 150th anniversary of the assassination of Abraham Lincoln. The culprit, John Wilkes Booth, was a successful actor and failed oilman. After investing in an oil well in Pennsylvania, in an effort to boost its yield, he detonated explosives inside the well, thereby wrecking it. This was shortly before the assassination took place. If this early attempt at fracking had not been botched, Booth may have thought twice before shooting the president. In 1967 a nuclear bomb was detonated underground near Farmington, New Mexico. The explosion was part of a programme to see if nuclear bombs could be used to stimulate the release of natural gas locked in shale deposits. The experiment was judged a technical failure, and concerns were raised over radioactive contamination. Today’s technology is better, by any standards.

[ Oil & Gas ]

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more on duplex, especially super duplex. The reasons behind this trend include corrosion resistance, weight saving and price stability (lower alloy costs). Here are a few recent orders:

• IPP Scomark Engineering Ltd completed a high-pressure manifold made of hipped super duplex for Total’s Martin Linge field in the Norwegian North Sea.

• Outokumpu won a contract to deliver 22,000 tonnes of duplex 2205 to a natural gas field project in Oman, the largest duplex contract in the company’s history.

• Technip Umbilicals has awarded Vallourec a contract for Total’s Edradour project in the UK North Sea. Part of this order consists of super duplex welded tubes for umbilicals.

• Civmec has been awarded a contract by Technip in Australia for 68 subsea jumper spools made of Inconel clad pipe, super duplex and carbon steel.

• Subsea 7 and Butting have concluded an agreement on the supply of metallurgically clad, mechanically lined, duplex and super duplex pipes. They are being used on an offshore project in Brazil.

TitaniumBecause it is becoming cheaper to process and fabricate, the use of titanium in offshore oil and gas could increase. Topside, it has long been

Premier Hytemp is to invest USD 20 million in its second manufacturing facility in Singapore.

Sourceswww.bloomberg.com/news/articles/2015-02-10/drillers-take-second-crack-at-fracking-wells-to-cut-cost-energy; http://oilandenergyinvestor.com/2015/02/saudis-will-regret-big-oil-bet/#deeplink; http://powersource.post-gazette.com; www.infomine.com; www.norsktitanium.no ; www.timet.com.

About the authorJames Chater (D.Phil.) was born and educated in the UK. He has also lived and worked in the United States, Canada and the Netherlands. From 1986 to 1997 he worked for the record company Philips Classics in Baarn, the Netherlands. He then worked as Editor for KCI Publications from 2000 to 2008. In 2008 James moved to France, where he lives with his two children and works as a freelance journalist. James researches and writes feature articles for KCI publishing and is a regular contributor to Stainless Steel World magazine. His hobbies include chess and music. James can be contacted at j.chater@kci-world.com.

Gazprom’s Chayandinskoye oil, gas and condensate field. This field will feed the Yakutia gas production centre, which will supply gas to China and the Russian Far East via the Power of Siberia gas transmission system.

used in heat exchangers, fire protection systems and chemical treatment lines. As wells get deeper, we could see more use of titanium in risers and stress joints. Other application include the tooling components of Remotely Operated Vehicles (ROVs) and seismic equipment used in exploration. In applications where pressures and temperatures are too high even for super duplex, titanium is often a viable alternative because of its high yield strength and resistance to corrosion and cracking.