Energy companies are starting to feel the pinch from plunging oil prices, although production is expected to keep rising at least in the short term.
With prices for Brent crude dipping below $50 per barrel for the first time in nearly six years, companies are idling their rigs and shifting resources to more lucrative shale regions in North Dakota and Texas as they make tough choices about how, where and whether to spend cash.
Drilling in tight-rock formations in shale is more expensive than the conventional wells prevalent in other oil-producing nations, and prices at current levels are unsustainable for many firms. The more prolific shale regions — the Bakken in North Dakota and Montana, the Permian and Eagle Ford in Texas — offer the best bets to make a profit or to simply break even.
Continental Resources, the company that led the way in the lucrative Bakken shale formation, announced in December it would cut capital spending almost in half to $2.7 billion, from an original projection of $5.2 billion — though it forecast a production increase between 16 and 20 percent. ConocoPhillips announced it would curb spending by 20 percent, down to $13.5 billion.
“We are setting our 2015 capital budget at a level that we believe is prudent given the current environment,” ConocoPhillips CEO Ryan Lance said.
U.S. production is expected to hit 9.3 million barrels per day this year, according to the U.S. Energy Information Administration. That’s more than the U.S. produced in 2014, but less than the EIA’s original projection of 9.5 million barrels a day, showing that the low prices are taking a toll.
“Lower [capital expenditures] will slow down the rate of growth of production. I think it’s unwise to say it will go negative,” Edward Morse, global head of commodities research at Citigroup, said at a recent Washington event.
The drag is also hitting small- and medium-sized businesses. In Oklahoma, drilling firm Helmerich & Payne said it would take between 40 and 50 of its advanced rigs off the market because prices are too low. As of Sept. 30, the firm operated 329 U.S. land rigs. Concho Resources said it would slash spending from $3 billion to $2 billion.
Companies that provide services to drillers will feel the pinch more acutely, as cuts in exploration and drilling new wells translates to fewer opportunities for businesses that specialize in seismic imaging to find oil deposits and preparing wells.
“That filters right on through the oil-services companies,” Tom Watters, an oil and gas sector analyst with Standard & Poor’s, said in a recent interview. “Their top lines are going to be affected right away.”
But spending cuts don’t mean it’s time to panic, Morse said. He noted that production will continue to rise in the first six months because companies will complete certain wells, which can be done cheaply, and many companies still have rigs under contract.
“The momentum will continue that rate of growth for a long time, and it may surprise those that are testing the resiliency of the system,” Morse said.
Several factors have contributed to the drop in oil, which cost more than $100 per barrel in July. Chiefly, the culprits are surging U.S. production, a decision by the Organization of Petroleum Exporting Countries to keep the spigot on, and sagging global demand as other major economies lag.
Saudi Arabia largely drove OPEC’s November decision to maintain output, a move meant to preserve market share from U.S. competitors. With several hundred billion dollars in foreign exchange reserves, it was a choice Saudi Arabia could afford to make to ward off the world’s second-largest oil producer — second only to the House of Saud — though it upset countries such as Russia and Venezuela that rely on high energy prices to fund their governments.
The cheap oil is helping U.S. consumers through low pump prices that have acted as as an economic stimulus. Also benefiting are energy-intensive industries and automakers, with car sales up nearly 11 percent in December from the previous year, according to AutoTrader.com.
In the long term, though, policymakers are worried that cheap oil could rattle a U.S. economy that owes much of its newfound strength to rising oil and natural gas production.
“We are trying to put together a comprehensive picture of what current oil prices mean,” Energy Secretary Ernest Moniz said last week, noting that low gasoline prices have been a boon for consumers. “Clearly if these prices persist for a long time, then the reductions in [capital expenditure] that we have seen are clearly going to start coming in down the road. But right now, I think we’re looking carefully.”
