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The dramatic consequences of plunging oil prices

Screen Shot 2015-01-16 at 09.03.51“Brent futures are set to fall to as low as $31 a barrel by the end of the first quarter from about $48 now.”; “People know these prices are unsustainable,” he said, and they will lead to large-scale layoffs and cuts in maintenance spending, which will eventually sharply reduce overall output. BP’s announcement of layoffs was just the start…; “Just a few months ago, analysts predicted the price would bottom out at $70 a barrel, and then $60. Now it’s at $46, and many have given up trying to guess when the bottom will come.”

From an article by Will Kennedy and Firat Kayakiran published on 16 January 2015 by BloombergBusinessweek under the headline:

“Big Oil Companies Get Serious With Cost Cuts on Worst Slump Since 1986”

Major oil companies are awaking from their slumber and facing up to the magnitude of the crash in crude prices.

From Royal Dutch Shell Plc (RDSA) canceling a $6.5 billion project in Qatar to Schlumberger Ltd. firing about 9,000 people and Statoil ASA (STL) giving up exploration in Greenland, the oil industry this week concluded that the slump is no blip. 

And there’s certainly more unwinding to come. For most of this month, crude oil has traded below $50 a barrel, a level few predicted even two months ago when OPEC signaled it wouldn’t cut production to defend prices. If the market stays this depressed, global spending on exploration and production could fall more than 30 percent this year, the biggest drop since 1986, according to forecasts from Cowen & Co.

Shell, BP Plc, Chevron Corp. and other top producers are preparing to present 2014 earnings to investors at the end of this month or early February and will signal plans for this year. Their chief executive officers are faced with the challenge of assuring shareholders they can see through the depression without cutting dividend payments.

$31 Brent

The direction of the oil market shows companies probably need to prepare for the worst. Bank of America Corp., noting the speed global oil inventories are building, forecast Thursday that Brent futures are set to fall to as low as $31 a barrel by the end of the first quarter from about $48 now. That’s even lower than the $36.30 seen during the depths of 2008’s financial crisis.

Shell, Europe’s largest oil company, took the axe this week to a $6.5 billion petrochemicals plant it planned to build in Qatar in partnership with the state oil producer. The company, based in The Hague, said the project wasn’t economically feasible in the current price environment.

Job Cuts

Schlumberger (SLB:US), the world’s biggest oilfield-services company, took a $1.77 billion charge in the fourth quarter and said it will cut about 9,000 jobs, 7.1 percent of its workforce, as it anticipates lower spending by customers.

BP, based in London, cut 300 positions in Scotland, arguing this was necessary to ensure that its business stayed competitive. The local trade union said it expected many more of its members in the industry would lose their jobs.

“Persistent low oil prices are pushing all the producers to focus on cutting costs and delaying investments

FULL ARTICLE

From an article by Stanley Reed published 15 Jan 2015 by The New York Times under the headline:

“OPEC Report Downgrades Demand for Its Oil as Prices Fall Again”

Extracts

LONDON — The Organization of the Petroleum Exporting Countries issued a report on Thursday that downgraded demand for its crude for 2015, while also predicting slower oil-production growth in the United States.

Brent crude, the international benchmark, closed down more than 2 percent on Thursday, at $47.67 after a drop of $1.02, and the United States benchmark dropped more than 4 percent, to $46.25 after a drop of $2.24. Oil prices have plummeted roughly 60 percent since June.

Worries about a glut of oil in the first half of this year are a crucial factor depressing oil prices.

The impact of lower prices is rippling through the oil industry. BP said on Thursday that it had informed its North Sea staff that it would be cutting about 200 employees and 100 contractors. Royal Dutch Shell on Wednesday said it would be scrapping plans for an estimated $6.5 billion petrochemical project in Qatar that was a joint venture with Qatar Petroleum.

Seth Kleinman, an analyst at Citigroup in London, said that the current oil industry could not function with prices in the range of $50 a barrel.

“People know these prices are unsustainable,” he said, and they will lead to large-scale layoffs and cuts in maintenance spending, which will eventually sharply reduce overall output. BP’s announcement of layoffs was just the start, he said.

FULL ARTICLE

From an article published 16 Jan 2015 by telesurtv.net under the headline:

“Schlumberger Slashes 9000 Jobs”

Extracts

Oil services giant Schlumberger Limited announced Thursday that it is slashing 9000 jobs due to low oil prices.

ConocoPhilips and BP announced their own rounds of firings on Thursday.

In the U.K., ConocoPhillips is slashing 230 jobs, while BP is firing 300 staff and contractors on its North Sea operations.

“If oil prices stay at this level, none of these companies would just be able to adjust with one round of workforce reductions…”

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From an article by Lauren Rosenthal, a reporter for KUCB in Unalaska, published 15 Jan 2015 by Alaska Public Media under the headline:

“Plunging Oil Prices Cast Doubt on Arctic Drilling”

Extracts

As oil prices continue to plummet, some corporations are scaling back on expensive exploration projects — like drilling in Arctic waters. But, one company with a major stake in the region has yet to tip its hand.

Royal Dutch Shell has been quiet about whether it’s still planning to go back to Alaska this summer for the first time in three years.

Spokesperson Megan Baldino wouldn’t comment on the role that oil prices might play in Shell’s decision. But Foster Mellen, a global oil and gas analyst with Ernst & Young, says it’s clear what they’re up against.

“Pretty much all companies — even the big, financially sound companies — are looking at very much reduced cash flows for the coming year,” Mellen says. “So discretionary spending such as high-risk, high-cost exploration is probably the first to be put on the shelf.”

Unless the price of oil is above $80 per barrel, Mellen says it doesn’t usually make sense to drill in the Arctic. Right now, the price is somewhere around $50.

Shell has walked away from the Alaskan Arctic once before…

The company’s expected to provide more details on its plans for the Arctic — and other ventures around the world — during a quarterly earnings call with investors on January 29.

FULL ARTICLE

From an article by James Osborne updated 16 Jan 2015 published by The Dallas Morning News under the headline:

“Texas oil boom heading for bust in a hurry; downturn may be prolonged”

Extracts

Just as quickly as it emerged, the oil boom is crashing.

Drilling budgets across Texas and the world are being slashed. Crude prices today are almost 60 percent lower than they were six months ago. The last time the world saw such a rapid descent was the financial crisis of 2008. Before that, it was 1986, when two thirds of Texas’ drilling rigs shut down in two years’ time.

It is a sharp turnaround for the Texas oil industry, which in just five years tripled its production and drove hundreds of billions of dollars into the economy.

For decades Texas oil had slowly been disappearing from the world market. The big companies were chasing oil buried under ocean floors off the coasts of Russia and Nigeria and in thick, tar-like crude in western Canada. Then came advances in hydraulic fracturing and the shale drilling revolution. Suddenly, what had been considered third-rate fields in Texas’ Eagle Ford and Permian Basin became some of the most sought-after prospects in the world.

Now concern is deepening that the U.S. oil industry is entering what could be a sustained downturn.

“It’s going to be devastating. For all practical purposes we lowered the barrier to entry so low that every Tom, Dick and Harry could go out and rent a rig,” said Fadel Gheit, a managing director with the investment firm Oppenheimer & Co. “The longer prices stay down, the more companies are throwing in the towel. We will see a lot more pain before we get any gain.”

And the European giant Shell announced earlier this month that it would cut 5 to 10 percent of its workforce in western Canada’s oil sand fields, which have some of the highest oil extraction costs in the world.

Just a few months ago, analysts predicted the price would bottom out at $70 a barrel, and then $60. Now it’s at $46, and many have given up trying to guess when the bottom will come.

FULL ARTICLE

From a Wall Street Journal article by Peter Evans and Selina Williams published 16 Jan 2015 under the headline:

“Oil’s Fall to Erode European Energy Firms’ Earnings”

Extract

LONDON—The collapse in oil prices is casting a long shadow both now and into the future for European energy companies…

FULL ARTICLE

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