Oil: Exploration Down, Industry Conflict Up – 11/2/16

In recent years, oil companies committed vast amounts of capital to finding new deposits despite mixed results. Then the 2014 price collapse happened and sparked a rush to cut costs, including those from exploration and similar services.

Oil companies boosted exploration spending in the 2000’s amid high prices and rising Asian demand, but as spending increased, success didn’t. Every dollar spent brought back less and less in new reserves, and the diminishing marginal returns made it clear that the spending spree was unsustainable even before the break in Chinese demand sent markets reeling.

In 2015, oil-exploration spending worldwide was at its lowest since 2007 with less conventional oil discovered in the past 2½ years than in 2012 alone, according to Edinburgh-based consultancy Wood Mackenzie. The firm also found that annual volumes of oil discovered from conventional sources have consistently declined since 2010 and that BP, Eni and their peers cut exploration spending by 35% in 2015 compared with 2013.

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Giants like BP and Royal Dutch Shell PLC look to be focusing their exploration more accessible reserves — and spending their savings buying up holdings of smaller companies. BP has cut exploration spending from $3.5 billion in 2013 to around $1 billion this year. Meanwhile, Shell bought BG Group for roughly $50 billion earlier this year to fill its reserves.

Some in the industry say the decline in exploration spending will eventually contribute to a supply shortage, others say it is the new normal. For those who say low prices will persist, the battle is over who will bear the brunt of the lower margins.

For now, the primary combatants are oil companies and the companies like Schlumberger Ltd and Halliburton that help them drill new wells. Schlumberger and others accepted sharply reduced rates for their services through the price collapse on the assumption that not doing so would do too much harm to the industry. For those oil-field service companies, cutting rates meant working on money-losing projects and laying off more than 80,000 workers between them.

After falling to $25 a barrel from above $100 two years ago, crude prices have climbed again to about $50. And, now, the services companies are trying to convince producers that they need to be paid more again. Those pushes are being met with some resistance as executives from big oil companies say the high rates charged during the boom years have to come down and stay down.

Companies like Schlumberger will decide how much and how lasting the rate cuts will be, but they are clearly unsatisfied with current prices for their services. The question of who will suffer the costs of lower-for-longer oil is clearly everyone involved; however, conflict over who pays the most is still being decided.

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