Oil Exploration Unlikely to Recover Soon – 6/17/16

In the chain of businesses that work to bring oil to market, the companies responsible for finding new deposits were among the hardest hit when oil prices started tanking. It’s hardly surprising to hear that with record amounts of product in storage energy companies were quick to cut costs associated with starting new projects, especially exploration. In 2015, oil discoveries fell to their lowest level since the 1950’s mostly in response to the price collapse making the discovery of new reserves much less of a concern to most.

The cutbacks made by explorers could have some serious ramifications. Though the short-term impact will be minimal, there must be some replacement for the fields currently being drained. Still, the long-term impact is unclear since it can take 5 to 10 years to ready discoveries for pumping anyway and emissions targets are likely to keep demand relatively stable.

Unfortunately for explorers, their services will likely never recover the value they had when crude oil was selling for $100 a barrel. Shale-oil is too cheap and easy to access to allow prices to rise above even $60 a barrel without inspiring a new boom and inevitable bust, which as we recently witnessed could take place in as little as two years. Add to that over-supply things like rising fuel efficiency standards, electric vehicles, and climate change legislation, and even current supplies begin to look excessive.

In addition, most of the major current events driving prices up could reverse themselves in a hurry. U.S. production may have dropped substantially at the same time as pipeline attacks in Nigeria and Canadian wildfires hit output abroad; however, those are not permanent disruptions and there are still record amounts of stored oil and partially drilled wells to work through.

In the case of Canada, such fires are not likely to happen again anytime soon. And the Nigerian government curbed attacks on its pipelines in the past for years. Only Venezuelan production looks to be in danger of going offline in significant amounts. Yet, the collapse of a major oil producer’s economy doesn’t occur often and any losses of output are not irreplaceable.

Oil hitting $50 a barrel may bring many U.S. shale field projects back into the black so even if it doesn’t inspire new wells, pre-existing ones could make a comeback. Companies with a backlog of partially completed but untapped wells could start bringing about hundreds of completions in just a few months, though producers are likely to be cautious after last years false rally hit many hard. If $60-a-barrel oil is the new $90, producers will still need to see that threshold holds for more than a couple months before they start springing for exploration again.

Print Friendly, PDF & Email

Comments are closed.