As we enter 2015, it has become a tough time for companies in the oil & gas industry. With the price of WTI and Brent crude now less than $50, some producers are finding they cannot make a profit. What’s driving the price of crude down? OPEC recently made a decision to not cut production as they have often done in the past. Instead they are continuing with their production levels to ensure the glut of oil in the world which in turn drives down prices. OPEC can afford to do this as their cost of production is far less than North American producers. By continuing with their high production levels in the Middle East they appear to be pushing higher cost producers and speculators out of the business. However, it is almost a certainty that when it suits OPEC, it’ll turn the spigots down and as demand exceeds supply, the price of crude will rise again.
There have been numerous articles written about North American oil and gas producers and what their breakeven point is. And certainly producers do not have the same costs because each producer’s method of exploration, extraction and processing can be a bit different. The differences in methodologies are very important. There will always be a leveling of the playing field and at times like these, those companies with low efficiencies and thus higher cost levels will be forced to make a decision, to either keep producing at low profit margins or for some, a loss, or to scale back or maybe even shut down!
Simply shutting down operations does not drive a company’s cost to zero, far from it.
Although a company may choose to cut costs by letting leased resources lay idle, halt or delay new exploration efforts, layoff admin and production personnel, close lower producing wells, close older, less efficient plants, sell off properties, incur the cost of depreciation, they will still have to bear the interest costs of loans. And exacerbating the situation is the fact that as the price of oil continues to drop the less cash companies have to service their debt.
Amidst a global crude oil price war, it seems a defeatist approach to be laying off personnel, retreating and waiting it out until the price of crude returns to the $80 range. Maybe an alternative strategy is banding together. The North American oil and gas sector is known to be able to simultaneously compete and collaborate, which in turn collectively allows it to get the resource to the marketplace. With that in mind, it seems the power of all interested parties collaborating to temporarily implement claw backs could have a positive impact on North American energy companies and their ability to stay profitable during this global price war.
Is it plausible for energy companies and all interested parties to be able band together to respond to the lower crude prices? Could all parties simultaneously collaborate in an expedited manner to;
- lower salaries and implement work sharing programs
- lower royalties
- lower costs for leases,
- modify supply chain agreements, and
- receive increased government assistance for training?
Having less of something is a lot better than having a whole lot of nothing!
Is this an idea worthwhile acting on if energy companies can remain profitable, personnel remain employed, landowners continue to make some money from lease agreements, governments receive some royalties, and the workforce becomes more effective and productive through government subsidized training? It seems that an industry wide collaboration in North America is the best response to a crude oil price war.