GLOBAL oil producers are taking heavy losses in their stride, in the hope that prices will eventually rise – after a year of low oil prices, just 0.1% of global production has been cut back because it’s unprofitable, a new report shows.
It’s partly because the major oil companies are betting that low prices will eventually drive production down and lift prices. But others are “locked in” to production mode and there are real barriers to exit.
The report from consultants Wood Mackenzie Ltd highlights the industry’s resilience, and suggests that oil prices will need to drop even more—or stay low for a lot longer—to meaningfully reduce global production.
The analysis, published ahead of an annual oil-industry gathering in London next week, indicates OPEC and major oil companies like BP Plc and Occidental Petroleum Corp. are willing to suffer losses now in the hope that production will eventually fall, and prices will rebound.
But that’s taking longer than expected, in part due to the resilience of the U.S. shale industry and slumping currencies in oil-rich countries, which have lowered production costs in nations from Russia to Brazil.
Among African producers, shrinking revenues from exports has obliged Nigeria and Angola seeking help from the World Bank; facing an estimated $15 billion budget deficit in 2016, Nigeria’s finance ministry has said it is looking to borrow as much as $5 billion.
It has held discussions with the World Bank, African Development Bank and China’s Export-Import Bank due to their “concessionary rates of interest.”
Burning through reserves
Nigeria’s government has been burning through its foreign currency reserves, which fell to $28 billion at the end of January from $43 billion two years ago.
As prices continue on the downward slide, Nigerian oil firms are barely breaking even, and may be even producing at up to $5/barrel loss, as average production costs for local producers is between $30 and $35/barrel, Nigerian newspaper The Vanguard reported last week. Oil majors operating in the country continue pumping, even though small producers are being squeezed out.
Still, even with the current bleak outlook, “many producers will continue to take the loss in the hope of a rebound in prices,” the Wood Mackenzie analysis indicates. “Since the drop in oil prices last year there have been relatively few production shut-ins.”
The company, which tracks production and costs at more than 2,000 oilfields worldwide, estimates that 3.4 million barrels a day of production are losing money at current prices, of about $35 a barrel.
Canada, the U.S. and the North Sea have been affected the most by closures related to low prices.
Barriers to exit
For major oil companies, a few months of losses may make more sense than paying to dismantle an offshore platform in the North Sea, or stopping and restarting a tar-sands project in Canada, which may take months and cost millions of dollars.
“There are barriers to exit,” said Robert Plummer, vice president of investment research at Wood Mackenzie.
The price of Brent crude, a global benchmark, has fallen from more than $100 a barrel in mid-2014 to a thirteen-year low of $27.10 a barrel last month. The contract traded at $34.47 at 4:32 p.m. Friday on the London-based ICE Futures Europe exchange.
Oil production may still fall as companies stop investing and drilling new wells, letting output naturally decline. As oilfields age, production typically goes down by 5-10% a year. The new U.S. shale wells have steeper decline rates, so companies’ production drops faster if they don’t drill new wells.
Beyond natural decline and lack of new investment, the Wood Mackenzie report signals that production will remain resilient. “Being cash negative simply means that production costs are higher than the price received. It does not necessarily mean that production will be halted.”