stena forth drillship

Riskiest Oil Projects Crushed by Price Collapse

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January 7, 2015

stena forth drillship
The 2009-built Stena Forth drillship at work in the Gulf of Mexico under contract to HESS working on the Pony Deepwater Discovery Project. (Gulf of Mexico, April 2010), image (c) Hess Corporation

By Joe Carroll

(Bloomberg) — Dangerous and difficult oilfields that looked like goldmines when crude fetched more than $100 a barrel have turned into money pits as oil crashes to multi-year lows.

Collapsing oil prices not only shrink profits for producers and imperil dividend payouts prized by investors, they can cripple a company’s future growth by starving it of cash needed to find, drill, assess and equip discoveries. A spending halt in deep-water fields and Canada’s oil sands could disrupt the chain of new projects needed to keep the world supplied as older wells dry up.

For the biggest explorers, the impacts of slumping prices are dramatic. Every $10 price drop erases $2.8 billion in annual cash flow for Exxon Mobil Corp., according to analysts at Barclays Plc. For Chevron Corp., which is more crude-dependent than its bigger rival, a $10 change translates to $3.85 billion in cash flow.

“Because of their long lead times, once canceled or postponed, oil sands and deep-water projects cannot be brought on line at short notice in response to rising prices,” Chief Executive Officer Andrew Hall said in a Jan. 2 communique to investors in his Astenbeck Capital Management commodity funds. “This sets up the potential — if not the inevitability — for supply shortfalls in the future.”

Energy explorers who committed to hundreds of billions of dollars in oil projects from Brazil to Scotland to Oklahoma during the past five years now are scrambling to trim costs and delay contracts. Crude’s tumble to less than $50 a barrel, the lowest prices since 2009, is prompting budget cuts and layoffs from the rig floor to the steel mills that make piping for wells.

Lingering Glut

An oil-market rebound that would bail out the most ambitious and expensive ventures seems increasingly unlikely. Worldwide demand growth is faltering, worsening a U.S. supply glut that hasn’t been this big at this time of year in three decades. The excess — a result of the unprecedented production boom in U.S. shale rock formations — may take “months or years” to be absorbed, said United Arab Emirates Energy Minister Suhail Al Mazrouei.

Brent crude futures, the benchmark contract for more than half of the world’s oil, fell for a fifth day and touched a 5 ½- year intraday low of $49.66 a barrel. The 6-month slump is the longest since the global financial collapse of 2008 that slashed demand for petroleum-based fuels.

Fortune Shift

Oil was trading for $125 a barrel when drilling began on Noble Energy Inc.’s Gunflint prospect in May 2008 about 70 miles (113 kilometers) off the Louisiana coast. Now oil is 60 percent less valuable as the Houston-based company begins installing a sprawling network of pressure-control devices and valves more than a mile beneath the sea surface that will start pumping crude by the middle of 2016.

Reba Reid, a Noble spokeswoman, didn’t respond to telephone messages left at her office.

At another deep-water Gulf of Mexico project, known as Stampede, Hess Corp. is forging ahead with a $6 billion effort to unlock as much as 350 million barrels of crude starting in 2018. When directors at Hess and three partner companies formally greenlighted Stampede in October, oil was trading for more than $80 a barrel.

Every $10 drop in the price of a barrel of crude erodes Hess’s cash flow by $850 million, according to Barclays.

Lorrie Hecker, a spokeswoman for New York-based Hess, declined to comment on whether Stampede will be postponed or redesigned to account for the slump in crude markets. Details on the company’s 2015 spending and drilling plan won’t be released until later this month, she said.

Moving Ahead

“Stampede is an important long-term part of our portfolio that we intend to move forward,” Hecker said in an e-mailed message.

Even before the oil market collapse began in late June, developers in Canada’s oil sands were already doubting the viability of new projects after a $250 billion building spree over the preceding eight years.

France’s Total SA put its C$11 billion Joslyn joint-venture project with Suncor Energy Inc. on hold in May, citing escalating construction costs. That followed a 2013 cancellation by the companies of their C$12 billion Voyageur oil-sands upgrader.

In September, Norway’s Statoil ASA delayed work on the 40,000 barrel-a-day Corner oil-sands development. Devon Energy Corp. said in November that a decision on how to proceed with its Pike oil-sands venture with BP Plc will be made by the end of 2015.

Too Costly

In Brazil, home to the Western Hemisphere’s biggest oil discoveries in a generation, falling prices are close to slamming shut the profitability of those reserves. Petroleo Brasileiro SA, or Petrobras, said in a statement yesterday that it needs a minimum price of about $45 a barrel to justify tapping the string of mammoth offshore discoveries that captivated the global energy industry in 2007. That $45 figure doesn’t account for costs associated with handling natural gas that flows to the surface alongside crude, or other infrastructure. Those costs add another $5 to $7 to the per- barrel price Petrobras said it needs.

Exotic offshore and oil-sands projects aren’t the only ventures at risk. In a geologic formation along the Kansas- Oklahoma border known as the Mississippi Lime, $65 is the threshold for reaping an “acceptable return,” Sandridge Energy Inc. Chief Executive Officer James Bennett said during a Nov. 6 conference call with analysts.

At the time, benchmark U.S. oil futures were trading for $77.91 a barrel. Since that conference call, Oklahoma City-based Sandridge’s stock has plummeted 62 percent as oil fell below $50.

Duane Grubert, a Sandridge spokesman, didn’t respond to a phone message seeking comment.

Copyright 2015 Bloomberg.

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