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Oil price continues climb Questions over what’s fueling price uptick, what it may mean for Alaska industry Alan Bailey Petroleum News
Continuing from what had already been characterized in mid-October as a bull market for oil, the oil price has maintained its upwards trajectory. Brent crude passed $60 per barrel on Oct. 27 and reached a peak of $64.26 on Nov. 6, according to data from oilprice.com. Since then the price has slightly declined but has remained comfortably above the $60 level. According to data from the Alaska Department of Revenue, the price of North Slope crude has quite closely tracked the Brent price.
But does this price trend represent a sustained price rise? And what do the new price levels mean for the Alaska oil and gas industry?
Subject for debate According to various media sources, the drivers of the price rise remain a subject for debate, thus suggesting continuing uncertainty over where the price may go from here. According to a Nov. 12 report by Bloomberg, global oil supplies have been tightening, with speculation mounting that the Organization of Petroleum Exporting Countries will continue beyond March its policy of limiting oil production.
A sustained era of low oil prices in the last few years has, in part, been attributed to an excess of oil stocks held in storage. According to data from the Energy Information Administration, global crude oil stocks have declined somewhat since March of this year but remain relatively high. The EIA forecasts that stock levels will increase somewhat in the coming months.
Increasing demand However, as reported previously in Petroleum News, the EIA has also predicted a significant increase in oil demand in the coming years. The International Energy Agency, in its latest World Energy Outlook, has predicted a continuing growth in oil demand, albeit at a slowing rate as improving fuel efficiency and electrification make inroads into fuel usage. The IEA also thinks that U.S. oil production will surge ahead, particularly as a result of shale oil production.
One factor that seems to be impacting the current oil price is political instability, particularly in the Middle East. There have been concerns over oil supplies from northern Iraq, following an independence referendum in Iraqi Kurdistan and Iraqi forces subsequently taking control of Kirkuk. And heightened tension between Saudi Arabia and Iran have been causing worries about the possibility of an escalation of military action in the region. Commentators have speculated on the extent to which these concerns have driven the recent oil price surge, and the extent to which market fundamentals have been behind the price movement.
Statements made in analyst calls and investor presentations have shed some light on how oil companies operating in Alaska are handling the oil price situation.
ConocoPhillips: no price prediction During a Nov. 8 analyst and investor meeting ConocoPhillips executives explained their strategy for dealing with current oil price trends. Commenting that “predicting price is useless but scenario planning is priceless,” Matt Fox, executive vice president for strategy, exploration and technology, explained that his company has adjusted its resource portfolio to achieve the diversification necessary to adapt to different oil price situations.
Al Hirshberg, executive vice president production, drilling and projects, said that ConocoPhillips now has a resource inventory of 15 billion barrels with a cost of supply of less than around $50 per barrel. The company is seeking ways to reduce costs for a further 23 billion barrels that have a higher cost of supply.
He said that the 15 billion barrel low cost of supply portfolio consists of three tranches: conventional oil in legacy positions with established infrastructure; unconventional shale oil; and a tranche that includes liquefied natural gas and oil sands. The first of these tranches, which includes ConocoPhillips’ Alaska operations, provides medium-scale chunks of profitable production. Unconventional assets provide opportunities for flexible, short-cycle investments. And the LNG and oil sands assets provide continuing low-decline production that can dilute the capital needed per unit of output.
Sustaining price below $40 Fox said that currently the ConocoPhillips resource base requires an oil price below $40, simply to sustain current production levels. Sustained production requires investment of about $3.5 billion per year, available as cash from operations. And the company anticipates being able to achieve all of its financial targets at a $50 oil price - the company’s plans should not require significant adjustment if the price remains in the $45 to $55 range, Fox said.
Given the need to accommodate the unpredictable price future, a sustained rise in the oil price above $55 would not trigger an increase in long-term capital commitments, but would require careful management of potential inflation in production costs, Fox said. Oil prices below $45 for an extended period, on the other hand, would cause the company to capture deflation in costs and possibly exercise capital flexibility, even at the expense of a drop in oil production. However, ConocoPhillips does not anticipate having to drop its production levels, unless the oil price falls below $40 per barrel for a sustained period, Fox said.
In Alaska, ConocoPhillips has reduced the estimated cost of its Greater Mooses Tooth 2 project by about 10 percent since last year, thus reducing the cost of supply from the project by about 15 percent, Hirshberg said. The company continues to seek cost reduction opportunities through possibilities such as the use of longer lateral wells and the debottlenecking of production facilities, he said.
Referencing the company’s Willow discovery in the National Petroleum Reserve-Alaska, Fox commented that, following appraisal drilling in the discovery, ConocoPhillips anticipates conducting an evaluation of how to best develop the find. Depending on what makes best economic sense, the company could extend its Alaska production flat over 20 years or grow the production level, he said.
BP plans for $50 Obviously each company has its own view on where oil prices may be heading and on how to address oil price uncertainty. During the World Petroleum Congress in July BP CEO Bob Dudley commented that his company is planning on $50 oil for the next five years. Although on a daily basis the oil market is in balance, world inventory levels remain high, Dudley said.
On Oct. 31 during a quarterly results analyst call Brian Gilvary, BP chief financial officer, said that BP expects global oil inventory levels to continue to edge lower. OPEC has been successful in maintaining planned oil production cuts, but non-OPEC production is expected to increase, Gilvary said. He said that BP has succeeded in maintaining its cash flow and dividend payments at a Brent oil price averaging some $52 per barrel. The cash balance point for the company has sat at about a $42 oil price, but with a $49 price needed for full dividend payout.
In an August earnings call Dudley said that in the first half of 2017 BP’s organic cash flows had been comfortably in balance at a $50 oil price level. And, although there is always the potential for geopolitical events to trigger oil price spikes, BP is planning for an oil price of about $50 over the next five years, with a target breakeven price well into the $30s, Dudley said.
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