Comments: Surviving the Downturn
Authors: Donnelly John 
Published: January 2017

Editor's column
The recent IHS CERAWeek conference in Houston brought together high-level executives from international oil companies, national oil companies, major independents, the service sector, and government. Over 5 days of discussions and panel sessions, several key themes emerged about the current state of the global oil and gas industry.
Oil prices eventually will rebound and, although when is pretty much a guessing game, the consensus is that the interim will continue to be painful throughout the industry. Independents are worried about cash flow and are trying to hold on until the rebound occurs. Those firms are currently in “hunker down mode” trying to preserve cash, said David Hager, president and chief executive officer of Devon Energy. But the oil resources are still there waiting to be exploited if independents can “stay alive for another day.”
The International Energy Agency (IEA) released its latest market outlook at the conference, predicting that prices had bottomed out and would begin to rise as cuts in investment and production work to reduce the global supply glut. That could be later this year, next year, or even 2018 depending on how resilient US producers are. Once oil prices reach USD 40–50/bbl, tight oil production may ramp up again and that level could also trigger merger and acquisition activity. Although there is talk among major producers about a supply “freeze,” such a move would only keep output at near-record levels, and Saudi Oil Minister Ali Al-Naimi made it clear that OPEC producers will not cut output.
Shale is not going away. Despite Saudi Arabia’s efforts to push out “high-cost producers,” unconventional resources once again will be exploited when prices rise. Producers in the US have become more and more efficient and production has been slower to fall than expected. “Anyone who believes that the US revolution has stalled should think again,” said Neil Atkinson, the head of the IEA’s Oil Industry and Markets Division. But there will be a significant decline in shale oil production through this year that will help rebalance the market, particularly as world demand continues to grow at an estimated 1 million B/D clip. Whether shale oil is a “short cycle” or “swing” producer, the resources in North America are enormous, and the learnings there will spread to other regions. Argentina’s shale play appears particularly promising. “I don’t know how we will live together,” said OPEC Secretary General Abdalla Salem El-Badri. “Any reduction in production will be met by an increase in shale oil.”
But ramping up shale production after this downturn might not be that easy. Increasing shale output “will be more like turning around an aircraft carrier than a speedboat,” according to Hager. That means the breadth and depth of cuts in capital spending and production could lead to a supply shortage in coming years, which could cause oil prices to spike sharply again, continuing the tumultuous up and down cycle. In addition, the industry could find itself short of technical talent again, as both producers and service companies have laid off thousands of staff over the past year. JPT