What does the future hold for North American oil?
What is happening to the oil industry in North America? Andrea Murad investigates how the new administration will stem the tide of falling prices.
The oil and gas industry has recently struggled due to lowered oil prices that cannot sustain operations for most companies.
President Donald Trump's campaign platform of being the oil industry panacea is still in early days, and in turn, the industry is both optimistic and apprehensive about whether Trump’s promises will turn to policy.
Oil and gas touch almost everything - hydrocarbons are broken down into many different components and are consumed in numerous ways but to find this raw material, companies need a balance between traditional offshore (conventional) and non-traditional onshore (unconventional), which has witnessed a resurgence in the form of shale.
Traditional offshore has a very long lead time in comparison, but without a stable mix of the two businesses, it becomes harder for companies to produce, sell, earn money and invest for the long term.
Pipeline and regulations
“[Trump] effectively pledged to lift restrictions on $50 trillion production on US energy reserves - US shale, oil, natural gas and clean coal - and he called it job-producing American energy reserves,” said Ed Brewerton CA, who works in Canadian oil and gas.
President Trump also approved the Keystone XL pipeline project which would allow for faster transport of Canadian crude oil to the Gulf Coast and the Dakota Access Pipeline.
“All of these are subject to a lot more approvals, but his executive orders sanctioning the build of these pipelines is good for [Canadians],” Ed explained.
Even so, how the US will treat Canadian imports in the future and whether there’s a border tax is unknown.
The administration is also trying to eliminate environmental regulations that aren’t value-added, particularly if those serve as a headwind to small business and economic growth.
Changes in regulations are passed by Congress, however, and environmental issues are important to the American public. On the other hand, many of the executive orders that Trump has signed have not changed laws but rather ask for reviews and studies.
Trump effectively pledged to lift restrictions on $50 trillion production on US energy reserves - US shale, oil, natural gas and clean coal - and he called it job-producing American energy reserves.
Trump is focused on making the US more energy independent by lessening the reliance on imports and bringing jobs to America.
“The people working around Trump are very pro-oil, but if I look at what the administration could influence, like regulations and access to drilling in new places, that doesn’t make as much of a difference as to the price of oil,” revealed Patrick Van den Bossche, Partner and Board member with A.T. Kearney.
He acknowledges that while the price drives the industry to open new wells, “even if Trump made a blanket statement [for companies] to drill where they want, it’s not worth it for them at $50 to $60 [per barrel].”
Oil prices drive the industry
A lower oil price stimulates demand and suppresses supply. In times of lower prices, the greatest impact tends to be in exploration spend, then development spend, while production spend is relatively more resilient.
Not surprisingly, the sharp drop in oil prices to around $30 per barrel in 2015 and 2016 resulted in a significant reduction in spend, most markedly in exploration and development.
After a point, companies shut the wells and stop drilling, which means the industry stops exploration and that limits the supply of raw materials.
Low prices also deplete a company’s reserves, which are used as a borrowing base. “The level of oil reserves you have is also based on what’s economic to produce, not just what’s in the ground physically,” added Ed.
“The oil reserves that are economic at $50 per barrel may not be economic at $45 per barrel, and if they’re not, you have to write off the reserves.”
Without enough reserves, a company might not have the funding for new projects and to develop new fields, which could mean layoffs. “There’s a big lag once you shut production to seeing those jobs return,” said Ed.
Supply and demand, combined with the Opec Organisation’s decision to cut back on their own supply, has resulted in an oil price increase. To date, this has been reflected by increases in North American onshore activity, which includes shale-related production.
Operators also consider the balance in their portfolio from shorter cycle versus longer cycle developments, and factor in the associated risks from the project timescales alongside their anticipated returns.
The big issue with oil prices is that the forward curve through 2026 is flat ($52-56 per barrel). “Nobody makes money at that price,” explained Jacquelyn Harrison CA, who works in planning and governance for an oil, gas and energy corporation.
“After a point, companies shut the wells and stop drilling, which means the industry stops exploration and that limits the supply of raw materials. If it takes a very long time for a conventional field to be developed, can the world live without that raw material for a long time?”
About the author
Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Consumers Digest, Entrepreneur.com, FOXBusiness.com, Global Finance and InstitutionalInvestor.com.