BP economist: Oil industry should hunker down for “a couple of years” as prices recover

The surge in shale drilling that has made the U.S. the world’s No. 1 oil producer has started to slow under the weight of a global crude collapse, and that downturn is likely to stick around for a while, BP’s chief U.S. economist said Wednesday.

Amid falling oil prices that plummeted by more than half in a few short months, the global oil giant has readjusted its business as it settles in for a prolonged crude slump, Mark Finley told an audience gathered in downtown Houston to hear his presentation of BP’s annual statistical review of world energy, a wide-ranging analysis of global demand and supply.

“When we crunch the numbers, it looks like we could be in this for an extended period,” he said in response to a question at the breakfast meeting. “For at least a couple of years, we think it’s prudent to re-base operations around the prevailing reality we find ourselves.”

The global market remains oversupplied by up to 1.5 millions barrels per day of oil, extending a supply-demand imbalance that drove down oil prices beginning last year, Finley said.

After a record-breaking 2014, in which the U.S. soared past its 1970 oil output peak, drilling activity has started to taper off, Finley said.

The dramatic reduction in the U.S. rig count foreshadows a coming slowdown in U.S. oil output, a trend that’s expected to happen at the same that time that global oil consumption has started to swell. While those two factors give the industry some hope that prices could rebound, OPEC’s decision to continue flooding the world with crude may thwart efforts to balance the markets, Finley said.

Iraq and Saudi Arabia have both boosted production, contributing to the current “state of a significantly oversupplied market,” Finley said. Adding to the uncertainty are the pending nuclear negotiations with another member of the oil cartel, Iran. If international diplomats agree to lift sanctions preventing Iran from exporting its crude, the country claims it could immediately increase oil production to half a million barrels per day, Finley said.

Even though the U.S. commands a greater sway, spurring calls to crown the shale drillers the world’s new swing producers, the Organization of Petroleum Exporting Countries remains a potent force in the world’s crude markets, Finley said.

“The shale revolution created a new set of challenges, but it might be premature to write OPEC’s obituary,” Finley said. “OPEC is relevant by choosing not to act, just as they are when they choose to act.”

As the pain in the oil patch lingers, U.S. producers have proved surprisingly resilient as they slash costs and figure out ways to drill faster and cheaper than they have before, Finley said in an interview with reporters after the breakfast meeting.

Despite doubts that shale drilling would lose its economic viability at prices much lower than the $100 per barrel producers were fetching at the peak last year, oil companies continue wrangling crude from dense rock formations months after prices plunged.

“There’s nothing magical about the price thresholds of $100, or $90 or $80 and the real-world experience is bearing that out,” Finley told reporters. “As the price has fallen through this and kept going, guess what? People have found ways to cut costs and stay in business.”

Rather, the break-even point for projects depends on the “operating environment at the moment,” Finley said, adding that when he joined BP, the company used a project planning price of $16 per barrel.

“So where exactly is the threshold? The answer, it’s going to be a moving target: Who’s going to be good at cutting costs and how much costs can they really cut out of the system?” he said.

Many companies have managed to stay afloat during the tougher times because they pared back their budgets to focus on key projects, they hedged production, meaning that they locked in contracts to sell oil at a certain prices, and because they still have access to cash to fund operations, Finley said. But those assurances may not last.

“At what point do the hedges roll off? At what point does the ability to access equity markets become an issue? At what point can you no longer really cut costs out of the system?” Finley said. “These will be the factors that determine whether financing becomes more of an issue going forward or not.”