Oil collapse most brutal in history for drillers, energy researcher says

HOUSTON – At the height of its fury, the oil-market collapse over the past two years squeezed drillers harder than any previous downturn, creating an unprecedented financial crisis for oil drillers. Scores of North American oil companies have gone bankrupt in its wake.

Even after the industry cut hundreds of billions in spending, the average oil company only collects $26 for each barrel they sell at today’s oil prices, and that money disappears after cash costs. In February, when U.S. oil prices fell to a 13-year low of $26 a barrel, drillers couldn’t generate any cash selling oil – and they still had to pay off their debts.

The difference between the price of a barrel of oil and the cost to get it out of the ground had never been slimmer, an oil specialist said on Wednesday at the Offshore Technology Conference in Houston.

“This is, in historical context, extraordinary,” said Lars Eirik Nicolaisen, a partner at consultancy Rystad Energy in Oslo, Norway. “When you compare this to history, it makes some of the setbacks that we’ve put behind us in 2009 and the early 2000s look like a walk in the park.”

The oil industry has pulled back on spending more than in any previous downturn, with 2015 outlays down $220 billion last year and another 21 percent this year. Around the world, oil fields naturally decline around 10 to 12 percent. The question is, Nicolaisen said, is why global oil production hasn’t fallen sharply enough to correct the world’s oil glut by now.

It’s because even though the industry has mothballed billions in oil projects, they’re still spending money to pump oil from deep-water installations and other projects that were approved years ago. In 2013 alone, oil companies sanctioned projects with 18 billion barrels in reserves.

In isolation, those previously approved projects added 1.7 million barrels a day to the world’s oil production last year and would add another 1.7 million this year, and another 5.8 million from 2017 through the end of the decade.

Even still, after nearly two years of low oil prices, the global market is set up for a decline in crude production in 2016. And Rystad believes oil demand will rise steadily to 98 million barrels a day by the end of the decade, possibly pushing crude prices back up.

Nicolaisen said crude prices need to reach at least $80 a barrel for oil companies to boost investments in major projects.

“Oil prices have never been as low as they were in February this year when you see it from the context of costs,” he said. “So something has to give. We are convinced oil prices have to give quite a lot.”

SHOW MORE