13 July 2015 – Oil’s recent plunge due to a host of worries about potential increased supply and decreased demand threaten to gum up what looked like an emerging recovery in the US onshore sector.
Before the most recent drop from around $60 per barrel for US benchmark West Texas Intermediate to a price in the low $50s, it had appeared that shale players were getting comfortable with the new price environment and were ready to return to work.
Operators in the Permian, Bakken and Niobrara plays have all announced plans to put rigs back to work, and the overall Baker Hughes rig count showed its first weekly increase in more than six months.
Moreover, the market for assets appeared to be heating up, with a raft of deals representing a few billion dollars in aggregate value announced in the past two weeks.
But a more volatile oil price in the low $50s is very different from the period of relative stability around $60 for the past month that appeared to release the industry from its paralysis.
Many of the rig additions by companies such as Pioneer Natural Resources and WPX Energy were predicated on a stable oil price of at least $60 or the ability to fund the operations with existing cash flow — both conditions that seem less certain in the current oil market.
The asset market also could see another pause after the latest drop. Anecdotally, financial players in the industry have said they have seen buyers begin to drag their heels in the past couple weeks. This is not to forecast a return to the frantic cost cuts that characterised the first few months of the bust, but only to point out that the defining characteristic of the US onshore business is its ability to rapidly respond to the market.
Such flexibility was seen as a key factor in the ability of the sector to snap back after oil prices stabilised, but it can also scupper such a ramp-up just as quickly if oil markets worldwide experience a hiccup.
Until rigs start turning bits and deals get signed, there is no guarantee that even the best laid plans will lead to production.
*Noah Brenner – Upstreamonline