Black October on the horizon

The price of oil may not have hit the nadir yet, supply is almost double that of demand, and the Iran deal may slash oil prices to new lows.

By Eric R. Eissler July 30, 2015

Looking back to the mid-1990s, no one could have predicted that hydrocarbons would be as plentiful as they are now. In fact, the sentiment was quite the opposite. Scientists had many theories and postulations that 2005 would be the year the world would hit peak oil, and from that point forward, demand would increase and supply would shrink. While, fossil fuels are finite, gauging how much really lies beneath the earth’s surface has not been less than accurate. As technology improves, so do the chances of discovering more hydrocarbons and taking them to market.

Due to a global economic downturn and increased oil and gas production, the U.S. Energy Information Administration (EIA) estimates that in 2014 the global supply of petroleum-based liquid fuels was almost double the demand. October 2014 could be called "Black October" for the dubious consequences it had on oil and gas companies, sending them into a chasm that is taking a longer-than-expected time to climb out of. 

Lighten the load

To stay afloat and profitable, many companies have cut jobs, frozen cap ex projects, and-to some surprise-pushed production to full throttle. The increase in production is due, in part, to automating oilfields and using new technologies to analyze production and streamline processes. Now is the time the oil and gas companies can step back and scrutinize process optimization and introduce new technologies to a rather conservative, resistant-to-change industry. The worst part of this boom-bust industry is the loss of jobs. According to Bloomberg, more than 100,000 jobs in the oil and gas industry have been lost, with more coming as oil prices shrink. Super-major Chevron recently announced that it will cut some 1,500 jobs companywide. It’s bad enough to lose jobs, but to lose a company in a buyout can be worse.

Now is the time of acquisitions

Many small producers have massive debt stacked against them and a trickle of revenue. This has made them a prime target for buyouts. Not even the large companies are safe. Perhaps the biggest shakeup in the industry was oilfield services provider Halliburton acquiring Baker Hughes, another oilfield services provider, at the cost of $34.6 billion. It is possible that the industry will see more mergers as long as oil prices are depressed.

Looming Iran deal

On July 14, 2015, the U.S.-led group of six nations reached an historic deal with Iran on its nuclear ambitions. While the U.S. Congress still has 60 days to ratify the treaty—and given the history of this case, it may take the full 60 days to come to consensus—and then another 30 days to lift sanctions if agreed, it would bring us well into October 2015. Could it be another "Black October" for oil and gas companies? When sanctions are lifted, Iran can go to market with 1 million barrels of oil per day, and it has 30 million barrels loaded on its super tankers in the Persian Gulf. Going to market with that amount of oil could drop the price of oil from $10 to $15 per barrel, estimates the EIA. Potentially, another bad year for oil companies hinges on the Iran deal. Black October is just around the corner, again.

– Eric R. Eissler is the editor-in-chief of Oil & Gas Engineering.

Original content can be found at Oil and Gas Engineering.