Home' Trinidad and Tobago Guardian : November 1st 2015 Contents SBG2 NEWS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 1 • 2015
The oil sector is slipping into the red after years of
fat profits as the steep slump in oil prices shows little
sign of ending, with this quarter shaping up to be the
worst since the downturn started.
The world s top oil companies have struggled to
cope with the halving of oil prices since June 2014.
They have cut spending repeatedly, made thousands
of job cuts and scrapped projects.
The lower-for-longer outlook for oil prices took its
heaviest toll yet in the third quarter as oil companies
again reported a dramatic drop in income. Some saw
results swing into the loss column, and the industry
had billions of dollars in impairment charges.
"This downcycle poses significant challenges," Jeff
Sheets, ConocoPhillips chief financial officer, told
investors on a conference call after the company posted
With 10 of the top 20 European and North American
oil and gas producers having reported third-quarter
results, seven have posted losses.
These include Royal Dutch Shell, Italy s Eni and in
North America Occidental Petroleum Corp, Anadarko
Petroleum Corp, Hess Corp, Suncor and ConocoPhillips.
Shell posted a third-quarter loss of US$7.4 billion
on Thursday, hit by a massive US$8.2 billion charge
after halting its exploration in Alaska s Arctic sea and
a costly oil sands project in Canada.
About half of Shell s charges reflected a downward
revision of the long-term oil and gas price outlook,
Chief Executive Ben van Beurden said. Net profit
excluding identified items collapsed to US$1.8 billion
from US$5.85 billion a year ago.
Eni posted a net loss of US$1 billion and France s
Total had a sharp drop in profit, though its results
were stronger than expected.
ConocoPhillips, the largest US independent oil and
gas company, reported a quarterly loss of US$1.1 billion
and lowered its 2015 spending target seven per cent.
"The sector is rapidly moving into the red," Jefferies
oil and gas equities analyst Jason Gammel said.
"It is slowly going to claw its way back into the
black through cost-reduction efforts, but that will take
time. It will depend on price movements, but it will
take time to get all these cost savings through the sys-
Even after cost efficiencies and spending cuts, Euro-
pean oil companies on average will require an oil price
of around US$78 a barrel in 2016 to cover spending
and dividend payments, according to Jefferies estimates
before the latest results.
Analysts polled by Reuters expect Brent crude to
average a much lower US$58.60 a barrel in 2016.
Shell, which Jefferies says has the lowest cashflow
breakeven point at around US$66 a barrel, said it
would axe 1,000 additional jobs after the 6,500 job
cuts announced earlier this year.
Companies are also tapping the debt market, ben-
efiting from a relatively low debt ratio that will allow
them to cover spending and dividend payments that,
except for Eni, have remained unchanged.
Britain s BP increased its debt ratio to 20 per cent
from 15 per cent a year ago after agreeing in July to
pay US$20 billion in fines relating to the 2010 Gulf
of Mexico oil spill.
Norway s Statoil posted worse than expected third-
quarter core earnings and said it would slash capital
BP, like Total, posted a sharp fall in profits but beat
analyst expectations, citing efficiencies, higher oil pro-
duction and strong refining results.
Shell and Eni shares were down 1.4 per cent and
1.8 per cent respectively, with Total up by 0.4 per cent.
The European oil and gas index was largely flat.
As oil prices are now hov-
ering around US$45 per
barrel, the entire oil and
gas industry is looking
forward to the next OPEC
meeting, due to be held
on December 4 this year in Vienna. On
October 14, non-OPEC member Mexico
confirmed its participation in a technical
meeting organised by the cartel on October
21 in Vienna to which seven other non-
OPEC members were also invited.
"We are going with a technical delegation
to receive information and exchange it with
other producers. But Mexico will not take
part in any reduction in production volume,"
said Mexico s Energy Minister Pedro Joaquin
Coldwell. The meeting was held last
Wednesday and was attended by represen-
tatives of five countries: Russia, Brazil, Kaza-
khstan, Colombia and Mexico. The main
agenda of the meeting was to exchange dif-
ferent market views and create a common
strategy in response to the current market
conditions and low oil prices.
What exactly happened at the
Venezuela has been the most vocal OPEC
member when it comes to the issue of raising
oil prices by altering the cartel s production
levels. During the technical meeting between
OPEC and non-OPEC members, Venezuela
proposed that OPEC must resume its policy
adopted in 1980s of fixing the oil price. It
suggested a possible ceiling price of US$88
per barrel which would naturally require
OPEC to reduce its current production levels.
In addition, Venezuela also proposed another
technical meeting of this kind to be held
during the upcoming December 4 meeting.
"We are concerned about the depletion
of reservoirs and about the decline of pro-
duction. We are talking here about an equi-
librium price to sustain the production,"
said Venezuela s Oil Minister Eulogio del
Pino in response to his nation s stand on
the OPEC production levels. Although it
was agreed that a similar meeting would
be held again after December 4 for assessing
the global oil markets, Venezuela s proposal
of reducing the production levels for setting
a specific ceiling price was not even dis-
With Russia and other non--OPEC mem-
bers refusing to stand by Venezuela, the
meeting re-iterated OPEC s policy of sticking
to its production levels instead of reducing
Although Venezuela has received support
from other OPEC members such as Ecuador
and Algeria to some extent, the OPEC leaders
dismissed any further speculations on pro-
With this firm stand, it is possible that
we might witness the formation of two
blocks within OPEC during the next Decem-
ber 4 meet in Vienna. One, led by Venezuela,
Ecuador, Libya and Algeria that would want
to reduce production levels and the other
led by Saudi Arabia, UAE and Kuwait that
would stick to the current strategy of defend-
ing market share.
Iran may have a neutral stance as, although
it urged the other OPEC members to reduce
their combined production to maintain a
ceiling of US$70-US$80 per barrel, Iran
would itself be ramping up its production
levels to regain its lost market share, once
the western sanctions against it are lifted.
What does this decision mean for
the future of OPEC and the oil
"OPEC made it very clear months ago
they will not interfere to control prices and
it is the market that should do that," said
one of the OPEC delegates during the meet-
It is quite clear that even Russia (which
produced around 10.74 mb/day in Septem-
ber, a new post- Soviet Era record) is not
interested in reducing its output and is com-
peting directly with Saudi Arabia in markets
like Europe and Asia, battling for market
On the one hand, the Saudis are offering
discounts to customers in Asia, Europe and
the US. On the other, Russia is competing
hard with Saudi Arabia in Eastern Europe
In any case, a potential OPEC cut in pro-
duction levels would not be the complete
solution to the problem of the global supply
glut as the U.S. shale patch has nearly dou-
bled its production, up by 4 million barrels
per day between the year 2011 and 2015,
arguably making them more responsible for
the supply glut and current oil price crash.
Survival of the fittest
In the end, it will come down to survival
of the fittest. Players who have higher
breakeven costs will be the ones who will
blink first and thereby reduce their produc-
In the present scenario, the US shale
drillers, who have very high breakeven costs,
are going out of business and we are already
witnessing how US production is falling
every month since April. Still, oil prices
remain below the US$50 per barrel mark.
The survival of the fittest also applies to
Middle East oil producers, and especially
to Saudi Arabia, the undisputed leader of
As widely reported by the media, the
International Monetary Fund has warned
that Saudi Arabia is now facing the possibility
of going broke in the next five years, while
the other Middle Eastern nations like the
UAE, Kuwait and Qatar have foreign reserves
that could last for almost 20 years.
The desert kingdom is now facing a mas-
sive budget deficit of US$36.8 billion accord-
ing to its 2015 budget figures and is burning
its foreign reserves at an alarming pace.
Although Saudi Arabia is responding to this
crisis by cutting spending, postponing several
projects and by attracting foreign investment,
is it doing enough to salvage the situation?
Many experts now believe that Saudi Ara-
bia will eventually be compelled to cut its
production levels as its rising budget deficit
will leave the desert kingdom with no other
option. And, with Saudi Arabia deciding to
cut the production, we can expect oil prices
to bounce back in the longer run. Until then,
oil prices will continue to remain bearish
Although it is almost certain that OPEC
will not change its strategy in its next meet-
ing in Vienna, it is unlikely that it would
maintain this stance for too much longer
slipping into the red
as outlook dims
How long can
OPEC hold out?
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