Share

Price fall to push oil industry into recession

New York - The oil price plunge will force energy companies to slash capital spending in North America, Europe and Asia in 2015, said investment bank Evercore IS.

But investment will continue to rise in Africa and the Middle East as producers in those areas seek to boost long-term output in the flooded global oil market.

Evercore estimated that oil companies would cut spending on exploration and production globally this year by 10% to 15%, and by 25% to 30% in North America.

"To sum it up, a sharp recession is coming to the global oilfield," said James West, an oilfield services analyst at Evercore, after surveying 300 global oil and gas companies on their 2015 spending plans.

The report shows the impact of the steep drop in oil prices. US oil prices Tuesday closed at $47.93, down from nearly $107 in June.

The London benchmark, Brent crude, has fallen from $115 a barrel to less than $52 Tuesday.

The oil-price crash is also beginning to reverberate across other industries. US Steel plans to lay off hundreds of workers due to lower petroleum industry demand for pipes, a union source said Tuesday. About 750 workers are expected to lose their jobs, according to US media.

Evercore said the oil industry is contending with lower cashflow and a lack of access to capital. Independents are especially vulnerable.

As a result, companies are cutting back especially in high-cost Arctic drilling and in Canadian oil sands projects, as well as on some US shale ventures.

Arctic projects require oil prices of about $115 to $122 a barrel to break even, while Canadian oil sands and deepwater developments can require $90 a barrel.

Many US shale developments can withstand a somewhat lower price, but Evercore said a sustained fall to $60 a barrel or below would force companies to curtail operations.

Evercore also expects capital spending in Europe to fall by 20% due to cuts in the North Sea. It projects more modest declines in spending in Asia and Latin America.

Investment in Russia will be trimmed by 10% or more due to lower prices as well as international sanctions on Russia.

However, Middle East capital spending is expected to rise 15%, with Saudi Arabia proceeding with a number of high-cost natural gas projects and Kuwait working to boost its crude output to four million barrels a day in 2020 from about three million now.

The report said African spending would rise by six percent in 2015, thanks to strong investment in Angola and Algeria.

 Oil services slump

The Evercore report showed a sector grappling with uncertainty at how low oil prices would fall and for how long.

Companies in the sector based their capital budgets on an average 2015 price of $78 a barrel, implying the industry sees a rally in crude prices later in 2015.

But Societe Generale Tuesday slashed its earnings estimates for oil services companies, predicting that "the oversupply situation will pressure the oilfield environment well into 2016."

Oil-services companies Halliburton (-0.9%), Schlumberger (-2.1%) and Weatherford International (-0.7%) continued to drop Tuesday in parallel with crude prices.

Evercore's projections were based on replies to a survey on company spending plans that was begun in November, when the US price was still above $70 a barrel.

Survey responses showed 2015 capital spending declining by 11% in North American and 2.1% in international markets.

However, West said because oil prices have continued to sink since the survey was launched, its numbers "grossly" underestimate the scale of likely spending cuts.

Indeed, in December 15 companies revised down their capital spending plans by an average of 38%.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.90
+0.2%
Rand - Pound
23.85
+0.2%
Rand - Euro
20.39
+0.2%
Rand - Aus dollar
12.31
+0.2%
Rand - Yen
0.12
+0.1%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders