The oil price is being picked to only rebound slightly over the next few years, not getting close to reaching the peaks of recent years.
Woodward Partners, a corporate advisory firm, forecasts the price of Brent Crude Oil will only increase marginally to US$70 a barrel by 2017.
The price of Brent Crude (the most commonly used benchmark globally) is sitting at US$60, but slumped to a low of US$46 in mid January.
It peaked just under US$150 a barrel in July 2008, before plunging to US$35 in December 2012, and rebounding to US$130 at the start of 2012 and US$115 in mid 2014.
Woodward predicts the price will linger around US$50 during the first half of the year, increase to US$60 in the second half of 2015, US$65 in 2016 and US$70 in 2017.
“Current pricing levels are fundamentally unsustainable, however we think it will likely be 2016 before meaningful direction arrives.
“Ahead of that, with OPEC’s apparent resolve, burgeoning inventories and system bottlenecks we think risk lies squarely to the downside from current levels.
“We would not be at all surprised to see Brent back below its January US$46 trough point as US production peaks during the next 3-6 months.”
The Wellington-based firm makes its forecast having just attended the Argus Americas Crude Summit in Houston.
It says its forecasts are slightly more subdued than many of 550 North American delegates, who are predicting the price to rise to US$70 to US$80 over the next 12-18 months.
While they believe the problem of over supply will correct itself, Woodward says issues around the supply and storage of oil aren’t showing signs of abating soon.
Where does this leave the industry in New Zealand?
Woodward head of research, John Kidd, says all operators in New Zealand are taking a hit with their revenues essentially halving.
Yet larger companies are in a better place to absorb the impact, with greater cash reserves, and established production operations.
Woodward says, “Cuts have been announced by the parents of each of the global players that are most active in New Zealand, however in our view it is unlikely that near-term NZ work programmes will be materially affected.”
Kidd says the likes of Shell, Todd and OMV will continue producing at the deeply established Maui, Pohokura and Kapuni fields.
“Each of those fields are still going to be very profitable for their operators, and there’s no real need for them to look at sell-offs or equity share”, he says.
Woodward reports, “The impact at the top-end will be muted due largely to the relatively advanced (in respect of planning, execution and cost outlay) status of most existing work programmes.”
Shell chairman Rob Jager says, "We have a strong balance sheet and take a long term view on finance and project economics. Like any prudent business, we keep a close eye on a range of market factors and how we respond."
Neither Shell nor Todd will comment on whether they are deferring or cancelling exploration projects to cut costs.
Early last year Shell announced it aimed to start a major exploration campaign in the Great South Basin in the summer of 2015/16.
Kidd says Shell hasn’t secured a rig to undertake this work yet.
“With the focus of most of the major players over the next couple of years likely to be on completing previously committed and low-cost geotechnical and geophysical work (seismic acquisition and reinterpretation, desktop studies etc), we don’t expect a material near-term impact against programmes already slated”, Woodward reports.
“‘Next generation’ programmes that would require drilling outlay closer towards 2020 to proceed are at greater risk of the oil price track, and will be watched closely over the next 12-18 months.”
Smaller players feeling the pinch
TAG Oil has revised its Capital Programme for the year, and is cutting its budgeted commitments from $85.5 million to $17.5 million.
The Canadian-based company, which formed and gained stakes in New Zealand in 2002, says it hasn’t yet achieved commercial success from its capital-intensive exploration efforts, so is having to scale back and de-risk to cope with plunging oil prices.
Country manager, Max Murray, says the company will continue production from its Taranaki sites like usual, but is postponing some of its exploration plans.
He says it’s also seeking joint venture partners to help fund exploration, but will have to drop some of its permits if it doesn’t have the funds.
This may mean turning its back on its controversial plans to drill on the East Coast of the North Island.
Coming off the industry’s busiest summer in New Zealand, TAG was awarded two of the six onshore exploration permits awarded by the Crown in last year’s Block Offer.
Murray says the company isn’t making staff redundant. However, it isn’t hiring new staff, or replacing those who leave. It’s also relying more on contractors.
New Zealand Oil and Gas is also tightening its belt, relinquishing two exploration permits for off the coast of Taranaki.
Chief financial officer, Andre Gaylard, says the gas component of the business is keeping it afloat.
The local gas market is driven by production from New Zealand-based fields, so is insulted from oil price changes.
Gaylard says 75% of what it produces from the Kupe field is gas for LPG, which it supplies to Genesis Energy.
He says New Zealand Oil and Gas has a ‘life of field’ gas supply agreement with Genesis, which pays a fixed price, adjusted for inflation.
One permit surrendered
The Ministry of Business Innovation & Employment says since December only one oil and gas company has relinquished its exploration permit, and none have relinquished their production permits.
It says financial hardship – ie an oil price drop – isn’t a valid reason for companies to have their work programmes extended or modified.