US$60 is new benchmark for oil industry investment
For U. S. oil drillers, US$60 is the new US$50.
Earlier this year, oil and natural gas companies facing the worst slump in a generation said they’d need crude to reach US$50 a barrel before resuming drilling. This week, despite higher prices and lower costs, the industry has raised the bar, signalling it will take US$60 or better before meaningful production can resume.
“The industry doesn’t want to ramp things up until they are fairly confident prices will hold up,” said Brian Youngberg, an energy analyst at Edward Jones in St. Louis, in a telephone interview. “I think the industry has learned that it needs to get away from this boom-bust scenario.”
Al Walker, Anadarko Petroleum Corp.’s chief executive officer, is one energy industry leader waiting for that US$60 mark. “The more we feel comfortable about that sustained $60 price environment, the more likely you will see us increase capital,” he said on a conference call to discuss secondquarter earnings on Wednesday, noting that he expects prices to hold at that level in 2017. Hess Corp. cited the same tipping point before it adds rigs.
Above US$60, drilling is likely to pick up and costs will rise for oilfield-service crews, Pioneer Natural Resources Co. CEO Scott Sheffield told analysts on a conference call Thursday. Pioneer has bucked the trend and largely kept drilling through the price slump, but an increase would lead the company to tap even more wells. “In a $60, $70, $80 price environment, the company will have to bring forward more of their locations,” executives said on the call.
A wave of service-cost inflation is expected to put pressure on explorers starting back up, according to Schlumberger Ltd. As producers ratchet up spending to get back to work, much of the early investment will be soaked up by rising costs from every part of the service and supply chain, Chief executive officer Paal Kibsgaard told analysts and investors last week on a conference call.
“Customers are going to need something that’s coming in around $60 or high $50s, just because certain costs on our side are going to go up,” Martin Craighead, CEO at Baker Hughes Inc., said Thursday on a conference call.