The last barrel

Oil prices are back in the headlines and, unfortunately for those of us whose paychecks are derived from hydrocarbons, it isn’t for the right reasons. After peaking in early June, prices slid in July, with both WTI and Brent slipping into a bear market in early August.

After reaching its nadir in February, oil began to climb, and the overwhelming consensus was that things would start to rebalance in the second half of the year. Now, the general consensus seems to be that oil’s latest sally into a bear market will be short-lived. However, we would do well to take the changing opinions—and that is what they are—of experts with a grain—or perhaps a whole bag—of salt.

The one thing that no one, no matter how well-paid, can predict—with certainty—is the future. Analysts can make educated, well-informed predictions, based on the best available data, but given the ever-changing nature of the upstream industry and the seemingly emotional nature of crude oil trading, it is far from an exact science—a fact aptly illustrated by the bloody trail of failed oil-price projections from this downturn. There is, however, one constant that all but guarantees an eventual uptick in oil prices and, therefore, activity: investment.

Spending. According to recent research from the good folks at Evercore ISI, global E&P spending looks set to fall another 26% this year—the second largest drop since 1986, when spending dropped 31% from the prior year—after declining 21% in 2015. According to the consultancy, global upstream capex will drop below $400 billion for the first time since 2009.

The scale of the cutbacks also was illustrated in another recent study by Wood Mackenzie, which said that global upstream development spending between 2015 and 2020 has been cut 22% or $740 billion. However, when spending on conventional exploration is included, the total rises to more than $1 trillion.

Meanwhile, with a reckless disregard for such cutbacks, demand is set to continue growing. According to IEA’s Medium-Term Oil Market Report 2016, global demand is projected to grow 7.2 MMbpd between 2015 and 2021, at an annual average growth rate of 1.2%; so, while demand stood at 94.4 MMbpd in 2015, it is expected to reach 101.6 MMbpd by 2021.

While the spending cuts have been taxing, exacting a painful human toll, the dearth of investment is, slowly but surely, paving the way for higher prices. As we are all too well aware, the cuts have resulted in many projects being cancelled or delayed, and production rates will only continue to decelerate, as maintenance delays and natural decline rates exact their inevitable toll. And despite being hailed as the new swing producer, shale, while far more agile than other plays, will be unable to counter the sheer scale of the cuts.

As Evercore so succinctly put it, “We continue to believe current spending levels, as well as oil prices, are unsustainable, and the longer spending remains subdued, the stronger and longer the coming upcycle will be.” The next expansion is in the making; we just can’t see it yet.

Offshore leasing. Meanwhile, the Bureau of Ocean Energy Management (BOEM) announced last month that Western Gulf of Mexico Lease Sale 248 will be the first federal offshore oil and gas auction closed to the public. The auction, which will be held on Aug. 24 in New Orleans, La., will, instead, be streamed online.

According to a spokesperson, the bureau has been taking steps to “modernize and streamline the leasing process” for several years, and it believes that broadcasting the auction will promote governmental efficiency (an oxymoron if ever there was one) and transparency. (In the name of editorial transparency, I must confess, I’d rather watch Netflix). However, the change—which comes after the March lease sale was interrupted by protesters—also acts as a harbinger of troubled times and the increasingly vociferous anti-industry rhetoric of environmentalists.

“This re-evaluation of the lease sale process is part of our ongoing effort to reduce costs associated with travel and rental expenditures, and to help BOEM minimize its carbon footprint,” the agency said in a note explaining the change. “In fact, BOEM had been considering alternative methods of hosting all its public meetings, including the oil and gas lease sales. However, recent events have demonstrated that some modifications to the lease sale process are warranted and could be implemented immediately to help meet these objectives, and in particular to ensure the safety of employees.”

Leaving aside further jokes about efficiency, the fact that oil and gas auctions now have to be held behind closed doors, to ensure staff safety, is deeply troubling. BOEM, in my opinion, acted correctly in closing the auction—it does, at the end of the day, have a duty to protect its employees, stakeholders and the general public—but what’s next?

The treatment meted out to this industry—by both environmentalists and the federal government—is, quite frankly, a disgrace. The oil and gas industry, which, according to API, supports 9.8 million jobs and 8% of the nation’s economy, is alternately treated as little more than a whipping boy and a cash cow. As for the environmentalists who marred the March lease sale, I wonder how many of them will summon up the righteous indignation to actually watch the next auction online. Oh, silly me, they can’t. That would be hypocritical; after all, oil is used to make the plastics used in computers and cell phones. Shhh—don’t tell the enviros; they might have another tantrum.