The last barrel

Given the oil-price tsunami that has swept the industry, it’s a relief to see some semblance of stability finally emerging—at least for the moment. Crude has been trending in a positive direction for some time, and sighs of relief could be heard across Houston as oil spiked, albeit briefly, above the symbolic—if of little practical value—$50/bbl mark last month.

Now, at first glance, WTI at $50/bbl may not seem like something to be excessively happy about, but it does represent a significant improvement (about 90%) from this downturn’s February nadir of $26.19. For the time being, however, the price will likely need to hold steady, and at a higher level, before operators commit to completing DUCs and redeploying rigs. In the meantime, a number of challenges lie ahead, which will impact the industry for years to come.

Declining exploration. While the focus of the past few months has been on excessive production and rising storage levels, attention is increasingly shifting to the not-too-distant future and the legacy of decisions necessitated by the downturn.

IHS released a recent report warning that the volume of conventional discoveries outside of North America continued its multi-year decline last year. According to the information service, explorers found just 12 Bboe—2.8 Bbbl of oil and over 9 Bboe of natural gas—of estimated recoverable resources, which represents a record low since 1952. Unfortunately, this year probably isn’t going to be any better.

According to IHS’ Dr. Leta Smith, the decline, which was accompanied by a sharp drop-off in exploratory/appraisal drilling,  “will create a ‘hole’ in oil and gas operators’ portfolios and eventually negatively impact production. This would be beyond the impact of current low oil prices—more likely in the 5-to-10-year range, which is typical between discovery and first production.”

The same basic warning was echoed by Statoil CFO Hans Jakob Hegge in a recent interview. “For the first time in history, we’ve seen cutting of Capex two years in a row, and potentially we risk a third year, as well, for 2017,” Hegge said. “It might be that we see quite a dramatic reduction in replacing the capacity, and, of course, that will have an impact, eventually, on price.”

So while we’re not going to experience a production shortfall, or booming prices, any time soon, the industry could, potentially, find itself frantically scrambling for resources in the future.

But what about shale? Well, in a remarkable about-face from the pre-shale U.S. investment exodus, many large independents shifted their investment back from international projects to U.S. shale. However, the investment shift doesn’t change the fact that shale won’t be able, on its own, to counter the fall in conventional discoveries and delayed projects.

“IHS is forecasting global tight oil production in 2040 to still be in the range of 10% to 15% of total global oil production, so the world market will still need significant conventional exploration discovery and production,” Jerry Kepes, V.P. of IHS Energy, said.

Meanwhile, Tord Lien, Norway’s Minister of Petroleum and Energy, displayed a refreshingly far-sighted vision for the future of the Nordic nation’s industry, hitting back at criticism over opening new areas in the Barents Sea for exploration. “A huge part of the supply today comes out of offshore resources and huge fields that are in decline already,” Lien said during an interview with Bloomberg. Maintaining production at today’s level 10–15 years from now “demands huge investments in oil and gas production.”

So there we have it. We, as an industry, need to better balance long-term objectives with short-term commitments. Decisions need to be made with an eye beyond the next quarterly report, and the next dividend payment, to ensure that we don’t hinder the future success of our respective companies.

Ideology. After drawing heart from Lien’s comments, we see a somewhat different attitude emanating from U.S. officials. When researching a policy issue, it would seem only proper for the agency responsible to at least give the impression of neutrality—actual neutrality may be too much to ask. However, it would appear that BOEM doesn’t worry about such pesky little details.

The agency posted a message on social media last month that could be interpreted in a way which suggests that the agency isn’t acting in a completely impartial manner, as it evaluates which lease sales to keep in the nation’s 2017–2022 leasing program.

The Department of the Interior released details of the proposed sales—10 in the Gulf of Mexico and three offshore Alaska—in March. It subsequently came under fire for ruling out exploration in the Atlantic and limiting the offering offshore Alaska.

However, it looks like the industry will face a continued uphill battle as exemplified by a recent BOEM tweet. The tweet in question, which was posted on May 18 and included a photo of the agency’s director posing with a group of stakeholders, read, “Great meeting w/ Tribal Council of Native Village Point Lay & @alaskawild reps re: opposition to #Arctic drilling.”

Never one to shy away from a fight, U.S. Senator Lisa Murkowski (R-Alaska) took BOEM Director Abigail Ross Hopper to task on the propriety of the tweet during a congressional hearing, saying, “How do we not conclude that the die is already cast, and that your agency has already decided what it is that you are going to be doing?”

When challenged, Hopper insisted that the agency tweets many pictures from its public meetings, including a variety of stakeholders. However, when I scrolled through the agency’s Twitter feed, I couldn’t see any equally prominent, enthusiastic tweets boasting about meetings with group’s supporting responsible Arctic development—go figure.