IPAA '15: Senior analyst sees improvement coming to E&P market late in 2016
NEW ORLEANS -- With the downturn in oil and gas prices now having lasted a full year, at least one veteran observer believes the upstream industry may see the light at the end of the tunnel in late 2016.
Speaking to a second-day crowd at the IPAA annual meeting in New Orleans on Tuesday, John England, vice chairman, U.S. Oil & Gas, at Deloitte LLP, said that one of the primary reasons that he expects some eventual improvement in oil prices is that U.S crude output is “finally beginning to turn down.”
“But that decline is at a slower rate than originally expected,” added England. “For this year, U.S. oil production is projected to average 9.2 MMbpd, which is up from 8.9 MMbpd in 2014. And then it is projected to go down until rising again, late in 2016. Interestingly, while U.S. production has declined in various regions, the drilling productivity per rig remains positive. Yes, global liquids production continues to outpace consumption, but demand response should begin to kick in—we’re finally beginning to see that now. Also, we’re beginning to see auto sales pick up, particularly for SUVs and other vehicles that tend to consume more fuel.”
Production increase
England said that several factors contributed to oil prices declining more than 60% since mid-2014. “For one thing, U.S. output went up 2.0 MMopd, just between 2012 and 2014. Also, Brazil, Iraq and Canada, combined, put another 1.0 MMbopd online. And then, back last year, a lot of people thought that we would just continue to see strong Asian demand growth. Of course, that didn’t quite happen. Last, but not least, we also had come to rely on Opec as the ‘backstop’ for containing excess production. But in November 2014, when Opec didn’t cut production, that was the tipping point.”
Looking at trends that will shape prices further, England noted that “the underlying Chinese economy is still a huge machine, and it is still heading toward more demand growth. We also expect India to see more demand growth.” The analyst pointed out that in a trend that first began in January 2011, even though the U.S. rig count continues to fall, oil and gas production per rig is still increasing, and much of that is tied to the shale plays. “Without a doubt, shale does afford us some capital flexibility.
Another interesting trend, said England, is that there continue to be increased refinery runs in the U.S. market. This is based on increases for both capacity and utilization. “This has helped to accommodate increases in U.S. crude oil production.”
Looking on the gas side, England noted that the eventual export of LNG should help to firm up gas prices. “As of October 2015, the U.S. DOE has approved 10 non-FTA LNG export licenses, and FERC has approved six for construction. The Australians are worried about their LNG competitiveness, due to the relatively low cost of U.S. gas.”
