Future Shortage? | Russell T. Rudy Energy LLC
According to a recent article in “World Oil”, Jarand Rystad, managing partner at consulting firm, Rystad Energy, there will be a future oil shortage based on the cutbacks in the oil field service companies. Rystad’s research indicates that we need to replace 34 million barrels of oil per day every year to keep abreast of consumption. However, investment decisions made in 2015 will provide for only 8 million barrels per day for the long term.
Rystad observes that oil prices continue to fall as OPEC decided to remove its obsolete, and virtually irrelevant, output ceiling at its latest meeting in Vienna. Concurrently, exploration and production spending has been reduced by $250 billion this year as opposed to 2014, with a further reduction of $70 billion expected in 2016. Rystad sees dividend payment as imperative for many companies. This, in conjunction with incompressible tax and royalty payments means that most upstream players are cutting in critical areas. If demand growth concurrently remains strong, we likely will see a new shorting within a few years. When this happens, Rystad feels that oil service capacity will not be there to support growth at the requisite pace. This would result in a new era of step cost inflation, which in turn would drive oil prices to excessive levels and negatively impact the world economy.
Rystad supports this scenario by citing a 16% cut in jobs among the top 50 oil service companies. In 2014 these companies had $300 billion in revenues and 950,000 employees. Currently, 150,000 of these employees have been laid off, and an additional 250,000 layoffs can be expected worldwide from the nest tier of service companies.
Rystad concludes, “I am concerned that the current job cuts could lead to a severe shortage of oil service capacity in a few years. It is very easy to get rid of people, but it will take a lot of effort and cash to bring people back to the industry. A responsible action from petroleum nations would be to stimulate the oil price in the short term in order to incentivize drilling and field development globally and stop downscaling of oil service capacity.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2015/12/09/future-supply-security-at-risk-as-oil-service-capacity-continues-to-be-cut-rystad .
