Independents appear most capital-constrained in worldwide recession
Independent producers who heavily rely on cash flow face bigger financing challenges than major or national oil companies as the global recession depresses oil and gas demand, experts said.
Independent producers who heavily rely on cash flow face bigger financing challenges than major or national oil companies as the global recession depresses oil and gas demand and prices drop, experts said on June 3.
The possible consequences range from a new wave of acquisitions to slower development of natural gas from domestic shale formations, they said at a seminar at the Center for Strategic and International Studies.
"All of the banks have credit issues and are looking for less risk," said Adam Sieminski, chief energy economist at Deutsche Bank. "They're looking at who they lend to and the prospects of getting repaid. With the economy in trouble, they're also looking for projects with a decent rate of return."
"There's a significant difference among various classes in the oil and gas industry," said Guy F. Caruso, a former US Energy Information Administration chief who now is a senior advisor in the CSIS Energy and National Security program.
While the International Energy Agency predicts that worldwide exploration and production outlays will fall 21% year-to-year in 2009, major oil companies and state firms aren't reducing spending as much as mid-size and smaller upstream independents, he observed.
"If there's good news, it's that costs for steel, concrete and other E&P components are coming down after nearly doubling from 2000 to 2008," Caruso said.
Some may disappear
Susan Farrell, senior director for upstream and gas at PFC Energy, said that when that organization surveyed 79 independents about their 2009 spending plans, it identified several which could possibly disappear in the next few years because they can't service their debt.
The problem is that these are the companies which do most of the exploration, which will reduce those expenditures more heavily than other outlays, she said. "The majors are slowing projects down while the national oil companies, which have different objectives, are spending slightly more than last year. But the money is going to less expensive projects, which could have an impact on Canadian oil sands and other costly projects," Farrell said.
US shale gas development also could be affected because it has been largely driven by independents so far, she indicated. "In the last three years, the only US gas growth has been in unconventional formations where independents are most heavily represented. This also is the group that feels the heaviest financial pressure," she said.
Major and national oil companies which have been largely absent from US shale gas activity could acquire properties and companies as that pressure builds, according to Farrell. "The majors definitely are interested in shale gas. The question is materiality. There will be acquisitions, but only if they think the prospects are large enough to be worth the effort," she said.
Government actions also could drive consolidation, Sieminski said. "Any tax moves that put smaller companies at a disadvantage could hurt shale gas development," he warned. At the same time, shale gas development in Europe could reduce the region's dependence on Russian gas, he said.
Technology and people
New technology also will determine where companies direct their E&P expenditures, the panelists agreed. "Major oilfield service companies are where it is now. It has evolved dramatically in the last 20 years," said Alan R. Crain Jr., senior vice president and general counsel at Baker Hughes Inc.
"Our major focus is on technology and people. We can't have one without the other. We will continue to hire brand new engineers coming out of school and continue to educate the engineers we already have, but it requires a long-term commitment. It takes at least two years before we can send a new graduate out in the field and get productive results," he said.
Prices and economics are paramount, others in the group said. The inflection point for deepwater projects is $50-60/bbl, Farrell noted. Producers also could delay projects because they expect service and supply costs to be lower later, she said.
"Actual costs matter. In places like Canada, it's at least $75/bbl. In the longer term, prices will have to rise to at least the replacement cost," said Sieminski.
There's still a huge investment challenge in meeting future oil and gas demand as production declines, Caruso said. "Decline rates could be affected by reduced investment," he said.
"In the long term, investors know that tighter supplies are on the horizon. Demand will eventually resume, but supplies will continue to be depleted," Farrell said.
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