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Market expectations

A recent brief by the US Energy Information Administration examined market expectations following the sharp decline in crude oil prices. "December was the sixth consecutive month in which monthly average Brent crude oil prices decreased, falling $17/bbl from November to a monthly average of $62/bbl, the lowest since May 2009. The December price decline, and its continuation into early January, reflects continued growth in US tight oil production, strong global supply, and weakening outlooks for the global economy and oil demand growth...As oil prices have sharply declined, market expectations of uncertainty in the price outlook have increased as reflected in the current values of futures and options contracts."

WoodMac: The point at which producing oil fields become cash negative

As oil prices move ever lower, Wood Mackenzie has assessed at what price the operating cash flow from producing oil fields turns negative. Negative operating cash flow can be an immediate brake on production. While Wood Mackenzie does not think this floor will necessarily be triggered, this latest analysis serves to gauge where it is and how much supply would be affected at what level. Wood Mackenzie concludes that a Brent price of $40 a barrel ($/bbl) or below would see producers shutting in production at a level where there is a significant reduction of global supply. US onshore ultra-low production volume 'stripper wells' could be first to be cut.

Robert Plummer, corporate research analyst for Wood Mackenzie said: "The cash operating cost for oil fields becomes very important as prices producers can achieve for the oil they produce nears the marginal point. It can be a more immediate brake on production, although when and how that might be reached is never easy to predict.

"The point at which producing oil fields become cash negative is key in assessing how far the oil price could fall. Once the oil price reaches these levels, producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply," Plummer continued.

Wood Mackenzie's analysts have mined its global database of 2,222 oil producing fields, which account for total liquids production of 75 million barrels a day (bpd) and determined at three oil price points, the impact on oil production and percentage of global supply which will turn cash negative:

At $50 a barrel ($/bbl) Brent, only 190,000 bpd of oil production is cash negative, representing 0.2% of global supply. Seventeen countries supply oil that is cash negative at $50, with the main contributors being the United Kingdom and the United States.

At $45, 400,000 bpd is cash negative, or 0.4% of global supply. Half of this production is from conventional onshore production in the US.

At $40, 1.5 MMbpd is cash negative, or 1.6% of global supply. At this point, the biggest contribution is from several oil sands projects in Canada. Tight oil production only starts to become cash negative as the Brent oil price falls into the high $30's.

"Being cash negative simply means that the production is more costly than the price received. This does not necessarily mean that production will be halted. The first response is usually to store oil produced in the hope that the oil can be sold when the price recovers. For others the decision to halt production is complex and raises further issues," Plummer explained. "Thus, there is no guarantee these volumes would be shut-in. Operators may prefer to continue producing oil at a loss rather than stop production - especially for large projects such as oil sands and mature fields in the North Sea."

Wood Mackenzie says the key question for oil price watchers seeking to identify a floor for the oil price is where will production be shut-in first? Concentrating on a scenario of Brent oil price of $40, its analysis highlights where and what type of production is most likely to be examined:

US onshore production - There is approximately one million b/d of oil production that comes from what are called 'stripper wells'. Many of these produce only a few barrels/day and operating costs vary between $20 and $50. We believe that once the cost of collecting the oil from these wells becomes marginal, shut-ins are likely.

Canada Oil Sands - Turning on and off bitumen production is a complex and lengthy process. Stopping the injection of steam into oil sand reservoirs would result in a long and expensive re-start. Interestingly, a significant part of the operating costs of oil sands is fuel for the extraction processes, so at low oil prices, operating costs may be lower than current levels.

United Kingdom - Many North Sea fields are old and are reaching the end of their lives. The decision to cease production is often irreversible. Some platforms share their cost burden with other linked fields, and satellite fields are dependent on a mother platform. Consequently, the economics of a group of fields have to be considered. A company seeking to reduce its expenditure for the next two to three years, may prefer to operate with a small loss, rather than start the decommissioning process which may cost hundreds of millions of dollars.

Heavy oil - There are a number of heavy oil projects in Latin America, which become marginal at low oil prices, like those in Venezuela and Colombia. As governments are dependent on revenues from these fields, we may see some form of relief on royalty to ensure that production continues.

ConocoPhillips starts Production from Eldfisk II

ConocoPhillips has started first oil production from the Eldfisk II project in the Norwegian North Sea.

Eldfisk II, along with Ekofisk South and other projects offshore Norway, will add approximately 60,000 barrels of oil equivalent per day to the company's production volumes by 2017.

The Eldfisk II project includes plans to drill 40 new production and water injection wells. One of four pre-drilled wells is currently online, with the remaining three anticipated to come on stream this month. Production from the field will ramp up over the next three years as additional wells are brought online.

The Greater Ekofisk Area, located approximately 200 miles offshore Stavanger, is comprised of four producing fields: Ekofisk, Eldfisk, Embla and Tor. Crude oil from Greater Ekofisk's producing fields is exported via pipeline to Teesside, England, and natural gas flows via pipeline to Emden, Germany.

ConocoPhillips (35.1%) operates the Greater Ekofisk Area. The other Ekofisk co-venturers are Total (39.9%), Eni (12.4%), Statoil (7.6%) and Petoro (5.0%).

Moody's: Proppant companies' earnings at risk from oil price drop

Proppant companies' earnings are at risk following the severe decline in oil prices since mid-2014, according to a new report by Moody's Investors Service. These companies, which supply the sand used in hydraulic fracturing for oil and gas, generate a substantial portion of their revenue, and in some cases all of their revenue, from oil and gas end markets.

Moody's changed its outlooks for the exploration and production (E&P) and oilfield services and drilling (OFS) industries to negative in November, in light of falling oil prices. Since July last year, prices have plunged from over $100 per barrel to below $60 per barrel.

According to the report, if oil prices average $75 a barrel next year, capital spending in the E&P sector likely will fall by about 20%, but if they remain below $60 a barrel, spending could fall by 30%-40%. "The impact on proppant companies will become apparent this quarter and accelerate as spending declines, though advancements in hydraulic fracturing technology will help offset slowing demand for proppants," noted vice president, senior credit officer, Karen Nickerson.

Among Moody's-rated companies, US Silica and Fairmount Santrol are the best positioned to weather softening demand, since they sell into industrial, specialty, and recreation end markets in addition to oil and gas end markets, Nickerson said. They also have more destination terminal facilities at the basins where oil is drilled than competitors. Overall Moody's-rated companies are better positioned than their smaller, unrated peers to compete for falling demand from oil and gas companies.

"Liquidity will be important in navigating the current volatile environment, particularly for highly leveraged companies," Nickerson said. "Contract renegotiations are bound to follow cuts in E&P spending and will also pressure proppant companies' earnings this year and, if oil prices stay low, even more in 2016."

The slide in oil prices will see proppant companies' focusing on efficiencies and cost containment, especially in terms of transportation, which can account for as much as 80% of the total cost of sand, Moody's said. Rated companies' expanded logistical capabilities also leave them better positioned in this respect than smaller firms, and will continue to be a key differentiator in the competitive proppant environment.

Petrobras discovers accumulation in Sergipe Basin Farfan area

Petrobras announces results of drilling well 9-SES-188D (Petrobras nomenclature) / 9-BRSA-1280D-SES (ANP nomenclature), located at concession area BM-SEAL-11, in block SEAL-M-426, in Sergipe Basin ultra-deep waters.

The results confirm the light oil and gas discovery in Farfan area (between 37° and 40° API), as announced to the market on August 9th, 2013. The results presented excellent permoporosity conditions in the turbidities reservoirs with 54 meters thickness.

This drilling also presented a new light oil accumulation in a deepest reservoir, with 28 meters thickness and in good permoporosity conditions.

Located at 107 km off Aracaju, at 5.7 km off the discovering well and at a water depth of 2,492 meters, the well reached a final depth of 5,900 meters and it is under evaluation now.

This accumulation is part of the Sergipe-Alagoas Basin deep-water exploration project, according to Petrobras´ Business and Management Plan for the 2014-2018 period.

Petrobras will continue with the Discovery Evaluation Plan, as approved by Brazil's Petroleum, Natural Gas and Biofuels Agency (ANP).

Petrobras is the operator of the consortium (60%) in partnership with IBV-BRASIL (40%).

Chevron makes GOM discovery

Chevron encountered oil pay at the Anchor prospect in Green Canyon Block 807. The well, located approximately 140 miles off the coast of Louisiana and spudded Aug. 2014, hit oil in multiple Lower Tertiary Wilcox Sands. The well sits in 5,183 feet of water and was drilled to a depth of 33,749 feet. Chevron USA Inc. is the operator, with a 55% working interest. Co-owners are Cobalt International Energy Inc. (20%), Samson Offshore Anchor LLC (12.5%); and Venari Resources LLC (12.5%).