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Early Signs of a Pullback in Drilling
Activity, Due to 30% Decrease in Oil prices
Al-Jazeerah, CCUN, November 17, 2014
Early Signs Of
A Pullback In Drilling Activity
With oil prices low and showing no sign of an immediate rebound, the
industry is beginning to pull back on spending.
Oil prices have
30 percent since summer highs, raising fears among producers across the
globe. Yet, many oil majors are relatively diversified, with large holdings
downstream. For example, ExxonMobil and Chevron have been insulated in the
third quarter because of their large holdings in refining. Steep declines in
oil prices may hurt their production sectors, but with lower priced oil as
an input, big oil's refining assets become more profitable.
third quarter, ExxonMobil reported a
3 percent rise in earnings compared to quarter three in 2013. That was
largely driven by the Texas-based oil giant's
refining assets, which saw its profits rise by more than 70 percent from
$592 million to $1.02 billion. Chevron's refining program succeeded in
quadrupling its profits in the third quarter, more than offsetting the hit
the company has taken from the slide in oil prices.
that are not as large or integrated across various subsectors of the oil
industry are not as shielded from the current soft price environment. And
there are signs that a slowdown is beginning to take shape.
services firm Baker Hughes reported
another drop in the active rig count in early November, with oil rigs
declining by 14. With 1,568 rigs in operation, the oil rig count is now at
its lowest level since August, and down 49 rigs since a peak in October.
could decline to 1,325 in 2015, according to some projections.
While some companies appear undaunted, vowing to maintain or even increase
production, others are beginning to pare back spending plans. Continental
Resources, a major oil producer in North Dakota's Bakken play,
has stated that it won't deploy more drilling rigs next year. Pioneer
Natural Resources, with large holdings in the Eagle Ford and Permian basin,
has hinted at more modest plans for 2015 due to lower oil prices.
The companies that service the oil producers are also on the frontlines,
often feeling the brunt of a pullback in drilling activity quickly.
Transocean, a major offshore oil drilling contractor, reported a nearly
$2.8 billion impairment
charge during the third quarter, which was "due primarily to the decline
in the market valuation of the company's contract drilling services
business." In other words, lower oil prices hurt demand for Transocean's
Transocean's 29 ultra-deepwater drilling rigs had
296 combined days of being out of service in the third quarter. That was
an enormous increase over the previous two quarters – 110 days of
out-of-service days in quarter two, and just 98 days in the first quarter.
Even worse, the company expects the rigs to be inactive for a total of 435
days in the fourth quarter.
Short sellers are even stepping up their
positions against oil field service companies as they sense an opportunity.
reported on several European firms that are starting to come under fire
from short sellers.
Nevertheless, the selloff in oil prices could be
overdone. OPEC's Secretary-General Abdullah al-Badri tried to ease
speaking at a conference in Abu Dhabi on November 10. "Please do not
panic, things will fix itself," he said. On its face, that response would
seem to suggest that OPEC thinks prices have bottomed out. On the other
hand, Kuwait's Oil Minister
suggested that OPEC will not cut its production target, and echoing al-Badri's
comments, he said that "prices will settle down once surplus oil is
No decision has been made yet, and OPEC will meet at the
end of November in Vienna to decide its next move. But merely allowing the
market to sort itself out while maintaining current production levels will
almost certainly spark a negative reaction in the oil markets.
would put greater pressure on oil producers and oil service companies around
the world, potentially forcing further cutbacks in production plans with the
weakest players and the highest cost regions feeling the worst of it.
By Nick Cunningham of Oilprice.com
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