Pessimism reigns after big drilling rebound
Third weekly increase in Canada, U.S.
• Like green shoots after a dark winter, an optimist might have called the sudden pickup in drilling rigs a sign that life is finally coming back to the hard-hit sector.
The number of rigs actively drilling in the United States and Canada jumped by 19 last week, to a total of 876 active rigs, according to the most recent data from Baker Hughes Inc. Those additional rigs mark the third weekly increase in the North American drilling rig count in a month.
But optimism has a short shelf life in the oil industry these days. And now that WTI prices have fallen from over US$60 a barrel last month back below US$50 again, ana- lysts expect that activity to slow once more.
“I don’t think (oil) prices sub-US $50 are really high enough to justify a pickup in drilling in the U.S., if anything, I think they should be pulling back,” Scotiabank vice-president and commodity market specialist Patricia Mohr said Monday.
Mohr said the additional rigs are “one of the reasons why prices have moved down again,” as the market watches drilling rig numbers for signals of new oil supply in key shale plays in the U.S.
The West Texas Intermediate benchmark oil price closed at US$47.02 per barrel on Monday. “There’s been a little pickup again in drilling in (Texas’) Permian basin but I do not think that’s a trend that’s going to stay with us, particularly given the drop in prices again in recent weeks,” Mohr said.
Indeed, analysts are now saying those signs of life, and the expectations of an uptick in activity going into the third and fourth quarters — expressed by major drillers like Halliburton Co., Baker Hughes and Schlumberger Ltd. — are disappearing.
“The green shoots have been stamped out,” AltaCorp Capital analyst Dana Benner said.
“Oil had recovered for a while and with lower pricing in the oilfield service sector, et cetera, certain E&P companies were starting to gear back up again,” Benner explained.
He added that the rig count would likely fall “in the coming weeks” as a result of the oil price plunge and as big and small oil companies pull back on spending.
Indeed, a recent report from Wood Mackenzie said global oil and gas producers have delayed US$200 billion in capital spending on major projects as the oil price rout has taken hold.
“The upstream industry is winding back its investment in big (not yet finalized) developments as fast as it can,” the report notes, adding that oilsands development in Canada and global offshore oil projects dominate the deferrals.
New oilsands mining projects require US$100 per barrel oil prices to earn a 10 per cent return on investment, while new steam-based projects require prices above US$60 per barrel.
“While the long-term value of the resource for companies such as Cenovus, Suncor and Shell is significant, we expect a lull in new project spending through to 2017, after which an increase in capital allocation and more FIDs (final investment decisions) will once again be on the cards,” the report notes.