Credit Suisse
Clearly in surplus, we believe global oil markets are at a
tipping point. Either Saudi Arabia cuts oil production or lower
prices will force producers to adjust.
This note is about the latter case and we will walk you through
"the five stages" of upstream loss and grief involved in a price
shock, with average oil prices of $75 per barrel of West Texas
Intermediate (WTI). The first stage is denial.
Anger -- Our play-by-play rig-based U.S. upstream model cuts
production growth in the Bakken, Eagle Ford, Permian and other
tight oil plays from more than 1 million barrels per day in each of
the last few years to only 200,000 barrels per day (b/d) per year
increment in year one of $75 oil. Evidently, however, inertia (or
denial, anger, bargaining and access to capital) delays that
response. Ultimately though, in the U.S. and globally, declines in
the about 40 million barrels per day (Mb/d) of older fields should
accelerate and a cash-strapped industry will likely seek to defer
big new capital commitments.
Bargaining -- This will likely not be pleasant, but within a
scant few years, the redirection of capital and a more general
living-within-one's means attitude will likely enhance productivity
and drive down costs. Critically, in our view, steady state growth
within the U.S. shale universe, will rise back up to about 500,000
b/d per year as soon as 2016-2018.
Depression -- This too will pass, in our view. Oil demand should
get a lift from lower prices, in due course. Simply put, on a
global level an oil-consumption tax would be reduced by about 20%
(from a five-year rolling average of Brent oil at $100 a barrel
today to $82). Fully import dependent economies such as Japan and
South Korea face less of an energy headwind, and the U.S. consumer
can use its dollars to consume other products, outweighing the
negative effect of reducing the generally less productive
super-normal surpluses of Gulf Cooperation Council (GCC)
oil-exporting economies or intensifying pain for less-fortunate
sovereign producers.
Acceptance -- In the longer run, say from 2017-2018 forward, it
becomes increasingly obvious to us that less-well-mitigated decline
rates, project deferrals and resilient oil-demand growth may add up
to the need for more capacity growth. Ultimately, the industry will
very likely need to resuscitate large offshore and other big-ticket
projects. Whether we will see $100-a-barrel oil again depends in
part on how successfully majors barter down service costs.
-- Jan Stuart
-- Edward Westlake
-- Johannes Van Der Tuin
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