ODT senior business reporter Simon Hartley talks to Craigs Investment Partners broker Chris Timms about who are the winners and losers with low oil prices.
The global price of oil has plunged more than 40% during the past five months to trade at about $US53 ($NZ69) a barrel, or less.
For motorists, households and the transport, manufacturing and retailing sectors, it is welcome relief from consistently paying around $2 a litre of fuel in New Zealand, just a few cents off earlier all-time highs.
Main centre prices this week have been below $1.90.
While the average petrol consumer won't lose any sleep over the likelihood of large oil explorers and producers facing hard times, shrinking profit margins and investor returns, the consumer is reliant on them for getting oil out of the ground.
Up to four companies are scheduled to undertake more hydrographic survey work in the Great South Basin, and north of Dunedin in the Canterbury basin during the next two years.
New Zealand Oil & Gas, Anadarko and Schlumberger all have southern exploration intentions, but even the earliest test drilling could be several years away.
Globally, far more advanced oil and gas exploration projects worth more than $US150 billion are likely to be put on hold next year as the plunging oil prices make them uneconomic, data shows, and this could potentially curb supplies by the end of the decade.
Craigs Investment Partners broker Chris Timms said companies such as oil producers BP and Statoil, global oil services company Schlumberger and Woodside Petroleum, Santos, Origin Energy and Oil Search would all benefit from a rebound in prices, but many could weather the price storm for some time.
Since the fall of oil in June from $US112 a barrel, to less than $US60 in early December, shares in Santos, Woodside, Origin Energy and Oil Search had on average declined by 22.4%. Oil dipped below $US60 by December 19.
With the exception of Woodside, Mr Timms' estimated those companies' share prices were pricing in an oil price of about $US50-$US60 per barrel.
''All of the companies are earnings positive, even at $US50 a barrel.
''The majority of capital expenditure is behind us and these [new] projects can withstand materially lower oil prices before ceasing to be cash-flow positive once operational.''
Lower oil prices were a net positive boost for economic growth.
''On the whole, lower oil prices are good for the global economy.
''If oil stays at current levels, this could provide a 0.2%-0.4% boost to world economic growth in 2015,'' Mr Timms said.
He said in New Zealand, listed companies likely to benefit from continued oil weakness included Air New Zealand and Auckland International Airport, Freightways, Mainfreight, Port of Tauranga, The Warehouse, Hallenstein Glasson and Kathmandu.
Countries which are net oil importers, such as India, Japan, Germany, China, France, the US and the UK, are clear beneficiaries, while conversely, major oil exporters and producers like Venezuela, Russia and Norway will be the losers, he said.
''Where the oil price goes from here, and for how long, is difficult to predict,'' Mr Timms said.
The contracts of oil futures at present ''imply'' a 19% rebound in prices over the next three years to $US83.
''If the futures markets are correct, and oil rebounds, the Australian and global oil and gas sectors look highly attractive at current [share price] levels,'' he said.
However, further afield there is mounting concern in the exploration and production sector, which threatens $US150 billion worth of projects, which could curb oil supplies by the end of the decade.
Reuters has reported that as the big oil fields which were discovered decades ago begin to deplete, oil companies are trying to access more complex and hard-to-reach fields located in some cases deep under sea level.
However, at the same time, the cost of production has risen sharply given the rising cost of raw materials and the need for expensive new technology to reach the oil.
Now the outlook for onshore and offshore developments - from the Barents Sea to the Gulf or Mexico - looks as uncertain as the price of oil swirls around $US70 a barrel.
Next year companies will make final investment decisions (FIDs) on a total of 800 oil and gas projects worth $500 billion and totalling nearly 60 billion barrels of oil equivalent, according to data from Norwegian consultancy Rystad Energy.
But with analysts forecasting oil to average $US82.50 a barrel next year, about one third of the spending, or a fifth of the volume, is unlikely to be approved, head of analysis at Rystad Energy Per Magnus Nysveen said.
''At $70 a barrel, half of the overall volumes are at risk,'' he said.
About one-third of the projects scheduled for FID in 2015 are so-called unconventional, where oil and gas are extracted using horizontal drilling, in what is known as fracking, or mining.
Of those 20 billion barrels, about half are located in Canada's oil sands and Venezuela's tar sands, according to Nysveen.
Chevron's North Sea Rosebank project is among those with a shaky future and a decision on whether to go ahead with it will likely be pushed late into 2015 as the company assesses its economics, analysts said.
''This project was not deemed economic at $100 a barrel, so at current levels it is clearly a no-go,'' said Bertrand Hode, research analyst at Paris-Based Raymond James.
He estimates a development cost of $US10 billion for Rosebank, with potential reserves of 300 million barrels - meaning Chevron would only recoup $US33 a barrel.
Even with oil at $120 a barrel, the economics of some projects around the world were in doubt as development costs soared in recent years. Chevron's Rosebank project has already been delayed for several years.
In response to a question from Reuters, the company said ''the Rosebank project is in the Front End Engineering and Design phase. The review of the economics and the additional engineering work is progressing. It is premature to make any statements on an FID date,'' he said.
Mr Hode said any offshore project with a development cost above $US30 a barrel would most likely be put on hold in current oil prices.
Norway's Statoil this week said it had postponed until next October a decision to invest $US5.74 billion in the Snorre field in the Norwegian Sea as its profitability was under threat.
Any cutbacks in oil production bode ill for international oil companies that are already struggling to replace depleting reserves as exploration becomes harder and discoveries smaller. It also points to tighter supplies by the end of the decade.
Projects in Canada's oil sands, which require expensive and complex extraction techniques, are the most unlikely to go ahead given their high investment requirements and relatively slow returns. Total recently decided to postpone the FID on the Joslyn project in Alberta, the cost of which Mr Hode estimated at $US11 billion.
Shell's liquefied natural gas project in Canada's British Columbia, already under pressure from a looming supply surge, faces further strain in the current price environment, analysts said.
Royal Dutch Shell chief financial officer Henry Simon indicated in October that it was ''less likely'' to go ahead with unconventional projects in West Canada if oil fell below $US80 a barrel.
Asked by Reuters what the company's current thinking was, a Shell spokesman would not comment on ''internal decision-making.''
Even in the Gulf of Mexico, one of the most attractive oil production areas in the world, projects are facing challenges. BP last year put on hold a decision on its Mad Dog Phase 2 deepwater project in the Gulf after development costs ballooned to $20 billion and is now expected to further delay the field's development.
''BP were talking positively about bringing it back, but now it may be put on hold,'' BMO Capital Markets analyst Iain Reid said.
Additional reporting by Reuters
Oil future
• More than $US150 billion of oil projects face the axe in 2015.
• Oil prices drop puts economics of some projects in doubt.
• Canadian oil sands, lng projects at high risk of delays.
• Some North Sea, Arctic and Gulf of Mexico fields on hold.
Source: Reuters
