Future Brent Supply Security 'At Risk' Amid Cost-Cuts

European Oilfield Services: More Pain to Come before Sector Recovers
The future supply security of Brent is at risk amid continuing cuts to the oil service capacity, according to analysts at Rystad Energy.

The future supply security of Brent is at risk amid continuing cuts to the oil service capacity, according to analysts at Rystad Energy.

While the global market is currently oversupplied with crude, Rystad Energy research shows that investment decisions for only 8 billion barrels were made in 2015, even though the oil industry needs to replace 34 billion barrels of crude every year. This amount is less than 25 percent of what the market requires long-term.

Rystad Energy numbers show that prior to the post OPEC meeting oil price decline, the number of jobs in the oil service industry was already cut by 16 percent for the top 50 oil service companies. These oil service companies had aggregated revenues of $300 billion and 950,000 employees in 2014. To date, 150,000 employees have been laid off from these 50 companies alone, and an estimated 250,000 oil service employees from the top 400 oil service companies have been fired globally. 

Global exploration and production spending declined by 20 percent in 2015 and is expected to fall another 11 percent in 2016, marking the first consecutive annual decline since the mid-1980s, according to Evercore ISI’s Global 2016 E&P Spending Outlook. Rystad Energy forecasts spending to reduce by a further 70 billion next year and has warned that additional spending cuts in 2016 could occur following the current post-OPEC meeting oil price slide.

Jarand Rystad, managing partner at Rystad Energy, commented in a Rystad statement:

“Oil prices continue to fall after OPEC failed to reach an agreement on output targets and decided to remove its obsolete output ceiling last week. This decision occurs at a time when oil companies are in the process of taking final decisions on spending programs for next year. 

“We see that for most new developments oil prices are below life cycle costs. As oil companies need to pay dividends and have incompressible taxes and royalties, the majority of upstream players are destroying value as we speak and do whatever they can to cut costs. As a result, billions of barrels of crude are not being matured while global consumption growth is still very robust. Thus, a new shortage of crude is likely to come a few years down the road. When this happens, the oil service capacity will not be there to support the growth at the pace needed. There is then a risk that we will face a new era of steep cost inflation which again will drive up oil prices too much and negatively impact the global economy.

“I am concerned that current job cuts could lead to a severe shortage of oil service capacity in a few years. It is very easy to get rid of people, but it will take a lot of effort and cash to bring people back to the industry. A responsible action from petroleum nations would be to stimulate the oil price in the short term in order to incentivize drilling and field development globally and stop downscaling of oil service capacity.”

A number of energy majors announced a significant reduction in future upstream investment this year, including Total S.A., BP plc and Royal Dutch Shell plc, all of which have implemented cost-cutting measures worth billions of dollars in 2015. In spite of this, Evercore ISI believes that the oil and gas industry will resume growth in late 2016, with 12 percent growth expected in 2017 and 18 percent in 2018. Evercore expects North America to rebound first with the strongest recovery, following by international markets, and then finally, offshore.


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