Holdfast Training Services Trial Blog

Following an amount of chat on whatsapp regarding shares and in particular oil & gas shares (and following Jim’s comment on my last blog) I thought it might be worth writing a small blog to let you know where the industry is at the moment, as it seems like the construction industry is ‘steady away’ while the oil & gas industry is on its arse!

The oil & Gas Industry – Where are we?

The industry is not in a good place right now and of course it all relates to the price of oil. Demand has decreased whilst supply has increased leading to significant problems for all involved, especially for those who have the highest extraction costs. Different people will have different views as to the cause of the current trough, but can be summarised as follows;

• Increase in production in the USA due to onshore fracking.
• Canada & Iraqi oil production and exports are rising year after year.
• OPEC declined to cut production.
• Decrease in demand from the far east.
• Conspiracy theory that the Saudis & USA want to hurt Russia & Iran.
• Conspiracy theory that OPEC want to drive the new USA fracking market into the ground (excused the pun).

To make matters worse, in order counter the fall, many producers have increased production.

The following is a history of Crude Oil prices since 2000 showing a significant drop in 2008, due to a combination of an oil drilling ban being lifted by the USA, easing of tensions between the US and Iran, a stronger US dollar and the likely decline in European demand. It also shows the most recent drop which is struggling to recover in the same way the 2008 drop did.

Price of Crude since 2000

 So what?

So, unless it costs you less that the price of crude to extract the hydrocarbons, you are making a loss. Let me put it into context. The cost to extract from the North Sea is somewhere between $20 and $60 /bbl depending on the operator, type and location of reservoir etc. Each producer would typically assume an extra amount per bbl of say $10-20/ bbl as an investment cost for future improvements/developments etc. So unless you are at the far left of this scale then you are going to make minimal profit, if at all. Currently BP (North Sea) is in the bottom third.

What is BP North Sea doing?

 For the last 12 months or so, BP have been on a big drive to reduce operating costs and try to get out of the ‘bottom third’. BP expect oil prices to remain low for some time to come and are taking quite a pessimistic view on this. In order to make the North Sea more profitable, BP have been looking at the following;

– Cutting staffing costs, circa 200 in the last year (circa 10%)

– Cutting back on OPEX & CAPEX budgets

– Prioritising projects that add the most valve for the business

– Delaying projects or extending projects to share cost with following year’s budget

– Increasing production to lower average cost of production

– Simplification across the business in order to reduce costs

To answer Jim’s question – Yes there is a reduction in our projects, but also a drop in manning, so still busy! The less important projects have been pushed to the right with the big ‘increase in production’ projects still moving forward.

The future

The price of oil is expected to remain low for some time, unless something significant happens that reduces global production. BP is continuing its drive to improve efficiency and simplicity and increase production, and is continuing to invest in existing plant and future developments. It has been working and BP is creeping towards the middle third.

The above information is not a recommendation to buy/sell shares, and is just the view, in part, of the author. The value of investments can go down in value as well as up, so you may get back less than what you invest. I certainly would listen to me since the BP shares I bought in Jun have dropped 30%!!

BP share price over the last 5 years

Shell share price over the last 5 years