Trouble Comes to the Oil Patch

Petroleum executives gather in Houston facing a new world of sub-$40 oil and questions about costs, consolidation, and national energy policy

Story Tools

In the oil patch, the mood has gone from boom to gloom in record time.

Less than a year ago, pundits were predicting $200-a-barrel oil, endless growth in Chinese energy demand, and a world running out of crude. But at CERAWeek, the big energy conference put on by data and advisory outfit IHS (IHS), running Feb. 9-13 in Houston, the talk has now focused on industry consolidation, how to beat down supplier costs, and just how low the price of oil might go.

"It has become painfully clear that our understanding of market forces remains imprecise at best," Ali Ibrahim Al-Naimi, Saudi Arabia's Minister of Petroleum & Mineral Resources, told conference attendees on the night of Feb. 10. "Groupthink dominated financial markets. What many forgot, ignored, or wished away is that markets are cyclical and recessions inevitable." Al-Naimi said that with a big new field coming on line, his country would soon have some 4.5 million barrels per day of spare oil production capacity, well above the 1 million to 2 million barrels per day the country typically maintains.

In July of last year, crude peaked at $147 a barrel. On Feb. 11 it was trading below $36. Investment bank Morgan Stanley (MS) recently predicted it could fall to $25 in the second quarter of this year.

The Cracks Are Showing

"The economic outlook has changed dramatically," Tony Hayward, CEO of oil giant BP (BP) said. "The impact on our industry has been sudden and severe."

The cracks are beginning to show in Houston, America's energy capital. The city seems to shine right now, with gleaming new parks, shopping centers, and sports facilities. All over town, cranes are still erecting luxury condo towers, giving the city the feel of a Dubai on the Bayou. Look more closely, though, and there are For Lease signs in the windows of furniture stores. A gray-haired man and his wife ask for gas money in the parking lot of a fancy Italian restaurant. And a swanky downtown boutique hotel with an empty bar practically pleads for customers with a $4 happy-hour menu.

The world, it turns out, really is flat, or at least not "decoupled" as some pundits once suggested. Zhou Jiping, the head of China National Petroleum, that nation's largest energy producer, said oil demand in his country has shrunk dramatically in the past year. "The heart of every Chinese feels the same vibration as the rest of the world," he said.

How all this gloom affects oil-company spending is a $300 billion question. Research firm John S. Herold expects capital spending on the part of the world's oil companies to fall 13% this year from last year's $300 billion. Many of the higher-cost fields that attracted capital in recent years may not be profitable at today's prices.

The Price Equals the Cost

Peter Mellbye, senior vice-president at Norwegian oil company Statoil Hydro (STO), displayed a slide showing the cost to produce a barrel of oil all over the world, from $20 in Saudi Arabia to more than $100 for the viscous goo found in Venezuelan lake beds. In a startling display of oil-company candor, Mellbye also showed Statoil's costs across all its projects. The average was $40 a barrel, about where the price is today.