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For oil prices, the question is who blinks first | GulfNews.com

Oil is going to rebound. That is the view of both Harold Hamm, a
leading figure in the US shale industry, and veteran Saudi oil minister
Ali Al Nuaimi. However, both have sharply contrasting views on how that
recovery will come about.

Oversupply of oil caused a near-50 per cent fall in prices in the past
six months, and producers worldwide have been locked in a battle over
who will cut output to bring the market back into balance

.
Al Nuaimi suggested in an interview with the Middle East Economic
Survey that he expected higher-cost production, in Russia, Brazil, west
Africa and the shale oilfields of the US to be squeezed out of the
market. Oilfields in the Gulf, he said, had production costs of just
$4-$5 per barrel, and in any market economy, “high efficiency producing
countries are the ones that deserve market share”.

However, Hamm, one of the leading figures in the US shale oil industry,
argued that pressure was building on Saudi Arabia and other large
oil-producing countries because of their need to fund expensive social
welfare programmes.

“They can’t live with these prices,” he told the Financial Times. “They
can talk pretty bravely, until people are knocking on their door.”

Either they would voluntarily decide to cut their production, he suggested, or political instability would do it for them.

Almost a month on from the Opec ministerial meeting on November 27 that
rejected calls for production cuts and sent crude prices into
free-fall, the weight of evidence seems to lie more on Al Nuaimi’s side.

Private sector oil companies have been announcing sharp cutbacks in
their planned capital spending, with US shale producers in the vanguard.
ConocoPhillips announced a cut of about 20 per cent for next year
compared to 2014, as did Marathon Oil.

Hamm’s own Continental Resources, where he is chief executive and has a
68 per cent stake, announced it would spend $2.7 billion (Dh9.9
billion) on wells and other investment next year. That is 40 per cent
less than its expected spending for 2014, and also about 40 per cent
less than its previous plan for 2015, announced in October. That plan
was itself a reduction from the previous projection of $5.2 billion,
announced in September.

Lower costs for drilling, hydraulic fracturing and other services are
expected to take some of the strain. Continental thinks it can cut the
cost of each well by at least 15 per cent next year, as reduced activity
forces service companies to cut their rates.

However, the scale of its spending cuts still means that it will not be
able to drill as many wells as it had previously hoped. It plans to
keep 31 rigs running on average next year, down from 50 now.

Across the US shale industry, signs of a slowdown are mounting up. The
total number of rigs running in the Williston basin, which includes the
Bakken shale of North Dakota where Continental produces most of its oil,
is already down 9 per cent from its recent peak in October to 180,
according to Baker Hughes, the oil services company. The numbers of rigs
running in the Eagle Ford shale and the Permian basin, in the south and
west of Texas respectively, have also fallen.

Companies are still generally projecting production growth —
Continental, for example, says it expects its average 2015 output to be
16-20 per cent higher than 2014’s level — but by the second half of next
year growth is likely to be slow at best.

As Al Nuaimi points out, production from shale wells falls very sharply
in their first year of operation, so companies need to keep drilling if
they are to sustain their output. However, Hamm argues that in this
struggle between companies such as Continental and large oil-producing
countries, the companies have an advantage because they are more
flexible. “It’s easier to adjust a company than a country,” he says.

Russia’s financial crisis has been dominating the headlines in recent
weeks, but Venezuela and Nigeria are also under severe pressure, and
Hamm argues that other countries could be affected too.

“You very well could see revolution in some of these countries,” he
says. “When people start talking about unintended consequences [of the
oil price collapse], this is something they think about pretty quickly.”

Even Saudi Arabia with its large foreign exchange reserves could find
its finances strained, he adds. “They may have a pretty good stockpile
of cash, but that can dry up real quick. They have budgets too, and they
have to meet the expectations of a lot of people.”

Hamm’s conclusion is that the price of oil is likely to rebound, if not
immediately to its $100 per barrel level from June, then certainly to a
sustainable level of about $85-$90.

The type of political volatility that Hamm raises as a risk, however,
is by definition unpredictable, whereas the pressures on US companies’
cashflows and balance-sheets are relatively easy to predict. Eric Otto,
an analyst at CLSA, identified Continental as heading for an imminent
funding shortfall under its old capital spending plan, but there are
other companies including Whiting Petroleum and SandRidge Energy that he
says are facing similar problems within 18 months.

Standard & Poor’s, the rating agency, said it had a negative
outlook for ConocoPhillips because of the company’s rising debts,
meaning that if its financial position deteriorates more than the agency
expects, it could downgrade the group from it’s a rating.

Al Nuaimi suggested in his MEES interview that it could be three years
before low prices choked off high-cost oil production around the world.
However, he was confident the Gulf countries, and especially Saudi
Arabia, could afford to hold out.

Hamm described those comments as “bravado”. His fellow shale producers will be hoping desperately that he is right.
For oil prices, the question is who blinks first | GulfNews.com