Issue link: http://resourceworld.uberflip.com/i/517266
j u n e / j u l y 2 0 1 5 www.resourceworld.com 53 at roughly 14,000 and climbing since last summer. As those workers seek other employment, the industry is left to won- der whether they'll be available to rehire when things improve. Adding to the gloomy picture is a drop in US drilling rig rentals over 20 straight weeks, to 703 drilling for oil – down 55% from the 1,575 operating last December – and 225 drilling for natural gas. The Canadian rig count has fallen from a yearly high of 440 in January 2015 to 79 in late April. "The price crash has inordinately impacted oilfield service companies, from the offshore service providers to the prop- pant/equipment companies and the land drillers," Lawrence said. He predicted that the lower drill rig count eventually could affect the oil over- supply and push prices upward. "Especially in the US, given the rather accelerated and deep decline of drilling rigs, there's a sense that we'll have a production decline sooner than later; we've already seen cuts in the weekly numbers. Given the costs, proj- ect timelines and decline rates of the shale wells, especially those in non-core areas, there's a belief that the production decline will have a rather strong price impact. "The drilled, uncompleted wells/frack- log (about 20% of all wells) will help but these will still require completion, which is two-thirds of the cost, and are likely to be in non-core areas of the various plays." There are also global implications, as heavy projects with a 4-5 year timeframe from discovery to first oil are taken off the table and with reduced spare capac- ity among Organization of the Petroleum Exporting Companies (OPEC) members. But Lawrence said wild cards such as Iran and Libya could also weigh into the supply upside, while supply disruptions in Libya and southern Iraq have affected OPEC sup- ply. Equally, projects in Russia, Venezuela have suffered in the downturn. "There has been a large financial impact in both countries as they are both extremely reliant on oil prices and exports for their government revenue," Lawrence said. "The sanctions in Russia add a double bite and the government has been propping up the ruble with high interest rate hikes and maintaining high levels of production in a refusal, with OPEC, to lower supply in order to preserve global market share." He said in Venezuela inflation has soared to 60% and the government has brought about major spending cuts with bonds due. So far they've avoided default but future maturities by the government and state-owned oil company Petróleos de Venezuela S.A. (PDVSA) will increase the probability of default. Iran, expected to have its sanctions lifted soon, is reportedly already produc- ing above the sanction levels and the market has been absorbing this incremen- tal supply of 500,000-700,000 b/d and total exports of 1.2 mmb/d. Analysts sug- gest 700,000-1 million b/d could come to the market over the next year but experts believe this oil will be slow to restart and circulate based on field capacity issues and the maintenance required for restarts. Lawrence said the strong dollar has affected oil markets in the past year, along with the general economic strength of various economies. The US is stronger than Europe or Asia, which are now entering a "quantitative easing" stage. Global and regional storage inventories will play a role in discounting various grades of oil. The oil export issue in the US offers many benefits but geopolitics plays a role, espe- cially in the Middle East with ISIS and developing events in Yemen and the threat of another proxy war in addition to the Russia-Ukraine one, he warned. "The quick fixes are being used up rather quickly," Lawrence said. "It's important to remember that these produc- ers, as with other OPEC producers, have higher breakeven costs due to political and/or financial reasons, rather than geo- logical or operational costs." The picture isn't complete without looking at downstream benefits from those low prices. Every company directly or indirectly connected with oil has seen its share price decline significantly. The natural inclination, then, is to dump everything even remotely connected to oil. But a decline in oil prices doesn't have to be a bad thing for every company involved in the industry. Downstream companies are further removed from the actual extraction of crude oil from the ground than the upstream ones, who are more directly involved in the actual exploration and production of crude, and who are more affected on the unconventional side than the conventional. But downstream com- panies are primarily in the business of refining crude oil into various products and the related marketing and distribu- tion of them. For them, low crude prices aren't necessarily a bad thing. It may reduce the refiners' margins but it can also help increase consumption by the public. Increased consumption can lead to increased sales of refined products, which can offset lower margins. A reduction in the price of crude can also directly benefit the bottom line of certain downstream companies, as high oil prices often lead to high inflation and increased costs of living that can lead to public dis- content, especially in developing countries where disposable income is lower. Many developing countries for that reason exercise strict control over the price of fuel, includ- ing setting maximum prices for which fuel and other oil products may be sold, even if that price is too low to allow companies to profit or even recoup their costs. These governments can do this because they're usually the majority owner of the oil company. It isn't unusual to see the refining segment operate at a loss because of government policies. This changes when the price of crude is relatively low. Governments are in a better position to allow companies to set their own prices without any backlash from the public. A formerly unprofitable but necessary busi- ness can become highly profitable in the absence of price controls. Apparently, the sudden and dramatic drop in oil prices has caused the market to overreact in some cases and in the pro- cess created attractive opportunities for investors. In addition, fuel consumers, from truck-