Oil prices unlikely to increase above $50/bbl until 2018

By IM Staff
Published: Tuesday, 27 September 2016

Oil and gas output increasing; New oil fields coming on stream; Price increases delayed until 2018

Oil prices unlikely to increase above $50/bbl until 2018

Barbara O’Donovan

Oil prices are not anticipated to rise above $50/barrel (bbl) on a sustained basis until 2018, delegates at IM’s 4th Frac Sand conference in Minneapolis, US were told in September.

The critical element for increased drilling activity is for prices to recover, Michael Schaal, principal at energy consultancy firm, Energy Ventures Analysis, said.

"At $50/bbl (sustained basis) expect rig count to increase," Schaal told delegates. "At $60/bbl (sustained basis) expect drilling activity to surge."

The oil and gas industry is a major  consumer of minerals such as silica (frac) sand, barite (barytes), bentonite and ceramic proppant material. This means that a lull in oil and gas exploration  is likely to impact these industrial minerals markets.

Current DUC (drilled but not completed) well inventory is expected to be reduced for some but not all producers at $50 to $55/bbl, but at $60/bbl significant increases in drilling activity are likely, he explained.

New supplies 
news9_1  

The current focus is on excess global supply and the huge global storage overhang, Schaal said.

On the positive side, demand is increasing moderately and there has been a natural decline in production. However, new supplies are on the horizon.

As a result of the supply situation, the oil and gas industry is unlikely to eliminate excess global supply until about year-end 2017 and likely will not start to significantly erode the storage overhang until 2018, according to Schaal.

 

Historical

Projected drill rig count

 

2015

2016

2017

2018

2019

Total Gas Rigs

226

90

102

157

209

Total Oil rigs

749

390

383

441

624

Total Rigs

976

480

485

597

833

%oil from total

77%

81%

79%

74%

75%


In shale gas modest increases in drilling activity are anticipated in 2017 if prices reach $3.00/1m British Thermal Units (mmbtu) on a sustained basis as projected, Schaal said. However, a very mild winter could significantly impair the industry’s ability to reach the $3/mmbtu threshold.

The key constraints for a 2017 increase will be limitations on capital budgets owing to the industry’s poor financial health, he added.

Primarily because of the financial stress within the industry, some producers are phasing out of 'half cycle’ well economics to 'full cycle’ well economics.

Overall this results in a need for higher prices in order to generate a sustained increase in drilling activity, according to Schaal.

Brown sand demand up

  • Slow trade in traditional frac sand markets
  • Customers "still want" premium White Sand
  • Consolidation in market expected by 2017

Barbara O’Donovan

As low oil prices force market participants to reduce costs as much as possible, a demand shift towards brown sand over white sand for fracking applications has been noticed in the market, according to speakers and delegates IM’s Frac Sand conference in Minneapolis.

"There has been a shift in the Permian Basin towards brown sand," Twin Eagle’s Jason Jennaro said, adding that the company produces both brown and white sand.

The move towards brown sand in oil and gas extraction marks the culmination of a trend which has seen E&P firms opt for increasingly cheaper proppants to enhance efficiency. This has resulted in a shift from ceramic proppants to resin coated, then to white sand and now to brown. 

As in the case of each shift before it, the key driver behind the higher demand for brown sand is cost savings, with brown selling at cheaper price levels than white.

"Most E&Ps profess the quality virtues of white sand but will take a cheaper alternative now in order to lower the overall well cost," Simmons and Company director John Daniels said.

But the shift to brown sand may not be a permanent feature of the market, some said.

Rick Shearer president and CEO of Superior Silica Sands said that some suggestions that Northern White Sand has "got a problem" are unlikely to be the case.

"There’s a split customer base out there," Shearer said, adding that there remain customers that want white sand and are still willing to pay a premium for it.

As a result of the changing demand requirements, there are a growing number of distressed Northern White Sand producers, however. These are the mostly likely companies to look towards M&A opportunities in order to survive, Jordan Sands CEO Scott Sustacek said.

At this point in time it "would make sense for a brown sand producer to acquire a white [sand producer]", Sustacek added. 

Both Shearer and Sustacek, during a producer panel at the conference, expressed surprise that there had not been more consolidation among sand producers since the downturn in the oil market, suggesting that the industry may now be reaching the "tipping point" where more will happen.

"That tipping point is coming (…) we’ll probably see more [consolidation] as we exit 2016 and enter 2017," Sustacek said.