David Fuller's view -
The world’s most powerful oilman brought a harsh message to Houston for executives hoping for a rescue from low prices: high-cost producers -- many of them sitting in the room -- need to either “lower costs, borrow cash or liquidate."
For the thousands of executives attending the IHS CERAWeek conference, the message from Saudi Arabia oil minister Ali al-Naimi means deeper spending cuts, laying off more roughnecks and idling drilling rigs.
"It sound harsh, and unfortunately it is, but it is the most efficient way to rebalance markets," Naimi told the audience in Houston on Tuesday.
As many as 74 North American producers face significant difficulties in sustaining debt, according to credit rating firm Moody’s Investors Service. Shale explorers from Texas to North Dakota will be “decimated” in coming months amid a wave of restructurings and bankruptcies, said Mark Papa, the former EOG Resources Inc. chief executive officer who helped create the shale industry more than a decade ago. The survivors will be more conservative, Papa, who is now a partner at private-equity firm Riverstone Holdings LLC, said during a panel discussion on Tuesday.
The message will resonate beyond the American Energy industry as declining spending, rising debts and layoffs are starting to spread to Main Street, with the impact spreading from regional banks in Oklahoma to the economies of cash-strapped Venezuela and Brazil.
For the oil industry itself, the warning is a sign of more months -- and perhaps years -- of financial pain. The S&P 500 Oil and Gas index has fallen roughly 60 percent since mid-2014 to its lowest since 2009. The debt of junk-rated U.S. oil companies is yielding more than 20 percent, the highest in at least 20 years, according to Bank of America Corp.
Naimi told the executives in Houston that Saudi Arabia believed that freezing oil production -- as it just agreed with Russia -- would be enough to eventually balance the market. Over time, high-cost producers will get out of the business, and rising demand will slowly eat up the oversupply, he said. The International Energy Agency believes that means another two years of low prices.
The freeze agreement isn’t "cutting production. That is not going to happen," Naimi said.
Well, Ali al-Naimi has chutzpah and this is certainly a game of attrition. It may also be a game of high-stakes poker. Every oil producer is losing, so who will blink first?
That remains to be seen but the economic damage is already considerable and increasing. The US is both a loser within its oil sector and a big winner in terms of national consumption of oil. If the US wants to up the ante, it can subsidise its oil sector.
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