IHS: Oil recovery could be more than a year away

DENVER – U.S. shale oil exploration may not begin to recover until the second half of 2016 due to an oil supply glut and turbulent global markets, according to energy analyst IHS.

Stephen Trammel, research director and energy adviser for Englewood-based IHS, said the future remains bright for shale oil, but he cautioned that the recovery may not begin until additional industry consolidation and cost-cutting occurs.

Trammel presented his shale oil market outlook Friday during the Energy M&A Financing Forum held by Denver-based law firm Davis Graham & Stubbs LLP. Oil prices have tumbled below $50 per barrel this year, falling from highs surpassing $100 last summer. In 2014, U.S. production topped 8 million barrels per day, the highest level since 1986. Turmoil in the Middle East and Europe have dragged down oil prices, as well as tapering demand in China, a shift in Europe to renewable energy, nuclear power in Japan and new production in Mexico.

Oil companies have responded by cutting their capital spending. Noble Energy Inc. (NYSE: NBL), among the top producers in Weld County, cut its 2015 capital budget by 40 percent to $2.9 billion from more than $4 billion last year. Anadarko Petroleum Corp. (NYSE: APC) is expected to announce its capital budget in March.

Some companies have cut their 2015 capital spending by more than 50 percent, Trammel said. The number of rigs exploring for oil and natural gas in the Denver-Julesburg Basin, meanwhile, has fallen 28 percent. The rig count in the D.J. Basin, a drilling region that includes Weld County, Colorado’s No. 1 oil producing county, dropped to 39 this week from 54 rigs the same time last year.

Oil company stock prices, meanwhile, have plummeted.

The weakened market could lead to hostile takeovers of some companies and shareholder lawsuits, said John Elofson, partner in Davis Graham & Stubbs.

“It’s going to be a very interesting summer in both of those worlds,” he said.

Trammel said many companies have not completed wells that they have drilled, opting to wait until oil prices rise. But Trammel believes the market recovery will begin before the end of 2016 as U.S. companies consolidate and lower their costs and as oil production declines.

“Don’t despair right now,” Trammel told an audience of people in the oil industry. “Stay the course or whatever comforting words you say to yourself when you go to sleep at night.”

Despite the struggles of the industry, $1.5 trillion has transferred from net oil exporting nations to net oil importing nations, he said. Plummeting oil prices, in fact, will add between .3 and .5 percent to global economic growth in the coming year. The U.S., a net oil importer, is expected to see growth of 2.5 to 3 percent.

on Facebook on LinkedIn