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The Changing Economics of the Oil Business

News Article Sponsored by Holt Cat

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shutterstock_169614275_oil_engineerThe economics of the oil industry have changed dramatically since June 2014.

The price of crude oil has gone from over $105 a barrel in 2014 to around $32 a barrel as of January 2016 – a 70% drop.

Low prices are forcing oil companies to rethink their business strategies. With lower prices, revenues are dropping substantially. Companies are taking different actions to shore up their balance sheets until prices recover. A number of oil companies have been forced to cut their dividends to help support cash flow. Oil companies often operate with substantial amounts of debt. With current prices, they have less money to service this debt. To that extent, many companies are cutting dividends and using that money to reduce their debt loads.

Both oil drilling rig company Transocean Ltd. and natural gas producer Chesapeake Energy cut their dividends in 2015. Kinder Morgan, a large pipeline company, cut its full-year dividend by 75% in December 2015. The company said it needed to preserve cash to continue growing and servicing its large debt load of around $41 billion. The cut is estimated to save Kinder Morgan around $3.19 billion a year. Other companies are likely to follow suit in the coming months if oil prices remain under pressure.

Lower Rig Count, Steady Production

Many market observers forecast the price of crude oil would recover in 2015. They thought the low prices would force cutbacks in production as companies shut down rigs. Oil rig counts in the United States went from 1,913 in August 2014 to around 700 in December 2015. The dropping rig count has not led to substantially lower production as anticipated.

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Oil producers in shale formations are using technological advances to increase their efficiency. The U.S. produced around 9.5 million barrels a day of oil in 2015. The U.S. Energy Information Administration (EIA) notes a combination of technological and process improvements in rig, labor and well productivity is supporting the amount of daily production. This reduces breakeven costs on a per barrel basis. The EIA forecasts daily production will decline to around 8.5 million barrels a day in 2016 and 2017.

Shift in Focus for Oil Companies

Oil companies wanted to expand capacity and create as much supply as possible when prices were over $100 a barrel. Since the price of oil is under pressure, companies have shifted their focus. They are looking for ways to lower productions costs, increase efficiency and improve their profit margins with current prices. Oil service providers are seeing greater demand for technology that allows drillers to be more efficient. The use of new technology can increase the production for new wells being drilled or for wells already operating.

New Technology for Drilling Rigs

Companies are using high-tech equipment such as lasers and data analysis tools to determine the best locations for new wells. Other companies are trying to increase production from already producing wells. New fracking technology allows for better production in lower productivity rigs. There is new fracking technology that can allow a well to be redrilled for greater production efficiency. Some estimates indicate there may be hundreds of billions of barrels that can still be produced from already mature oil fields. This is a huge amount of potential supply that can be accessed with new technology.

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