Catella sees price challenge to US oil and gas sector

The price of natural gas has fallen so low in the US that new drilling projects are being put on hold, Swedish manager Catella says following a visit to the industry’s headquarters in Houston.

Ulf Strömsten, fund manager, said that the latest fact-finding visit to the city found that three key trends are driving the industry.

These include continued investments in shale gas, strong demand for drilling for so-called ultra-deep oil, and projects for extending the life of existing fields.

Despite these demand factors and the significant ongoing investments into the petrochemical industry, demand for rigs is actually expected to decline through 2013 by some 9%.

“A contributing factor to this trend has been reduced demand for natural gas, particularly from the energy sector. The oil market has been stable, and the outlook for 2014 seems, if possible, somewhat better,” Strömsten said.

One reason for the decline in natural gas rigs is the continued fall in the price of the commodity as more shale gas comes on stream. This has taken some 40% of the US gas market to date, and lowered the price of gas in the US by half since 2008.

More than 800,000 people are now employed in the shale gas industry in the US, Catella said, and some 80% of all relevant production equipment globally is found there.

But the success in driving down the price of gas is now causing services companies such as Haliburton to postpone new investments – for example, in rigs intended to drill for gas in the Gulf of Mexico. The current price cited is some $3.9 per thousand cubic feet, versus a price of $5.5 that Haliburton says is required to ensure that investments restart. The price is expected to remain depressed because current regulations make gas exports difficult, and even where allowed there is not enough infrastruture in place to make it feasible.

The bright spot in the Gulf of Mexico is oil, Catella said, where a recovery has been seen in the industry since the Deep Water platform disaster involving BP in 2010. This is especially the case involving rigs drilling at deapths greater than 1,000 feet.

Offshore drilling in areas such as Africa and Latin America remain subject to other types of risks such as geopolitical, while the global price of about $100 is hitting profitability.

One solution is to drill more holes per well, Catella noted. This is seen as a way to increase efficiences per well and drive down costs. These efforts are likely to remain important in the face of challenges such as the recently announced deal with Iran over its nuclear programme, which could see more oil exports to the global market, and thereby act as a dampener on any potential oil price increases.


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