Capex cut to increase if crude price remains unsustainable: Al-Sada

The cut in capital expenditure (capex) was likely to go up if oil price remained in the current range, said HE the Minister of Energy and Industry Dr Mohamed bin Saleh al-Sada, who insisted that “current price of oil is not sustainable and hence it should change”. In a statement issued yesterday al-Sada, also Opec’s current president, said the oil price had fallen 18% since the beginning of 2016.He said the current level of oil price was “below a lot” of conventional oil production cost, let alone non-conventional oil. Its unsustainability therefore manifested itself visibly by a huge drop in investment estimated to be $130bn (20%) in 2015 alone followed by 16% in 2016. To date, since the beginning of the drop in mid-2014, it is estimated that $380bn of investment has been deferred in the oil and gas sector projects running until 2020. It is likely that this cut in capital expenditure is likely to go up if oil price remains in the current range. “It is the first time we have witnessed two consecutive years of such a huge cut in investment during the past two decades,” al-Sada said.The impact of this substantial drop in investment is already beginning to be seen in a drop in drilling rigs worldwide, conventional and non-conventional, especially the US. It is bound to manifest itself down the road, while world demand is increasing annually.Signs of drop in production, especially outside OPEC, are beginning to be seen with a drop of 400,000 bpd over the last eight months in US alone from 9.6mn bpd to 9.2mn bpd. In 2015, it was reported that some 24 US oil and gas companies went bankrupt and sought Chapter 11 protection. That was while Brent oil averaged $52. With prices further down by 18% during this month from the beginning of the year, it is fitting to say that the hardship on oil and gas companies and bankruptcy will be further aggravated. US shale oil is reported to need an average of $55 a barrel for viable production, with the current oil price is much below this level. It is expected that shale oil production will decline and US oil production during 2016 is expected to be at 2014 levels of 8.7mn bpd. Al-Sada said the trend was likely to continue into 2017, “if we consider that even at a scenario of modest world economic growth, it is estimated that demand will increase by 1.4mn bpd this year. “The total demand is expected to be more than 95mn bpd this year. Under the current circumstances, oil will turn into a new bull market before the year is out, as the current drastic price drop shuts enough production and erodes the global oversupply.