by Lori Ditoro
February 5, 2015

We knew it could not last forever and the boom would eventually slow down. However, the timing of and speed at which oil prices dropped has surprised the industry and the world. Directly a result of Organization of the Petroleum Exporting Countries' (OPEC) decision to continue production unabated, during the past six months, prices have decreased by more than half at the time of publication. The industry was successful, producing oil and making profits before the climb above $100 per barrel. After conversations with many industry experts, we learned that this is not a time for panic. With the cyclical nature of the industry, this is business as usual—a downtime for new developments, certainly, but a good opportunity to focus energy on optimizing existing wells and maintaining current assets. Many people we spoke with are cautiously optimistic but preparing for these lower prices through the end of 2015. What is the specific position of experts within the industry? Some of Upstream Pumping's Editorial Advisory Board (EAB) members and other industry insiders weighed in.

Denis Blaquiere

Oil Lift Technology Managing Director, Dover Artificial Lift Upstream Pumping EAB Member

Our main concerns are to keep costs down and focus on efficiency gains in our manufacturing operations. We are planning to pull back on unnecessary spending and are currently re-evaluating our 2015 budgets and growth plans. We are gathering market intelligence and refocusing on aftermarket products to capture more of the producers' maintenance spending with the reduced capital budgets. I think you would have to be naive if you were not concerned in a time like this. Budgets and expenses are being cut around the globe, which will affect all aspects of our economy.

Cleon Dunham

President, Oilfield Automation Consulting & ALRDC Upstream Pumping EAB Member

The Artificial Lift Research & Development Council (ALRDC) is moving ahead with plans to hold our artificial lift workshops to support the industry in this time of trial. People need training and encouragement to make the most effective economic decisions. Our primary concern is that companies focus on the long term and not react too quickly to cut staff. Companies will reduce spending on new drilling and other initiatives if necessary, but building a strong staff is a long-term proposition and should not be dismissed lightly. Some of my colleagues are advocating, and I strongly agree, that now is a great time to focus on enhancing and optimizing existing assets. At ALRDC, we focus artificial lift systems, which can be a relatively inexpensive way to make the most from the wells that have already been drilled and completed.

Chad Joost

Senior Vice President, Sales and Marketing, Stewart & Stevenson Upstream Pumping EAB Member

We are maintaining close contact with our customers to assess any changes in their future needs for products and support and to identify areas in which we can help make their operations more efficient. One concern is overreaction that could lead to the loss of key talent in our industry. Commodity prices tend to affect capital spending programs, which affect the demands for our customers' services in hydraulic fracturing and intervention. This recent decrease in price serves as a reminder of the highly cyclical nature of the oil and gas industry.

Daniel Lakovic

Marketing Manager, SEEPEX Inc. Upstream Pumping EAB Member

In the immediate situation, [the lower prices] actually help reduce costs, which opens up capital that can be used for other investments. Any decrease on the oil production side of the market will be offset by the increase in the chemical process side. This is business as usual for us. Historically, the industry has experienced ups and downs. The prices will rebound eventually. Everyone needs energy; that won't change. Technological advances will benefit Western countries and allow them to be more competitive when it comes to the end product.

Alan Jeffers

Spokesperson Exxon Mobil Corporation

ExxonMobil is in a strong financial position resulting from our proven business strategies and resilient competitive advantages, including our integrated model, feedstock flexibility and balanced portfolio. The company is uniquely positioned to invest in new energy supplies throughout the business cycle. Our capital spending plans are unaffected by the recent reduction in oil prices. We use a range of pricing to evaluate our investments. We will update our capital spending plans, as we do every year, during a meeting with investment analysts at the New York Stock Exchange in March.

Robert Mackenzie

Director of Research Iberia Capital Partners

How is the industry responding to the decreasing oil prices? "Exploration and production (E&P) companies are slashing their capital spending budgets. The more stable the company's financial situation, the better it can weather this downturn. We forecast a drop of about 600 rigs (of about 1,900) during the next year as a result of E&P spending cuts." What will operators do with wells that are drilled/completed or are already producing? "It makes no sense to shut in producing wells. The return on the investment to complete already drilled wells makes it cost effective for E&P companies. U.S. oil production will increase in 2015 but not at the rate previously forecast. During this time, most uneconomic activity is being squeezed out." As natural gas prices creep higher, will operators refocus on shale gas? "Yes, but it is more complicated. The lowest cost gas right now is from the Marcellus and the Utica Shales. The problem is with the take away capacity—the pipeline. Activity in the Haynesville is picking back up. However, the Haynesville gas will likely never be as inexpensive as Marcellus and Utica gas." Is the recent decline cause for concern or is this "business as usual" in the cyclical oil and gas industry? "We see cycles from time to time. This is the first downturn since the 1990s that is supply driven and not demand driven. It is a cyclical industry. We have lived through these downturns before. As spending gets curtailed and uneconomic activity is squeezed out, we will get through this recession and get back to working in earnest."

Conclusion

With crude oil price instability continuing, optimization and maintaining current assets will be a critical focus in 2015. While rig counts will decrease, North American production is forecast to increase, only at a slower pace than anticipated before the OPEC decision in November 2014. For more about the current state of the industry, check out our editors' blogs. Lori Ditoro's blog can be found here, and Savanna Gray's blog can be found here.