Oil prices ... barreling downward.
Natural gas prices ... up in flames.
Gasoline prices ... tanking.
The year got off to a scary start for the oil and gas industry.
Recent company announcements make it clear that 2015 will bring a smaller North American energy industry, spending less money. Talk of layoffs and reduced capital budgets began as early as last November.
In January, commercial intelligence and consulting firm Wood Mackenzie issued a list of "15 Things to Watch in North America Upstream in 2015." It predicted efficiency improvements, asset high-grading and cost relief for the industry.
Also, no big decline in production.
"What we're seeing right now is a lot of uncertainty. We are seeing the thesis play out where costs are coming down. And we are seeing production chugging along," said Delia Morris, senior North American upstream analyst for Wood Mackenzie in Houston.
"We think producers are going to keep producing until cash flow dries up for them to fund it," she added.
Overall, most industry observers expect economic pressures almost across the board, with only a few positive trends for North America, in these key areas:
Budgets and Finances
In November, Apache Corp. announced it would take more than $2 billion in non-cash charges and reduce its 2015 North American onshore capital budget by $1.4 billion. Unconventionals player Continental Resources Inc. cut its non-acquisition capital expenditure budget from $5.2 billion to $4.6 billion, and later slashed it to $2.7 billion.
Range Resources Corp. in January reduced its 2015 capital budget for the year from $1.3 billion - already down 18 percent from 2014 - to $870 million. A number of companies announced initial rounds of layoffs last month, led by Schlumberger's plan to trim its workforce by 9,000.
Similar moves were expected from other companies in a general pullback, resulting in one small solace for operators: Experts predicted a lower-cost service and supply environment for the industry, with downward pressure on the price of everything from rig rates to rub rags.
Wood Mackenzie called upstream costs "the silver lining for operators." It said if oil prices average around $50 per barrel in 2015, the U.S. horizontal rig count could decline by 40 percent and rig day rates could fall by 30 percent or more.
While production-oriented "master limited partnerships" have come under considerable pressure, the company said there still is room for growth in North American MLPs related to the storage or transport of oil and gas.
Lower costs and operating efficiencies could be the salvation for North American resource plays as breakeven points begin to drop, sometimes dramatically.
The Eagle Ford looks like a best bet, Wood Mackenzie said. Its supply-chain analysis predicted Eagle Ford costs will come down an average of 20 percent for drilling and 10 percent for completions, leading to lower WTI break-evens in the play's core and economic drilling below $50/barrel for many operators.
In the Haynesville, lower service costs should improve the return on dry-gas investment. Wood Mackenzie projected gas-price break-evens for the Greenwood-Waskom, Spider and Woodardville area sub-play at $3.46/mcf, $3.31/mcf and $3.37/mcf, respectively.
"Concerning tight oil plays and unconventional gas plays, we are seeing reversion to the core areas, to the money-making areas. Operators are running away from high-cost fringe areas," Morris commented.
Look for more refrac work in U.S. unconventional plays. Because of low natural gas prices, some operators have already introduced refracturing, which can boost production at relatively low cost.
Successful refrac testing also has taken hold in gas-rich plays like the Haynesville and Barnett, Wood Mackenzie noted.
Gulf of Mexico
The biggest surprise of 2015 might be an uptick in Gulf of Mexico operations. It's hard to think of a deepwater lease being a hot topic, but industry observers expect lease expirations to drive activity in the U.S. Gulf.
Lower rig demand has mitigated that outlook, with utilization projected to fall below 50 percent and some contractors already bidding their largest jackups below $100,000 per day.
On the high end of estimates, Wood Mackenzie predicted drilling in the Gulf to increase by more than 30 percent compared to 2014, as rig contracting continues and development drilling ramps up.
Sharply lower production prices are widely expected to limit oil sands projects and curtail western Canada drilling operations. Wood Mackenzie said up to 16 oil sands project phases are at risk of being deferred by low oil prices.
The Duverney, Montney, Falher/Wilrich, Glauconite and other liquids-rich areas will see lower activity levels, but to a lesser extent than in other plays, it predicted. And activity in the Deep Basin and new niche plays like the Saskatchewan Torquay will continue, but at a reduced pace.
In mergers and acquisitions, a low oil price environment could warm up the Canadian deal market and generate bargain investment opportunities for companies wanting long-term resource potential, it said.
Repsol S.A. announced in December it had agreed to acquire Calgary-based Talisman Energy for $8.3 billion, a possible sign of more deals to come.
Despite a great deal of talk - and posturing - by the Republican-majority Congress in the United States, surprisingly few experts see much love for the long-delayed Keystone XL pipeline proposal. Wood Mackenzie expected the project to remain in a holding pattern.
Mexico is in the process of reforming its energy sector to allow foreign investment. Last year the Mexican National Hydrocarbons Commission released an initial bid process for 14 shallow-water contract areas, one of five types of licenses to be offered in Round One.
Wood Mackenzie forecast a decline in speculative interest by smaller and newly established companies in Round One because of lower oil prices. It said most interest probably will focus on discovered fields rather than exploratory blocks, with the exception of the offshore Perdido area.
"This is pretty lousy timing for them to have Round One going on," Morris noted.
She said the offerings related to Mexican unconventional resource plays could be delayed or withdrawn, reflecting reduced interest in natural gas, unconventionals and heavy oil blocks.
North American Exploration
Morris said the exploration sector faces lower activity, reduced ambition and a flight to quality.
"For the shale players, companies are just not going to be drilling exploration wells in fringe plays," she said. "For deepwater, I'm pretty sure that's similar."
However, past price-hedging using futures contracts will provide some protection for operators through 2015. And cash flow will allow companies to maintain production levels in already-developed plays this year.
"You are not going to get the full effect until 2016," Morris said. "Then things are going to be more exposed, and you could see some of the small companies go under."