RIYADH: Major players are beginning to get itchy when it comes to the price of crude.

“The price is too low for everybody, consumers too would suffer in the long term,” says Saudi Aramco CEO Khalid Al-Falih.

Collapsing markets have also forced giant Aramco to tighten its belts.

“We will have to adjust to the realities of today. We will push some projects into the future, we will stretch some of them, we will renegotiate some contracts,” Al-Falih added.

The ongoing shale revolution in the US is also under gathering clouds.

Oil producers in West Texas and North Dakota “can’t drill for $45 oil,” energy investor Boone Pickens told media.

Collapsing crude prices are confronting scores of smaller US oil producers with the grim choice of either shutting older high-cost wells or burning through cash in the hope of riding out the downturn.

Now, operators are closing some small old wells, known as strippers, and tens of thousands of similar wells are on the verge of losing money.

There are about 400,000 stripper wells in the United States, most with operating costs of between $20 and $50 per barrel, according to analysts at Wood Mackenzie. Strippers often produce just a few barrels a day, but together they account for up to 1 million barrels per day, almost a ninth of US output.

“We’ve identified about 20 of our wells that are not economical at these prices,” Ray Lasseigne, of TMR Exploration Inc in Louisiana was quoted as saying.

Leslie Tipping says some wells are already closed while other higher-cost fields, across much of North America, including older parts of North Dakota’s Bakken, and areas where the geology is difficult, such as the Anadarko Basin in Kansas and Oklahoma, face closure.

The slowdown in domestic oil drilling is spilling over into the Marcellus Shale natural-gas region too. Several large drilling companies have announced plans to reduce 2015 capital-spending plans in Appalachia. Range Resources Corp announced that it will cut its capital spending for 2015 to $870m from $1.3 billion. Range spends 95 per cent of its budget in the Marcellus.

Producers in the “wet gas” areas of Western Pennsylvania, West Virginia, and eastern Ohio too have announced big reductions in drilling plans.

As prices slumped, oil drillers have also reduced the number of rigs operating in the US to the lowest in two years, Baker Hughes Inc data released on Jan. 23 reported.

Companies idled 49 US oil rigs last week, bringing the total to 1,317 in the seventh weekly decline, it said. The count has fallen 165 in January, the biggest three-week decline since 1987.

Canadian energy sector is stressed too. The Canadian Association of Petroleum Producers said last week oil production nation-wide is expected to drop by more than 100,000 bpd because of slumping oil prices.

The second-largest Canadian oil producer, Cenovus Energy is cutting its capital expenditures for 2015 to around $1.5bn. In December said it already trimmed it by 15pc to $2bn.

But like every story with a flip side, this is also not without one.

Investment in oil production will fall by $100bn, or 15pc, this year compared with 2014, guru Fatih Birol, the chief economist at the IEA, said at the World Economic Forum in Davos, Switzerland. This means oil at $45 a barrel will be a temporary phenomenon, he said.

“If we cut production then there will be spare capacity and producers will not invest, or postpone projects. The market will rebound back higher than the $147 we saw in 2008,” Opec Secretary General Abdullah Al-Badri warned in a press interview.

Claudio Descalzi, chief executive of Eni too is saying oil could hit $200 a barrel by the end of the decade if the energy industry continued to cut investment and capital expenditure.

BP’s two large North Sea oil projects are “challenged” by the price fall, CEO Bob Dudley conceded.

Markets seem now rushing to strike a delicate balance — between ‘efficient and inefficient’ sources. And until the search is on, flux is set to continue ruling the energy markets.

Published in Dawn, February 1st, 2015

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