How Will Production Respond To The Slump In Oil Prices: An Historical Perspective -- December 16, 2014

Another must-read article, John Kemp over at Rigzone provides an historical analysis:

Since 1974, there have been four episodes in which oil prices declined sharply over a relatively short time (ignoring the brief price spike and equally rapid reversal in 1990 associated with preparations for the first war between the United States and Iraq).

These price slumps occurred between (1) December 1985 and July 1986; (2) January 1997 and December 1998; (3) November 2000 and December 2001; and (4) July 2008 and February 2009 (http://link.reuters.com/weq63w).

In each case, the drop in prices was completed quickly, with the peak-to-trough move taking seven months, 23 months, 13 months and seven months respectively. In the first three episodes, prices fell by about half (58 percent, 57 percent and 46 percent) though the most recent instance during the financial crisis saw a larger decline of around 72 percent.

Each decline in prices brought a downturn in domestic oil and gas drilling. But with the exception of the slump in 1986, the downturn in drilling was proportionately smaller than the fall in prices.

The recent episode of price weakness has been typical so far. Prices have declined for just under six months. The total peak-to-trough move has been between 47 percent (for Texas sweet) and 55 percent (North Dakota sweet).

Crude production has risen by almost 600,000 barrels per day since prices started falling, and is expected to keep rising in 2015, according to the U.S. Energy Information Administration.

There are some important differences between the current slump and its forerunners.

First and foremost, all the previous episodes occurred against a backdrop of slowly declining domestic oil production rather than the boom that has occurred since 2011.

Second, the output from hydraulically fractured oil wells is initially much higher than from conventional wells but then declines more rapidly. So, production should be somewhat more responsive to the fall in prices and reduced rates of drilling than in previous episodes.

But anyone expecting the plunge in prices to translate quickly into an equally big decline in drilling rates and a sharp reduction in production is likely to be disappointed.

It looks like we're in for the long haul as long as Saudi doesn't mind giving its oil away at $60 / bbl, and leaving $138 million per day on the table.

********************************

Here's Another Way "Production" Will Respond to the Current Price Slump

Retuers over at Yahoo!News is reporting:

Spain's Repsol has agreed to buy Talisman Energy, Canada's fifth-largest independent oil producer, for $13 billion, showing how the drop in oil prices is pushing energy companies to take the plunge on big M&A deals. 

A near halving in the oil price since June has lowered price tags on producers like Talisman, spurring renewed interest from Repsol which has long been searching for oil and gas assets in North America and elsewhere.

But analysts said the Spanish company had paid a hefty price for Talisman.