FACING CRUDE PRICES SPIRAL DOWN Challenges, risks, and countermeasures
- Written by Lavinia Iancu
In general, the impact of falling oil prices on oil and gas companies operating in Romania, but not only, resulted in delaying the projects or even in giving up some important hydrocarbons exploration and production projects, be them conventional or unconventional, in reducing investments, in losses, in downsizing and layoffs, etc. Facing the effects of this phenomenon, the companies in the field have evaluated the risks and have developed concrete action plans for the next period.
On the international scale the fall in oil prices has hit the industry in the field. Examples are numerous, but there are also companies like ExxonMobil, for which the situation does not seem so dramatic. “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. ExxonMobil 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,” the officials of the largest US energy company told us.
The main negative effects
“The first effects have already occurred – by giving up or by postponing some large projects for exploration and production of unconventional resources: oil and gas from shale, tar sands, and the ultra-deepwater resources or the ones in Arctic basins. We are also witnessing the daily announcements of large companies of significant investment cuts in conventional production projects. As the size of this exhaustible source of energy is continuously decreasing - regardless of the drastic reduction of oil barrel quotation - we will witness a resumption of price increases in the near future,” estimates Bogdan Popescu, Non-Executive Director with Zeta Petroleum, specialist with an extensive international experience in the oil and gas industry and ANRM expert. Negative effects were felt also in the service providers for the companies in the field. “We have seen a slowdown in investment by delaying or postponing the projects already planned or those in the early stages of development,” stated Valentin Ilie, Regional Sales Manager Balkans Area Pentair Thermal Management. Moreover, it seems that the challenges the oil and gas sector that have undergone in 2014 will continue this year. “It is clear that 2015 will be a challenging year for the industry. As a result of the weakening outlook, during the fourth quarter of 2014 we took a USD 129 million restructuring charge to temper the impact of anticipated activity declines. Halliburton has successfully weathered multiple industry cycles. We are confident that we have the right people, technology, and strategies in place to outperform throughout this cycle too, and emerge as a stronger company,” concluded Dave Lesar, Chairman and Chief Executive Officer.
In turn, the oil giant Schlumberger decided to lay off 9,000 employees, which is equivalent to expenditure cuts of USD 296 million. Thus, “in response to lower commodity pricing and anticipated lower exploration and production spending in 2015, Schlumberger decided to reduce its overall headcount to better align with anticipated activity levels for 2015,” says Paal Kibsgaard, CEO of Schlumberger.
“The decrease in oil prices will certainly affect the profitability level of mature fields; at a low price it will be very difficult to justify a short or medium term investment for a deposit, which a few months ago had been already at the limit of profitability, when the oil price was around USD 100. This situation ought to be recognized by the government, which should take measures to reduce taxation on the production activity in these mature fields; otherwise the upstream investments, which have decreased lately anyway, will be further reduced with particularly negative effect on the domestic production of hydrocarbons. Taking out of production many mature fields placed on the edge of profitability will be in most cases irreversible,” warns Tudor Gafton, General Manager of Amromco Energy.
“A low price per barrel has, of course, a negative effect on the implementation of policies aimed at ensuring energy independence for many countries which, although they still have hydrocarbon resources, cannot «compete» with the major producers which have very low production costs,” he added.
The estimated level of losses
Whether we are talking about diminished financial results and/or image impact due to the blocking or the delay of certain projects/investments or other unforeseen circumstances, some companies in the oil and gas sector have already begun to account losses due to chain effects of the collapse in oil prices.
“The losses will be easy to evaluate for Zeta by the launching on the London Stock Exchange, launching we hope to take place in the first quarter of 2015. It is possible that distrust in industry may result in less money than planned, which would have been obtained through IPO,” Bogdan Popescu estimates. For Industrial MD Trading, the impact of falling oil prices could result in “loss in turnover of several million euros in 2015, and in terms of profit - in several hundreds of thousands,” said Horia Enciu, General Director of the company.
Ion Andronache, CEO of SYSCOM-18, says there were no negative effects felt by the company during September - December 2014. “We assume that in 2015 and 2016 Romanian oil and gas companies’ budgets will be significantly reduced, but this will happen also globally. Of course, this will have a negative impact on our turnover,” he opined.
Also, Pentair Thermal Management provides, for the following period, reductions of approximately 25-30 percent in the expected turnover.
Although Le Gaz Integral has no losses presently, the company expects delays on prospects in the 2nd half of 2015 and later, Filippo Rossati, Director General, mentioned.
Protective measures in the event of persistent low prices
As concerning the safeguard decisions, the range is quite wide. While some companies have adopted plans to restrict expenditures, have operated staff cuts, have frozen the wages, have reduced investments, others focus on finding new products for the same customers, on broadening the customer base in sectors not directly related to the oil and gas industry, on increasing competitiveness, on additional measures to streamline the production etc. However, we are only at the beginning of 2015.
Forecasts related to oil market developments
There are voices saying that the oil price will start to climb by the second half of the year, others estimate worrying decreases.
“If no force majeure events take place, we see no reasonable grounds for major fluctuations in oil prices, capable to affect to a greater extent than now the investment market in this sector,” opines Valentin Ilie. “In the current context when the major economies in the North Atlantic and European areas face recession at the macro level, a low price of oil should, in principle, contribute to re-launching and to sustaining a start of significant economic growth. On the other hand, maintaining a low price of oil on medium and long term will discourage investments in exploration and production sectors, especially in the offshore area, resulting in a lower replacement rate of hydrocarbon reserves. At the same time, the low price of oil barrel will discourage investments in alternative/unconventional energy. This combination will lead, at some point, to a sudden increase in hydrocarbons prices. The cyclical evolution of the hydrocarbons price is an economic phenomenon that should not surprise anyone, but large fluctuations can lead to sharp imbalances that adversely affect global growth,” says Tudor Gafton.
“The oil price could reach USD 25 per barrel, half of the current value and less than a quarter of the quotation during the summer of 2014,” estimated on January 16 Vaghit Alekperov, the CEO of Lukoil, Russia’s largest private oil company. His prediction is alike to a chorus of similar warnings, as at the same time the International Energy Agency (IEA) was saying that oil prices will continue to fall, while the representatives of American investment bank Merrill Lynch estimated that Brent oil prices will reach USD 31 per barrel before April. According to Alekperov, Brent crude will recover, however, its value being expected to reach to USD 70 - 80 per barrel by the end of the year.
No one knows how low the market’s threshold is, but for certainly the fall in oil prices has major and intensely debated consequences. The recovery might not be imminent, but there are signs that “the tide will turn,” the IEA report says.