Who is going through the crisis in the oil and gas sector and how
- Written by Lavinia Iancu
Is the oil and gas industry going through one of the cycles taking place once a decade or two? Or is it a phenomenon worse than the market cyclical functioning with serious long-term consequences? What is the lowest limit for oil prices? When is the recoil coming? These are questions that a player on the market is concerned with. However, during this period of time, even large companies in the industry continue to cut their budgets, to cut investments and operate layoffs.
According to provisional data released by four of the major oil companies worldwide by market value - Royal Dutch Shell, Chevron, BP and ConocoPhillips - they were able to replace, together, only two thirds of extracted hydrocarbons in 2014 with new reserves.
And yet, things do not seem so bad in Romania. Regarding the impact of the falling global oil prices, National Bank Governor Mugur Isarescu said the annual inflation rate, which indicates the increase of prices, will be below the minimum of variation range, expected to reach 1.5% by the end of September this year. He added that the index reached its lowest level in February, very close to zero, mainly due to the international low prices of crude oil. Recently, the most important companies in the oil and gas field in Romania have announced the financial results for 2014, results that show, in some situations, solid financial positions, ongoing investment projects (especially in exploration and production) although at reduced rates, and the negative impact on the activity of companies affected by the unfavourable market environment.
OMV Petrom has reported a lower profit in 2014 due to lower oil prices and to declining sales, halved against the previous year (RON 2.1 billion in 2015 as compared to the record profit of RON 4.8 billion in 2013). The company has also decided to reduce investments for 2015 and to further focus on E&P, which will get about 85% of total investments. “In light of the volatile and potentially prolonged weaker market fundamentals, we are scaling back our investment plans for 2015 and we have intensified cost optimization programs whilst maintaining our potential growth projects in the Black Sea. In 2015, we expect public consultations on the fiscal and regulatory environment to continue, as announced by the authorities, and we aim for a stable, predictable and investment-friendly framework, which is a key precondition for future investments,” said Mariana Gheorghe, CEO of OMV Petrom S.A. The largest producer and main supplier of natural gas in Romania, Romgaz, succeeded last year to consolidate the production stabilization process for the fourth consecutive year, putting an end to the production decline; it has discovered four new natural gas deposits and has confirmed three former findings. The exploration activity has identified prospective resources of about 2 billion cubic meters, contingent resources of approximately 5 billion cubic meters have been confirmed, 3D seismic research has been carried out over an area of 1,200 square kilometres and the process of drilling the first wells in the Black Sea – Rapsodia block has started. In the exploitation activities 12 operating wells were connected to the national transport system and were put in experimental operation four findings out of seven new wells.
Following these operations - experimental production for a number of fields, new reserves resulted from well recompletion operations and from updating the resources/reserves from a number of commercial fields, a reserve replacement rate of about 90% has been obtained. The exploration investments reached RON 427.9 million, up 1.9% against the previous year and which include most of the 2D and 3D seismic surveys conducted in Moldova, Muntenia and Oltenia, and the drilling of 22 exploration wells.
Conpet on upward trend
The fall of oil prices did not negatively affect the economic and financial performance of Conpet, the national transport network operator for petroleum products. “On the contrary, this market situation is an opportunity for oil refiners - beneficiaries of our transport operation - to increase the purchased quantities of raw materials and the amount of current transports, slightly on the increase,” company representatives have told us. Consequently, the proposed transportation programmes exclude losses or syncope in the line of projects and investments, respectively the need for protection measures or reducing losses (non-existent), the representatives further said. As regards forecasting oil market developments at regional/global level, Conpet representatives consider that the low prices of fuels at the pump will generate, at least on short term, an increase of sales, expected to have a series of domino upstream effects, meaning slight boost in refining and transport activities of the raw materials, with no revival of the investment activities in the extractive sector, which most likely will keep the regressive trend.
Petrotel-Lukoil, projects with ‘quick wins’
The rapid decrease in market prices of raw materials and petroleum products began in the fourth quarter of last year and had a negative impact on the Petrotel-Lukoil refinery’s business results. On the background of ‘falling’ market prices of raw materials and petroleum products, one of the key factors that contributed to the deterioration of financial indicators was the need to meet the strategic stocks storage (over 200 thousand tons). As a protective measure, the company is focused on: cost control, working capital management, optimization of the investment program, setting the priorities on implementing the ‘quick wins’ projects, i.e. obtaining maximum effect at a minimum of cost which may be implemented on short term.
“Lukoil’s budget for 2015 is calculated based on the price of Brent crude of USD 50 per barrel. We believe that the objective price will be at this level during the first quarter, and the annual average will reach USD 60 per barrel,” company representatives have told us.
Regional centre for engineering, specialized in safety processes management
For the moment, the fall in oil prices during September-December 2014 hasn’t had major effects on Siemens. “We will continue to monitor the decisions taken by the oil companies and the market developments. As suppliers and partners of the major players in the oil and gas field, we are interested in and influenced by their decisions - especially in planned investments,” says George Costache, CEO Siemens Romania. “There are no losses at the moment. On the short and medium term, the impact will be felt in the investments the oil and gas operators will carry on the known deposits and mines, as well as on brand new ones,” adds George Costache. “Siemens is an integrated provider of solutions for the entire chain in the oil and gas industry. We have tradition on the Romanian market and we will make all efforts to achieve our plans, even in the case of postponing some of the announced investments. In order to balance the situation on the domestic market, we have teams dealing with international projects. We have set up within Siemens Romania a regional centre for engineering, specialised in the safety processes management for the oil and gas industry. This centre’s team, located in Bucharest, serves clients worldwide such as ConocoPhillips, Exxon, British Petroleum and Saudi Aramco,” said the Siemens Romania CEO. He further explained that, for Siemens Romania, the losses - if occurring – will be reflected only in lower business volumes. If low prices for crude oil will be in place for a longer term, Siemens will closely monitor price developments and will recommend its customers products and solutions that provide competitive levels of CAPEX and/or OPEX.
Developments on the oil market
With regard to oil market developments at regional/global level, George Costache believes that “oil has a significant share in current energy mix and will remain important for at least ten years more. Forecasts related to consumption during this period are increasing, both in our region and globally. This will lead to further investments in the field, even if current market conditions will cause the decrease in their rate for some time.” There are many voices, especially bankers and analysts who, on the basis of various economic models, predict a bleak future. We know for sure that 2014 has opened the oil deflation era, but no one can say exactly when this era will end...