Oil Prices - Low, Below & Blow
It is debatable whether world & Industry leaders like Vladimir Putin, Dilma Rouseff, Gregory Goff, Lee M Tillman, Rex Tillerson, Nicolas Maduro, Laxmi Mittal or our very own Narendra Modi could have envisioned the real impact and side effects of low Oil prices?
Though the recent fall in the price of crude oil has largely been welcomed by Govt’s, The man on the street and Industries at large, low oil prices, however, are not good news for everyone. They hurt companies in the petroleum business with negative effects rippling through other parts of the economy.
Oil producers and the companies that support the energy sector have all seen their share prices drop dramatically over the past six months as the price of oil has fallen from above $120 a barrel to the $45-$55 range
The obvious link between oil prices and profitability being the companies directly involved with the petroleum industry with its various facets, including oil exploration, drilling, refining, and distribution to consumers.
Upstream companies are hit the hardest since the price at which they sell oil is regulated by the market, yet their costs of production remain largely fixed.
Also the top line drops appear debilitating for O&G Integrated companies and Oil Field Service (OFS) providers.
However these immensely experienced and large organizations at the pinnacle of breakthrough technologies continue to mitigate the challenges by revisiting existing contractual, financial, insurance arrangements and investment and scaling decisions as normally as they revisit them when oil prices go higher than expected.
Cost sensitive segments like Shale and Tight O&G production, (abundance of which contributed to market share fight through price war) can effectively be projected only if current and future values of variables such as asset location, operator’s learning curve and well placement & completion technologies used are accounted for in arriving asset’s Breakeven, IRR and Payback times.
Opportunity for local, niche and mid size Technical service providers
This low price market trend has ushered opportunity for non International O&G cos and Service providers to provide ‘Value for money ‘ services which compete on cost with international operators riding on ‘expensive proprietary technologies’ from oil field services to high end areas like EOR, smart wells and platforms artificial intelligence for geo evaluation and production modeling.
In the low price regime scenario with no fixed point or reliable forecast on the cyclical trend, today NOCs and IOCs are willing to bet on the right credentials (irrespective of size and pedigree) on whoever can give more for the same or same for less.
Opportunity all around
Imported oil dependent Govt’s like India can use this opportunity to build strategic reserves, lock in future supplies through long term agreements and get rid of subsidies and price controls. For National Oil Cos it is a great opportunity to re balance and re-align their portfolios in terms of investments and costs. For instance, NOCs should actively dedicate resources for strategic opportunities by adopting outsourced Integrated O&M services model.
For Service providers it is time to proactively realign with the principal users in an elastic way that the next rally of oil prices result in muscle development instead of fat accumulation.
Contributors
Pummy Chicker, COO-Sanmarg Projects Pvt. Ltd.
Mukul Kumar Saini, Sr Manager - Sanmarg Projects Pvt. Ltd.
References
http://www.rystadenergy.com/AboutUs/NewsCenter/Newsletters
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