Commentary, 1/2 2015

Published Feb 16, 2015
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Cover 1/2 2015

Confidence Crisis

Compare a graph of oil prices for the second half of last year with a graph of the same period in 2008, and you’ll see a remarkable similarity. Yet, while the tumbling oil price pattern is similar, the underlying causes for falling oil prices couldn’t be more different.

The global economic downturn and credit crunch of that time lead to a crisis for demand, with oil prices falling to the high $40s. At the beginning of 2009, the economic outlook was grim, economic promised to be slow in coming. But, despite the crisis, oil prices were on the mend the following year.

At the end of 2010, as a result of the first unrest that would later be called the “Arab Spring”, we saw oil prices skyrocket – in part due to an interruption in production in countries such Libya and Egypt, as as well as the fear that conflict could spread across the region.

Eventually, production resumed. And globally, increased stability in oil producing regions has kept the oil flowing.

Investment in new technologies has also done much to keep production apace with demand. During these last few years, a global market evolution has been result of the explosion of unconventional production in North America. With the USA importing less, and the oil producing countries continuing with higher output levels – for a number of reasons – supply now exceeds demand.

But the excess supply we see now is only a small percentage of daily global production, and the surplus could easily disappear as a result of demand or crisis. Barring crisis, demand alone would certainly pull prices out of this slump. The question is really only a matter of when we’ll see a turnaround.

The biggest challenge the industry now faces is how it will react to lower prices in the coming months.

As we prepared to go to press, DNV GL released its fifth annual report: “A Balancing Act – The outlook for the oil and gas industry in 2015”. Not surprising, among those DNV GL surveyed, the confidence in the outlook for the oil and gas industry has dropped among sector professionals from 65% to 28% in the last three months. For the survey, a “confident” respondent was one who was “highly confident” or “somewhat confident” in achieving profit targets during 2015.

While the number of those feeling less confident has risen, the report itself is hopeful that the industry has learned from previous downturns, and will avoid the pitfalls of “knee-jerk” reactions.

Cutting costs will be a hot topic this year, and among the creative, innovative ways to save are standardisation and adoption of new technologies – methods that have already proven successful.

Although workforce reductions are expected, the survey warns that risks remain when it comes to dealing with skills shortages. So although the challenge to find and nurture new talent may not be as acute right now, a balance must be struck to avoid a future shortage.

The most noteworthy aspect of the DNV GL report is how the respondents who remain confident are reacting to this price slump. The “profit-confident” group of respondents are more likely to retain staff (or possibly increase their ranks) and implement cost-saving technologies.

Moreover, the confident group shows a greater inclination towards working though the low oil-price cycle. This is bolstered by “…a degree of financial strength and a foresightedness to make bets for the long term.”

Many feel an upswing could begin in the months to come. While the market changes can be tracked in terms of hours, days or weeks, the industry itself counts time in months and years – so careful consideration of the next steps is essential. The long term may not take so long to arrive.

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