Just a few years ago, the world couldn’t get enough of it. Now, everyone talks of a glut. The oil price is well and truly in the doldrums. Since 2014, the price of oil has been on a downward trajectory which has taken the industry into territory not seen for decades. What, on the face of it, seems like great news for the consumer is already having serious knock-on effects in the world economy. Some are positive, some are not.
Oil and gas will remain as a key energy source and industrial resource for the long term. The world badly needs oil for many purposes; to power its cars, to plant it fields, to operate its oil-powered irrigation pumps, and to act as a raw material for making many kinds of products, including medicines and fabrics. If the price of oil is too low, it will be left in the ground. With low oil prices, production may drop off rapidly. High price encourages more production and more substitutes; low price leads to a whole series of secondary effects (debt defaults resulting from deflation, job loss, collapse of oil exporters, loss of letters of credit needed for exports, bank failures) that indirectly lead to a much quicker decline in oil production.
DEG President, Jefrey B. Aldrich in AAPG Explorer December 2015 mentioned that while we can understand the need to survive on a corporate level, these large redundancies will set the industry up for an unhealthy battle for talent when prices recover. To survive this will not be easy, now or later. For the younger generation, he advise taking or keeping any work you can. Many of my colleagues had to leave in the 1980s but successfully came back; the industry has a way of seeking forgiveness and forgetting the layoffs when they need talent.
During International Energy Summit event on June 1st, 2016 in Yogyakarta held by AAPG SC UGM, ISPG committee representative be a presenter on behalf Peter Grant (President AAPG Asia Pacific) talking about energy issues. Changes in politics, successful exploration, large increases to the cost base and a rapid decrease in oil and gas prices have placed enormous pressure on Oil and Gas companies and host governments. The industry needs to re-examine their attitude to investment by taking a longer term view. Oil price fall is not a new phenomenon, but there a few changes this time; the market has changed, the US has reduced oil imports and may export gas, OPEC does not produce the majority of oil (this may change in the future), more nations are dependent on oil revenues and this drop has been self-inflicted.
The changes between the past and the present oil price falls are; OPEC is less dominant, many more Asian countries rely on hydrocarbon revenues, populations have increased as have their expectations, greater energy needs by industry and created by supply/demand curve/oil shales. For oil companies, now they prioritizing their investments due to reductions in revenue. Discretionary projects are being cancelled/delayed, pressure is on capital expenditure, current projects are being delayed, exploration spend is being reduced or deferred and some companies cannot meet their obligations.
How about the impact on governments? Lower oil prices mean lower revenues for governments that enjoy petroleum production which places pressure on national budgets, infrastructure projects, employment, community projects, exploration programs required to maintain and grow oil and gas reserves and sanction of new projects. But all is not bad, countries importing energy have a much reduced energy bill, third party costs have reduced so new infrastructure cost will be less, and the oil cost continue to pay their training programs, rentals and community costs.
What is needed to return to profits? Collaboration is the key. Focus on technological breakthrough reduces time and costs and creates efficiencies. Exploration will continue due to costs are low so now is the time to explore and develop, portfolios are diminished, they need to be replenished, oil producers need their oil and gas revenues to balance their budgets, SE Asian supply demand gap continues to grow, especially in oil. *end