Where is the oil industry at? – or has the sky stopped falling?

Jun 26, 2015

The past 12 months have been amongst the most tumultuous in recent memory for the global oil and gas sector.

Fears of a global oversupply of crude oil, fuelled by ever increasing production out of the US and Russia, threats from OPEC to “keep on pumping” at near record levels, and forecasts of slowing Chinese demand, saw crude prices collapse by more than 50% since June 2014.

Just as dramatically, a number of major operating companies moved quickly to significantly cut their budgets, leading to an even more dramatic move by some of the leading service and supply companies in particular to cut staff and equipment.

Some analysts have suggested that these reactions were desperately needed, while others consider there has been a major “Chicken Little” over-reaction.

What has all this activity led to some 12 months after the crude price began its slide from a high of US$115 a barrel?

Thousands of oilfield workers around the globe, but particularly in the US, have lost their jobs, while almost 1000 US onshore rigs have been removed from activity (and US shale production still continues to flow at near record levels).

In Australia a number of projects have been put on hold and exploration campaigns slowed down. And hundreds of highly skilled workers are now out of a job (more on this later).

And what has all this activity done for the oil price.

Slashing budgets and staff does appear to have stopped the oil price crash in its tracks, with West Texas Intermediate sitting just under US$60 a barrel and Brent at just over US$62 a barrel.

Some analysts are suggesting that approximately US$70 is most likely the mark to be reached by year end.

While in the short term a number of CEOs are viewing this is a victory, others are ruing the long term damage that has been done to the industry as a whole, and to individual companies.

As per previous downturns in the oil and gas sector the biggest long term damage relates to the loss of skilled workers. Each time there are dramatic cuts like this thousands of workers walk away from the industry and potential entrants decide to look elsewhere.

Where does this leave us when things turnaround again? As history has repeatedly shown us, particularly in Australia, there is likely to be a mad scramble to find the workforce to meet project demand, which in turn will lead to dramatic wage growth and unsustainable cost rises. Will we ever learn?

On an individual company scale, one of the first things cut is the marketing budget. That can be a fatal mistake as one lesson that has repeated itself throughout history is that you are soon forgotten if you are not out in the marketplace trumpeting your wares. In fact it has been shown that it is in downtimes – when you really need extra work to keep your wages paid and offices open – that you need to be promoting yourself (not when you are so busy that you can’t keep up with the work demand). It is no secret that those that market themselves aggressively at this time are the ones that come out of the slump the quickest.

Aside from the changes to the Australian oil and gas industry brought about by the fall in oil prices, there has also been a significant local activity turnaround related to the move from a construction phase to an operational phase for Australia’s wave of LNG projects.

Those service and supply companies which can move quickly to meet the changing demand for brownfield-related activities will likely be the ones that benefit the most. Those that don’t will miss the boat.

A new report has suggested that the start-up of these LNG developments has the potential to add more than A$55 billion to Australia’s GDP by 2020.

The Accenture report, titled “Ready or Not? Creating a world-leading oil and gas industry in Australia” has also identified that embracing innovation if Australia is to achieve that type of world leading success.

All of the above topics and more are certain to be major items for discussion when AOG gets together again in February 2016. I can’t wait.

Article supplied by Colin Hay, Pesa News Editor

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