(MENAFN- Khaleej Times) Industry facing the low-price segment of crude super cycle.
International oil companies and independent firms would be under considerable financial pressure and likely need to reallocate resources away from high cost unprofitable reservoir. Photo: AFP
Dubai: A long-term scenario of crude prices at $60-80 per barrel is possible with the industry entering the low point of a super cycle but low production costs in the Middle East gives regional players significant competitive advantage energy experts said.
Global strategy and management consulting firm A.T.Kearney said in its latest report that the depressed oil prices predominant since late last year could herald a lasting trend if as evidence suggests the industry is now facing the low-price segment of an oil super cycle. “This new situation would pose both challenges and opportunities to Middle East companies and countries” it said.
“A scenario of crude prices at $60-80 per barrel for several years is possible if we’re entering the low point of a super cycle. Middle East national oil companies or NOCs would be uniquely placed to take advantage of the situation due to their low production costs” said the author of the study Sean Wheeler partner A.T.Kearney Middle East.
In contrast international oil companies or IOCs and independent oil companies would be under considerable financial pressure and likely need to reallocate resources away from high cost unprofitable reservoirs. “Regional NOCs could consider capitalising on this reaction by acquiring and absorbing this expertise into their operations which would be very effective when applied to the lower-cost Middle East basins” he added.
There is still much volatility in the global oil industry regarding oil price and a lot of speculation on how long the depressed oil prices will continue. But evidence suggests the industry may have to face depressed oil prices for a long period as experienced in the 1980s. Sustained lower oil prices will reshape the industry and in particular the upstream segment. “How oil majors respond depends on a range of factors but the scenario would likely favour national oil companies and fields in the Middle East” said the report. The study argued that a long period of low oil price would be due to the long-term nature of upstream investments assuming the historical high oil prices in recent decade have led to excess global oil production capacity development. “When the oil price drops it can take many years for actual demand to catch up with the available capacity and drive oil prices up again — a situation known as a commodity super cycle.”
According to A.T. Kearney sustained low oil prices will primarily impact the upstream segment of the industry. The dominant focus of upstream business investments tends to shift in response to low prices away from exploration and more towards improving the efficiency of existing production.
The downstream and petrochemical segments would also be impacted. Typically when crude prices fall but gross domestic product or GDP (and subsequent demand for oil products) continues to rise there is higher refinery utilisation. Global economic growth is currently slow but the 1980s super cycle scenario demonstrated that global GDP growth will resume before oil prices rise again. And when this happens investment in refining once again becomes attractive the study said.
“If we are indeed starting a sustained period of low oil prices the challenges for oil companies both globally and regionally are going to be significant. Everything the industry took for granted in the price hike years will be reversed: what used to be profitable may no longer be whereas formerly below priority activities suddenly become relevant. How each segment of the industry responds to this will vary but it will be critical for Middle East NOCs to effectively leverage their control of the world’s most cost-competitive oil reserves to take advantage of the opportunities that arise”said Eduard Gracia principal A.T.Kearney who co-authored the study.
On how long will oil prices stay low the study said: “There is substantial evidence that as happened after 1986 today’s reduced prices may signal the beginning of the low-price segment of a commodity super cycle. Indeed years of high oil prices fostered massive upstream investments which in turn led to oil reserves growing at a much faster rate than demand.”
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