Learning to live with oil at $50

Ever since the crisis began a few years ago, those at oil and gas (O&G) companies around the world found themselves starting their days with a close look at the movement of oil prices. Any increase would spring hopes for that day to be the first on the path to recovery; the anxiously expected first move towards the good ‘ole days when the price of oil averaged $110 USD or more per barrel.

However, it was not to be. As shown in the graph below, from the International Energy Agency (IEA), the average price of oil has remained within a relatively narrow band in the last several months, oscillating between $45 and $50 per barrel.

The question is, how can a company continue to operate and be profitable when its main source of income losses 60% of its value?

It’s clear that there will be a business for oil (and gas) for many years to come. Worldwide consumption will continue to grow beyond current levels at 96 million barrels per day. However, exploring for and producing hydrocarbons is a very expensive affair. Traditional reserves will be depleted as oil is produced, and finding additional sources of production requires huge investments in exploration that oil companies can’t afford in current market conditions. The key word here, however, is “traditional”.

With the coming of shale oil (see: Oil: things will never be the same again), the market found a gigantic, non-traditional and as yet not completely understood source of hydrocarbons that was not even in the picture as recently as ten years ago. There is a lot of oil out there, and the exploitation of these “new” reservoirs is becoming more efficient and cost-effective. The end result is that there is going to be a lot of oil available, and the old economic rule of supply and demand will continue to prevail, ultimately resulting in an abundance that will force prices to go down—or remain low.

The drop in prices generated a crisis because companies were used to a certain degree of wealth, and recovery, if there is to be one any time soon, may be slipping away. It isn’t right to live in a permanent “crisis mode” while things get back to normal; we must instead learn accept what we have. We must start to see current conditions as, well… normal. Companies must adjust their operations—and their finances—to make their business effective and efficient under present market conditions. It’s worth keeping in mind that, in the not too distant past, oil companies made money with oil prices below $30 USD.

What to do?

Apply timeless wisdom: go back to basics.

Before that, however, adopt the mindset that today’s pricing levels are going to be in place for a long time, a fact that most seem to acknowledge but many fail to take to heart. In a recent press release, the IEA forecasted that “Brent crude oil spot prices are expected to average $51/bbl in 2017 and $52/bbl in 2018. West Texas Intermediate (WTI) crude oil prices are expected to be $2/bbl lower than Brent prices in 2017 and 2018”. The WTI is the most widely used indicator in the industry, so there you have it. It’s a matter of accepting reality and getting back to work.

Then comes a very careful and swift evaluation of the available portfolio. Careful because companies want to look after their money and decide on their investments, paying as much attention to detail as possible. Swift because there are many other companies doing exactly the same, and the competition for quick-profit, fast-paced projects is going to be a lot fiercer than in the past.

The next step is to make sure that you have the best possible team in place. Recent software development, technological advances and streamlined processes are critical for improved efficiency and more effective projects, but the human factor is at the heart of the whole thing.

Consequently, keep and cherish the people that are valuable to you because they are the ones that will lead the recovery of your company. Expert geoscientists and reliable field hands take many years to develop, good managers are at the heart of the operation, experienced and skilled negotiators will secure the deals that the company require. The very arduous work and research of the strategists in the planning department must be protected as much as the people executing it. O&G companies (and service companies as well) released many of these very valuable and—in the short term—near-unreplaceable staff, pushing their cost reduction programs too hard in an attempt to have a “viable” P&L for their shareholders. They now find themselves struggling to find the people they need to put their business back on track (see: Skill Shortages in the Oilfield). A very strong effort must be made to succeed at this.

And then, there is persistence. The O&G business is going to be a very dynamic and important player in global economic development for many years to come. Resilience and determination, amid nearly impossible to predict pricing variations, are what will make O&G companies flourish again.