As Premier Oil makes a historic find in the Gulf of Mexico, probably one of the 5 largest discoveries of oil in the world, and its shares surge by a 1/3 to over 60p, we have to ask ourselves if this black gold discovery is as valuable as it used to be or will it simply add to the headache being experienced by OPEC in reaching a profitable oil price.
The truth is we are drowning in oil. Total Non-OPEC production in 2018, led by America, is expected to rise by 1.5 million barrels per day. This equates to double 2017’s rate of output growth. Shale oil will comprise half the increase. Shale Oil has surprised the Saudi’s and adjusted to lower prices, innovating and re-inventing itself at a phenomenal rate. The increase in Shale Oil production is expected to increase at an even faster rate in future years as the industry matures and the true expanse of Shale Oil becomes clear.
There are many headaches for OPEC that is slashing production in a somewhat ill fated battle to curb the drop in oil prices, some of these are:
- OPEC countries exempt from imposed supply cuts, Nigeria and Libya, have boosted production that has offset the cuts by rest of the OPEC countries.
- Canadian Tar Sands projects are coming online. These projects were sanctioned in the heydays of high oil prices, and surprisingly have not halted despite the breakeven price having dropped. Whether the production will be economical or not is questionable but these projects are set to add another 570,000 BPD to the glut.
- There are several other projects that were sanctioned when the oil price was high and have not been halted.
- The US Rig count was climbing recently adding more production into an overflowing market. There has been a slight decline but still insignificant
- Demand side is declining at the same time as supply is increasing. The green energy boom has taken hold despite Trump’s resistance to green energy and support of fossil fuels. According to the Telegraph last year £222bn were ploughed into renewables and the industry now employs 10 million people. Costs for onshore wind have fallen by 30% since 2008 and solar power has fallen by 80%. Both wind and solar are expected to be highly competitive by 2020.
- Hybrid and Electric cars have taken off as improvements in battery technology and charging networks have improved. Volvo has announced that they will be producing only electric and hybrid cars from 2019. This may be alongside petrol and diesel versions. France is looking to prohibit the sale of Petrol and Diesel cars by 2040 and Norway has similar targets but by 2025.
- Electric cars are here to stay. Whilst the V12 roar of the Aston Martin is great, the driver of the Tesla Model S P100D in ‘Ludicrous Mode’ will hear that roar behind him as he accelerates to 60 mph 1.6 seconds ahead of the V12 engine of the DB11.
- So oil prices are not going to soar anytime soon. There goes the ‘peak oil’ theory.
So what are the dozen things that companies can do to survive or even take advantage of the oil price shock?
- Face up to the bad news. Adjust your business model to the new norm and be prepared for further falls in oil prices. If you need to cut personnel that were a luxury previously, proceed with the cuts quickly and deeply. Take the pain early and do not wait to see further losses before cutting.
- The supply companies including vendors, contractors and consultancies have already reacted well to the market changes, those that have survived the carnage are probably strong companies. However they cannot be complacent.
- Companies must continue to reduce their costs and improve efficiencies using proven technologies where possible. Processes for all major activities should be examined and waste removed, simpler processes should be used with less red tape. Technology has changed dramatically in the last 3 years and companies should look to replace manpower intensive processes and paper with cloud based internet driven technologies where possible.
- Companies cannot carry any passengers and should be looking to recruit and retain the best people.
- Stick to the knitting and your core business. You may have ‘slimmed’ your recruitment departments but do not be tempted to waste your valuable time sifting through CVs from fitters pretending to be Chartered Engineers. Use reputable recruitment companies that specialise in white collar recruitment and let them do the screening for you.
- Unfortunately, there is likely to be more pain needed in many of these large operators as the companies are still too fat for the margins that they are making. Many of the larger operators have cushioned themselves from drastic changes using reserves from the golden era. Some trimming and replacement will be needed and should happen sooner rather than later.
- Sweat your assets. Efficiencies and utilisation of company assets need to be looked at including the efficient use of industrial space, equipment and plant capacity.
- Whilst production activity may slow down, operational expenditure in the industry is still likely to be high. Many assets are aging and need constant maintenance. Maintenance optimisation and planning can help companies reduce their operational expenditure significantly.
- Supply companies in the oil sector need to look at allied industries that are growing including renewables where similar skills are needed and also nuclear that is experiencing a shortage of skills.
- Decommissioning expenditure will hopefully take off in the near future if operators and the government can find the money needed to meet the obligations.
- Do not rely on government handouts. The governments support for the oil industry has been minimal at best and companies need to innovate and evolve with the market. There are many opportunities in a mature or even declining market but only available to companies that can see them.
- Protect your reputation. I am sure you have heard the one about sheep and bridges. Most established companies are very good at what they do.
Do not be tempted in a difficult market to allow company ethical standards to be lowered. Be careful about which companies you associate with and temptations for easy income. There is likely to be some fallout from the recent inadvertent connections made by excellent established companies that may be forgotten in time, but cause have some short term damage and act as a distraction for management.
Do not compromise on Safety and Environmental matters; even a small incident can lead to huge damage to your reputation, as well as driving up costs and causing a management distraction, not to mention the loss of life.
Whatever your opinion, we are definitely living in the Chinese curse of ‘may you live in interesting times’. Look out for my next management blog on the survival guide to the oil market; I may even discuss how we got into this mess!’