I did say I would look at how we got into this mess. In this blog I give some personal views and also look at the human element of the crises, a factor sadly ignored by many.
Background to a Crisis
OPEC has been stern in their commitment to curb oil production with persuasion tactics, carrots and sticks being thrown at Kuwait, Russia, UAE, Iraq, Kazakhstan and Malaysia to curb production. Promises of full support and conformity were reported by the FT. Result – OPEC’s actual production rose for three months in a row to July. Coupled with all the factors picked up in my previous blog, (add link to previous blog) Oil prices have been pretty static. Even the concerted efforts of Kim Jong Un and the sabre toothing from Trump failed to dent the oil price.
Notwithstanding the rise of electric cars and renewables, management of the oil price by OPEC has left a lot to desire. Initially, It rejected Shale Oil technology as a unlikely fad and when it became evident that Shale was here to stay it reacted slowly with a jingoistic strategy of flooding the market with as much oil as it could pump driving the oil price down. In the process, oil was produced irresponsibly damaging some reservoirs and the production was not replenished with new finds. Not to mention the irresponsible sale of the black gold at a throw away price.
OPEC’s moves inadvertently helped the Shale industry. With OPEC’s irrational tactics, money flowed out of the oil industry and went straight into shale technology to develop a hedge against OPEC’s stranglehold. OPEC misread and underestimated the Shale industries ability to innovate and reduce costs. At present Shale is comfortable at $40 Oil Price. The shale industry proved Napoleon’s adage that you should never interrupt your enemy, especially when he is making a mistake!
The Saudi’s were quoted as saying they were happy at $20 per barrel. In reality they found that their Net Foreign Assets were finite and shrinking (from $750bn in 2014 to $530bn in 2016) due to the high social cost of maintaining authoritarian policies for managing its people, an expensive and pointless war against Yemen and feeding its continuing rivalry against Iran and now Qatar. Its rather odd power policies including a decision to generate power by oil fired power stations consuming some 1m barrels of oil per day are also questionable, not to mention environmentally irresponsible.
What Should have Happened
In reality the Saudi’s probably need an oil price of more than $80 per barrel to break even; otherwise they eat into their foreign reserves! A more sensible policy for the Saudi led OPEC club would have been to embrace, and invest in Shale Technology and other renewable technologies using the mountains of cash accumulated during the hay days when it could charge $115 per barrel, and their actual cost of production was around $6 per barrel. It should have worked with Shale producers, including investing in Shale technology, to provide the world with a more reliable and balanced energy approach.
The irresponsible, ill-fated and ill-judged clash between OPEC and Shale producers has caused much ‘collateral’ damage and misery for nations, companies and individuals. Excellent, highly trained and committed people have been caught up in the middle of the fight between titans, not to mention the economic damage to top companies, cities and countries. Thousands of jobs have been lost and trillions of dollars of investment has been cancelled from oil and gas projects. Many Oil producing countries that have little other income than from oil, have been affected including Canada, Russia, Nigeria, Argentina, UAE, Kuwait to name a few.
A Case for Optimism
Whilst the carnage is tragic, the drop in the oil price has had some positive effects. When oil producers suffer, oil consumers benefit. So less oil dependent economies have a massive benefit from cheaper energy. Probably the biggest benefactors have been China, India, Pakistan and other similar consumers. The oil industry has shown a remarkable ability to cut costs and remove red tape that plagued the industry with the Operators picking up the bulk of the costs of an expensive supply chain. There is still fat in the oil industry, so expect further headlines of oil companies cutting costs, selling assets, merging and acquiring rivals. A restructuring of the industry is on its way, I’m afraid the carnage is far from over!
The Human Element
Coming on to the human element, if you are affected by the tragic job losses or are in employment in the oil industry what can you do?
- Acceptthat low oil prices are here to stay for a while
- Don’t under value yourself– some of the most talented and educated people have been produced by the oil industry. You will have learned skills to work in demanding environments and these skills are desperately needed by companies
- Don’t panic. Some operators including Shell have reported good profits and can make a decent profit at $50 per barrel. In fact, some say they can make more profit at $50 per barrel than at $100 per barrel as supply chain costs have been driven down so much. When operators can confirm this view the level of activity will pick up and operators may realise that they have cut too deep and are desperately short of skills to operate existing assets.
- Have a flexible attitude. We have been spoiled during the high oil price as good skills could not be found in some cases for love or money. We live in different times, temper your expectations and show more commitment and flexibility.
- Follow existing companies into new areas. Some oil operators are moving into renewables and electricity generation and distribution. Harness your existing contacts to move into other areas.
- Consider moving into an operations support role. The high OPEX spend is not likely to go down as assets need to be maintained and operated, in fact the OPEX per barrel goes up as assets age and production declines.
- Look at decommissioning. We have given a lot of lip service to decommissioning and I am not sure if there will be significant imminent expenditure in decommissioning during a downturn. However, if there is a move towards decommissioning then there is no shortage of old and knackered assets worldwide that need to be cut up and disposed in a responsible manner.
- Look at other geographical areas,different geopolitical dynamics affect different locations. Be prepared to travel.
- Look at allied sectors. When upstream oil industry suffers, the downstream refining and petrochemicals industries benefit due to the low cost of crude feed. The nuclear sector is suffering severe shortages and renewables industry is also short of skills. We are experiencing a massive growth in the construction industry, many major projects have been sanctioned in UK.
Remember that unemployment is at a record low. The FT states that 125,000 people found jobs in the three months to the end of June, meaning 75.1 per cent of all people between the ages of 16 and 64 were in work — the highest employment rate since records began in 1971.
- If you are unfortunate to be affected, do not forget to adjust your personal expenditure in line with your income. The biggest problem UK has is not Brexit, immigration, Theresa May, NHS…it is the massive personal debt mountainpropped up by record low interest rates and lack of understanding by all parties of economic issues!
These are tough times and I would urge recruitment companies to provide no obligation guidance to candidates in the oil industry looking for new assignments including, identifying suitable opportunities and assistance with CV writing and interview skills. Many of us are used to being head hunted and have never actively looked for new opportunities! Please respond to this blog if you are willing to assist candidates in this manner.
Look out for my next blog when I will look at the lessons learnt (painfully!) in the oil price carnage.