The Need for O&G Companies to Focus on ‘Above Ground’ Factors while OPEC Policies Play Out

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Heading into 2016, oil and gas pundits are finding little to cheer as fears of a ‘super-glut’ of global supply combined with decelerating demand begin to become apparent. As the new Government takes steps to clean up some of the governance issues that have created structural inefficiencies and lost money, companies are faced with finding new solutions to ensuring survival in a potentially prolonged low-oil-price paradigm.

Saudi Arabia, to the growing dismay of even its Gulf allies and other OPEC members, has now ramped up production to its highest in 30 years with no indication it plans to change course in order to stabilize the price of oil. At the same time, the lifting of sanctions on Iran figures to introduce more oil and gas onto global markets, and the supposed collapse in shale and tight oil production in the USA has failed to materialize. What nearly every industry watcher failed to anticipate entirely was just how resilient the constellation of US producers have been in the face of unprofitably low oil prices.

So who is Saudi Arabia’s policy of increasing production to create a glut benefitting? The cracks in OPEC are emerging, not just between the Gulf state allies and the likes of Venezuela, Ecuador, or Nigeria, but between the Gulf States themselves. At a recent conference, Mohammed Bin Hamad Al Rumhy, Oman’s Minister of Oil accused Saudi Arabia of creating a man-made problem which everyone else is suffering from.

Behind the strategy was an assumption that Saudi Arabia could survive longer on low oil prices than the US shale industry could – and once the latter started going out of business, Saudi Oil would swoop in with increased market share as prices began to rise again. It’s an assumption that now looks mistaken. As Drake Lawhead, Managing Director of the Oil and Gas Council “The US shale industry, unlike Saudi Arabia’s, is not centrally controlled by any single entity, rather, it is the sum of hundreds and hundreds of producers, large and small, thousands of service companies, tens of thousands of engineers and entrepreneurs solving problems every day, and hundreds of thousands of financiers and investors creating a liquid market that efficiently distributes capital to where it is will be profitable. And the whole thing is possible because the right regulatory framework and transparent fiscal incentives are in place to allow an efficient and diverse market to flourish.”

 

US shale story contains lessons for survival for Nigeria

There is a lesson for Nigeria there. “Nigeria is fortunate in one sense, which is that its average onshore production costs can be as low as $20 per barrel, and offshore around $30-40. The average marginal cost per barrel of shale in the USA is around $70, which means many of the struggles Nigeria will encounter in producing oil in a low-price environment are above ground – related to the efficiency not just of Government agencies, but of companies themselves”, said Lawhead. US shale companies have shown a resilience that has surprised industry-watchers, finding savings and efficiencies that many (including, presumably, Saudi Arabia) considered not possible.

“There is nothing a Nigerian oil company can do about the price of oil and little they can do about the machinations of Government policy over the sector, so they must focus on finding internal structural efficiencies, but also, the sector and all its entrepreneurs need to collaborate to find synergies, invest in new technologies, and find long-term sources of capital and financial backers who will sit with them to solve the problem.” Lawhead added.

The West Africa Energy Assembly, run by the Oil & Gas Council takes place in Lagos on December 1-2 and is designed as a forum to help Nigerian companies find these synergies, discuss appropriate Government regulatory policy, meet investors and make themselves attractive targets of capital.  It is open to senior executives in Nigeria’s Oil and Gas sector and details on registering are on their website: www.oilcouncil.com

 

Written by Drake Lawhead, Managing Director, Africa

Oil & Gas Council

mailto:Drake.lawhead@oilcouncil.com