Chain Reaction

The oil price has kept the industry talking over the past months. Disappointment, excitement, challenges and decisions have all been main staples for the value chain. Maritime Holland takes a closer look at how the decreasing, sometimes slightly increasing, oil prices have affected the oil and gas industry. What happens when the boom goes bust?

Halfway into 2014 a barrel of Brent oil, crude oil that serves as a major benchmark price for purchases of oil worldwide, cost 115 dollars, this plummeted to 50 dollars, sometimes lower, and at present it is traded at around 60 dollars. This is down to the age-old battle of supply and demand. With over-production on one hand, partly due to the uprising of shale gas in the United States of America, and weak demand on the other hand, brought on by the slow economical growth within the Eurozone. Subsequently, the United States of America and Canada might possibly become more self-sufficient in the future due to the shale gas, where both countries were vast importers of oil in the past. Further to that, the Organisation of the Petroleum Exporting Countries, otherwise known as OPEC, announced it would not be downscaling production, something that has been done in the past to stimulate the increase of the oil price. At times, it has been deemed, it is better to make a little money than none at all. And so the balancing act continues.

Delay projects, cut budgets, re-align the workforce

When looking at the value chain, several steps can be identified, such as exploration, production, transportation, refining and marketing. Within this chain, some companies noticed the backlash from the falling oil price sooner than others did. During an event held on the impact of various oil and gas regions Peter Sanders, director strategy and operations at consultancy firm Deloitte spoke of this difference stating that, depending on their position within said chain, oilfield services companies would be hit first, which has become evident in the announced layoffs within major organisations such as Haliburton and Schlumberger. Sanders: “When you look at engineering and construction, players like Heerema might see a slower order intake of the next period. The decision to investigate new fields will most likely be postponed for now and companies on the supply side of the industry could be relatively safe. But we all know the dynamics within oil and gas are subject to change.”

Financially unattractive?

In an interview with Offshore Energy Today, Richard Brakenhoff of financial institute Rabobank, who published the report ‘Offshore energy: Short-term dip, long-term rise’, also stated that surveyors and drilling contractors would be the first in the supply chain to suffer from the oil price plunge. Brakenhoff: “Seismic and drilling are the first activities to develop new oil and gas fields. The oil and gas industry have announced to cut their Capital Expenditure, or CAPEX, plans due to the lower oil price. First hit is the development of new oil and gas fields, because it would be financially unattractive to put projects that are already partly finalised on hold. These mega projects are for example the LNG projects in Australia, where the investment phase consist of many years.”

Not all bad

A lower oil price is not all bad news though, and if you are a keen news follower, you will have noticed mergers and acquisitions are rife. Classification society DNV GL states in their 2015 outlook for the oil and gas industry that the new reality the industry is currently facing, can offer the industry opportunities. Globally speaking, smaller companies and specific niche suppliers have a challenging year ahead of them, during which it may be necessary to seek partnerships with stronger, more productively wide-spread, organisations. In any shape or form, mergers are undertaken to strengthen position within the industry. Much like Haliburton who merged with Baker Hughes, both oil services firms, and were respectively number two and three in the world, with Schlumberger remaining number one even after the merge. The weakening oil price brought down the asking price of oil services companies, which offered the opportunity to strike while the iron was (or perhaps still is) hot. The combined Haliburton and Baker Hughes will be better able to compete with Schlumberger by saving on costs and offering competitive bids on a wider range of jobs.

What news from the Netherlands?

This merge or acquire trend has also hit the lowlands, where Dutch companies have experienced movement over the past couple of weeks. Most noteworthy is offshore-related increased share hold of Koninklijke Boskalis Westminster NV in Fugro NV. The strategy of Boskalis is focused on offshore and (maritime) infrastructure markets. In a press release, Boskalis states that Fugro fits perfectly within this strategy and that both companies have much in common in the way of assets, capital, clientele and knowledge, not forgetting both are leaders in their niche markets. The maritime services company stresses that the increased holding in Fugro NV is not a step towards making an offer on the company, but speculation remains.

Confidence is key

Dependant on your stance in the value chain, you will either deal with opportunities or have to deal with weakness, but wherever a company may be, it will most certainly remain challenging. Aforementioned DNV GL state that to ride out the storm, companies must look back to prior downturns and should strive to be, among other things, flexible, quality driven and concentrate on the core business. Not all industry players choose the same tack for 2015. Elisabeth Tørstad, CEO of DNV GL Oil & Gas, says: “It is interesting to see that the most confident industry players are forging a different path to their less confident peers. They are showing counter-cyclical behaviour by investing during the downturn, which is positive for the long-term health of the industry.” For the time being, all oil and gas related companies will need to contemplate, work hard and burn the midnight oil.

Rebecca McFedries