Oil below $70 – is it all doom and gloom for E&P?

With the price of Brent crude down to $69.57 at time of writing following a long steady period at around $110, what does this mean for the Exploration & Production industry, the activities undertaken and the people working in it?

Survival mode

The human body reacts to a drop in temperature by shifting its blood to the internal organs critical for life, a survival mechanism. This analogy can also be related to some E&P companies, whose risk profile is high, and who after observing a sharp decline in oil prices have begun to move their resources around their prized assets. The effect for those companies is obvious – as they seek to optimise production but reduce CAPEX and OPEX in a turbulent market, internal resources are reduced.  These companies will be looking to reduce exploration costs and even offload assets.

Increased movement of assets

However, with many oil industry experts commenting that the inevitable balance of supply and demand will see oil prices grow again in the long term, E&P players with healthy, well balanced finances are on the hunt to pick up quality exploration assets for a reduced price from distressed sellers.    We can expect to see an increase in the movement of assets amongst companies and an increase in consultancy work relating to these transactions.

Many recent licence awards will have a commitment to acquire seismic data or a timetable to drill exploration wells that cannot be postponed. We expect to see an increase in farm-out activity as this scenario continues to play itself out.

Pressure on costs

One clear result of the oil price is that costs throughout the sector are coming under pressure.  Rig hire rates are forecast to fall and contract labour day rates are reported as down from their peak.  However, as with any market, if a particular skill is in short supply, quality expertise will be in demand and should be able to maintain market rates.

Increased knowledge transfer activity

Financial pressure is making labour localisation projects more of a priority.  OPC is already heavily involved in running knowledge transfer projects throughout the globe and we are experiencing an increased demand for a wide range of our training programmes from IOCs and NOCs looking to maximise the benefits of local expertise.

Flexibility and cost effectiveness

Finally there will be an increased demand for cost effective and flexible service providers.  Major oil companies will scrutinise a supplier’s services and look for value – suppliers such as OPC who provides an integrated, flexible support network across all upstream oilfield services will become more attractive to oil companies, large and small. An integrated and flexible supplier can also provide valuable continuity to projects during these turbulent oil price times.

What’s your view?  What impact do you see on the exploration & production sector?  Comment on our LinkedIn page.