The energy sector continues to see low oil prices, positively affecting many consumers and dependent industries but negatively affecting the viability of both energy companies, their services sector and national economies. According to an analysis by Wood Mackenzie, the cost to the energy sector in lost projects in the near term can reach $1.5 trillion.
The price of oil has seen significant falls since last year, dropping from more than $110 a barrel over the summer 2014 to less than $50 in the recent period. The drop in oil prices has provided respite for motorists, while seeing the budgets of oil producing countries enter the red. According to a report by Wood Mackenzie, a global consultancy specialised in energy, metals and mining, the drop in oil price is starting to have a significant impact on the energy resources sector. The biggest issue faced by the industry is oversupply. Since the shale gas boom in the US and OPEC’s continued high rates of production, there continues to be an oversupply of around 2.5 million barrels per day – thereby causing a resultant decrease in price.
The effect of lower prices is affecting companies, whose projects are often placed on hold. In the US for instance, 46 large projects have been put on hold as they are deemed uneconomical at prices below $50 a barrel. According to Wood Mackenzie up to $1.5 trillion in investments for oil projects are at risk of being lost due to the low prices in the short term, with both primary and secondary services industries affected by the changes.
In the longer term, considerably more projects will be jeopardised by the low prices, with oilfield services contractors which provide thousands of workers and equipment, such as drilling materials, forecasted to be hit hardest. The loss of skilled workers through redundancies will be particularly painful for the sector according to the report, as they will be considerably more difficult to attract back from other sectors once prices stabilise again.
According to the analysis, companies are currently looking to cut operational costs – while a recent A.T. Kearney report suggests that many companies will either be bought out, or seek to buy out infrastructure that is going cheap.
A further effect of the price slump is that energy producing nations across the board have seen their revenues shatter in a number of different ways. In the GCC region for instance, the consequence is a decrease in the available capital for investment as revenue and cash reserves plummeted. In the Abu Dhabi region, up to $200 billion in planned projects by petrochemical companies have been cancelled. Large players like Saudi Arabia and the United Arab Emirates can weather lower prices for some time due to large capital reserves, however, nations like Bahrain and Oman lack buffers and thereby may find themselves in financial strife.
In Japan the reduction in the price of oil has seen consumer goods decrease further in price, leading to additional deflationary pressure. While in Norway the decrease in oil revenues from large national players has seen the country’s central bank lower interest rates to stimulate growth. The UK too is experiencing a downturn in North Sea income, placing oil and gas sector projects under threat. South American and African oil producing countries, like Venezuela and Nigeria, too face considerable headwind in balancing their budgets as expected incomes decrease.
According to industry experts, the oil price will start to reach higher ground from 2017, as industry players find a balance between supply and their own financial needs.