In Oil & Companies News 11/05/2015
The projected 20% drop in investments in the upstream oil sector this year is not good news for the oil market, whose stability is key to global economic recovery.
Energy companies that had been riding the crest of $100-plus oil are now facing a reality check. What looked like a good investment at $100-a-barrel, obviously, doesn’t look so profitable at $60 or less.
Slumping oil prices have had major casualties around the world in the last few months. Persistent oil prices have forced many energy-surplus countries either to scrap or delay projects to conserve cash.
Less investments mean no additional capacity build up, which in the long run may tilt the demand – supply balance, causing oil prices to jump significantly.
Very high oil price is not the recipe for stable global economic recovery.
In a recent interview with Gulf Times, the chief economist at the International Energy Agency in Paris, Dr Fatih Birol, warned that the drop could be in excess of $100bn, something the world has not seen even in times of financial crises.
The decline in oil prices is having far reaching consequences on the energy industry, as many companies are experiencing declining revenues and are cancelling projects that would have expanded their production capabilities.
A report said investing in new wells was profitable only when oil was trading at a minimum price of $80 a barrel. As such, oil companies will slash capital expenditures by 20% in 2015.
Cuts could be even higher among small cap stocks where some companies have already announced 50% reductions in spending. The cuts may even wipe out production growth or cause production to decline in the US by late 2015 or early 2016.
The World Bank in a report said reduced investments in new exploration or development will especially put at risk oil investment projects in low-income countries or in unconventional sources and oil in the Arctic zone.
The sharp decline in oil prices has been accompanied by substantial volatility in foreign exchange and equity markets of a number of emerging economies since late last year.
Low oil prices have already led investors to reassess growth prospects of oil-exporting countries. This has contributed to capital outflows, reserve losses, sharp depreciation, or rising sovereign credit default swap (CDS) spreads in many oil-exporting countries.
Growth slowdowns in oil-exporting countries could also strain corporate balance sheets (of especially large oil companies) and raise nonperforming loans.
Financial problems in large oil-exporting emerging markets could have adverse contagion effects on other emerging and frontier economies.
In addition, oil-exporters have channeled surplus savings from oil revenues into a broad array of foreign assets, including government bonds, corporate bonds, equities, and real estate.
The flow of so-called “petrodollars” has boosted financial market liquidity, and helped keep borrowing costs down over the past decade. If oil prices remain low, repatriation of foreign assets could generate capital outflows, and potential financial strains, for countries that have become reliant on “petro-dollar” inflows.
Clearly, fair price is essential for a stable energy industry and global economy.
