Effects of plummeting petroleum prices on major oil, gas projects

NO doubt, the sudden crash of crude oil prices at the international markets is taking its toll on various economies world over, as initiators of major oil and gas projects are finding it very difficult to forge ahead with their respective original plans.

  The global crash in crude oil prices is reverberating through the oil and gas industry, pressuring producers to curtail investment to protect profits and avoid cuts to dividend payments.

  International oil companies are cutting back on spending aggressively amid a brutal slump in oil prices.

  The price of Organisation of Petroleum Exporting Countries basket of 12 crudes stood at $43.69 a barrel on Friday, compared with $43.05 the previous day.

  Dangerous and difficult oil fields that looked like goldmines when crude fetched more than $100 a barrel have turned into mere hollow pits as oil crashes to multiyear lows.

  Specifically, analysts believed that falling oil prices could see more than $150 billion of oil and gas-exploration projects shelved this year.

  In 2013, OPEC members exported $825 billion oil, a figure expected to fall to $390 billion in 2015.

  The Nigerian National Petroleum Corporation (NNPC) said last week that there is possibility that the declining crude oil prices may delay or probably cancel three deep-water projects in Nigeria.

  Wood Mackenzie, the global energy consultancy firm, said there were only 23 “exploration” oil wells in the North Sea last year, a sharp fall compared to the previous ten-year average of 81.

  Even if the price recovered to $60 per barrel, it said 95 per cent of the projects awaiting the go-ahead would achieve less than a 15 per cent return on the required investment.

  The report was published as a survey of around 400 oil workers found 68 per cent are worried about the impact of low prices on the long-term development of offshore projects.

  The falling oil prices have put tremendous pressure on capital-intensive U.S. oil and gas projects such as offshore drilling and shale exploration. Brent crude, the global benchmark, was trading below $49 a barrel Tuesday, down more than 30 per cent from late November. West Texas Intermediate crude, the U.S. benchmark, traded around $47 a barrel, about 40 percent less than its price two months ago.

  Royal Dutch Shell is said to have ditched a $6.5 billion project in Qatar, in the latest sign of the broadening impact of falling oil and gas prices on the hydrocarbons industry.

  Norway’s Statoil ASA last month postponed work on its Corner field project in Alberta for at least three years, in an effort to “prioritize capital to the most competitive projects.

  In May, Total said it would delay a final investment decision at its Joslyn field because of escalating costs. 

  Group Managing Director, Nigerian National Petroleum Corporation (NNPC), Dr Joseph Dawha, said that the ongoing decline in crude oil price will delay the exploration of three national deep water projects.

  Dawha said that the theme was chosen to address the decline in oil projects in West African countries and seek solutions.

  According to him, many companies have cash flow challenges due to crude oil price decline that affected their capital expenditure.

   “To many healthy companies balance sheet, these will result in delay of economically viable projects.

   “Delay in major projects will now be featuring in many companies projects and progammes, especially for offshore projects, as companies try to balance cash flow for projects,’’ he said.

  Dawha said that a number of deep water projects will suffer delays or outright cancellation including one in Angola, three in Nigeria and one in Ghana.

   “While in shallow water, two projects in Angola, one in Nigeria and two in Ghana may also suffer delays,” he said.

  According to him, the challenges of the Nigerian oil industry revolve around managing major projects through both price and physical uncertainty.

   “As in the past, in 1986, 1998 and 2008, Nigeria has always responded in many ways through right balance of incentives, as this industry is important to the overall economy of our country,’’ Dawha said.

  The Managing Director/Chief Executive Officer of the Upstream Companies of Total in Nigeria, Elisabeth Proust, said that with rapidly falling oil prices, the decision to invest in large projects after discovery and appraisal would be more scrutinized by the shareholders.

  She added that it will also be highly dependent on the investor’s confidence in the stability of the contractual and fiscal terms and the perception that the country will respect the terms all along the duration of the contract, with any disagreements being settled through normal dispute resolution avenues.

  To survive these challenges, Proust said that the country needs petroleum law that would seek to encourage investment and to grow production and needs to be a robust investment vehicle that works during both good and not-so-good times.

  She stated: “The industry as a whole, and I refer here to the government, regulators, contractors, exploration and production companies and other stakeholders, need to do more to keep building the future of the industry on the continent.

  “Another strong element that assumes even more importance is management of cost. Cost drivers are relatively inelastic in the short term of one to two years. There is a time lag between movements in oil prices and cost due to existing contract commitments. This means that despite the best efforts of operators and partners, contractor prices do not fall as quickly as the oil price.

  “If we take the example of Nigeria, contractors integrate the cost of uncertainties and the time lag of contract approval cycles, in their bid offers. If those approval cycles could be reduced, it could have a positive impact in reducing projects costs. Other high expenditure uncertainties relate to the security cost of protecting people and installations as well as the time value of possible disruption of the works.”

  According to Proust, there is stiff competition in Africa between West African producers and Mozambique, Tanzania and Kenya with large volumes of oil and gas discovered. She expects exploration to continue in countries offering attractive terms, incentives and facilitating the circulation of means and goods.  

 Proust stated: “With lowered demand and plummeting oil prices, it is not only major projects but all projects and the way we work that must be managed in the new reality of the drastic fall of oil prices. We must not only fine-tune our technologies competences, we must also examine cost optimization initiatives.”