The depressed oil prices predominant since late last year could herald a lasting trend if, as evidence suggests, we are now facing the low-price segment of oil ‘super cycle’, according to the latest paper from global strategy and management consulting firm A.T. Kearney.
This new situation would pose both challenges and opportunities to Middle East companies and countries, it said.
According to A.T. Kearney, there was still much volatility in the global oil industry regarding oil price, and a lot of speculation on how long the depressed oil prices will continue. But, evidence suggests the industry may have to face depressed oil prices for a long period, as experienced in the 1980s.
Sustained lowered oil prices will reshape the industry and in particular the upstream segment. How oil majors respond depends on a range of factors, but the report discussed that the scenario would likely favour national oil companies and fields in the Middle East.
A long period of low oil price would be due to the long-term nature of upstream investments, assuming the historical high oil prices in recent decade have led to excess global oil production capacity development. When the oil price drops it can take many years for actual demand to catch up with the available capacity and drive oil prices up again, i.e. what is known as a ‘commodity super cycle’.
Sustained low oil prices will primarily impact the upstream segment of the industry. The dominant focus of upstream business investments tends to shift in response to low prices, away from exploration and more towards improving the efficiency of existing production.
Oil producing countries of the Middle East and their respective regional National Oil Companies (NOCs) will face significant challenges if low oil prices remain in the long-term, but are still better placed than many International Oil Companies.
“A scenario of crude prices at $60-80 a barrel for several years is possible if we’re entering the low point of a super cycle. Middle East NOCs would be uniquely placed to take advantage of the situation due to their low production costs,” said author Sean Wheeler, partner, A.T. Kearney Middle East.
“In contrast IOCs and independent oil companies would be under considerable financial pressure, and likely need to reallocate resources away from high cost — unprofitable reservoirs. Regional NOCs could consider capitalising on this reaction by acquiring and absorbing this expertise into their operations, which would be very effective when applied to the lower-cost Middle East basins,” he added.
The downstream and petrochemical segments would also be impacted. Typically, when crude prices fall but GDP (and subsequent demand for oil products) continues to rise there is higher refinery utilisation. Global economic growth is currently slow, but the 1980s super cycle scenario demonstrated that global GDP growth will resume before oil prices rise again.
And, when this happens, A.T. Kearney said investment in refining once again becomes attractive. A similar situation is witnessed in petrochemicals, with demand heavily dependent on GDP — although low oil prices are likely to benefit naphtha-based processes more than gas-based procedures.
Co-author Eduard Gracia, principal, A.T. Kearney, said,: “If we are indeed starting a sustained period of low oil prices, the challenges for oil companies both globally and regionally are going to be significant. Everything the industry took for granted in the price hike years will be reversed: what used to be profitable may no longer be, whereas formerly blow priority activities suddenly become relevant. How each segment of the industry responds to this will vary, but it will be critical for Middle East NOCs to effectively leverage their control of the world’s most cost-competitive oil reserves to take advantage of the opportunities that arise.”