Is the Sun Setting on the Oil Industry?
The oil industry is in a state of flux. Uncertain oil markets and infighting within OPEC, unable to agree amongst themselves how much they will each extract and produce, have ensured the price of Oil has and will remain lower for longer. Political pressures have suppressed the price of oil below the line at which governments require it to be in order to balance their budgets which have led to the significant job losses we are currently experiencing in the North Sea.
As this continues Middle Eastern nations will be forced to consider taking brutal austerity measures in order to balance their national budgets if the oil price remains below 80–90 USD / bbl for a prolonged period of time. Most, if not all, oil producers cannot afford oil prices of 40 USD/bbl for more than a year, but the question is: who will succumb to the pressure first? What we are experiencing currently is an economic variant of the game of chicken with North American Shale producers on one side and OPEC on the other. Who blinks first, loses.
OPEC had banked on lines of credit to the shale producers being withdrawn obliterating the prospects of Shale producers in the US. Instead, they have encountered an unexpected resistance and realised the resiliency of the Shale market which does not bode well for a return to high prices quickly. As the price increases shale wells which were economically infeasible at the lowest Oil prices will come back online and flood the market with yet more Oil/G ensuring the price does not rise quickly. In short the Saudis gamble appears to have failed and it seems they are all out of chips. OPEC’s reliance on high oil prices to balance fiscal budgets has been there undoing as has their ability to remain a cohesive cartel which corroborated prices. For what is a simple prisoner’s dilemma where everyone would benefit if collaboration could be assured has seen everyone lose because they can’t trust one another and agree to a level of production which is fair to everyone. Ultimately greed has presided over sensibility.
How then does this bode for the North Sea in the coming year? From a personal perspective, our outlook is relatively strong having restructured our strategy early to compete in a suppressed market. Expansions of our activities through strategic partnerships out with our typical markets and internationally, diversifying the business during an increasingly uncertain period in the Oil & Gas market also proved to be prudent and occurred at a fortuitous time. Some of our competitors have not been so lucky. It would be easy to assume that seeing your competitors struggling or going out of business is a good thing but that couldn’t be further from the truth. Speaking more holistically about the industry as a whole it is never a good thing to see businesses, companies and individuals going out of business on compassionate grounds but from the perspective that if entities which are good at their jobs aren’t able to balance their books it does not bode well for everyone else looking ahead. A thriving market flooded with opportunities fosters competition but at least, it conveys a sense that projects will be forthcoming.
Jobs it would be wise to consider
Fortunately, it feels like the worst of the cuts have been made and I don’t think there are any jobs more than any other which you should consider trying to depart. For those experiencing the ongoing unemployment crisis in the industry, I realise this is no consolation. That said, from what I’m hearing and seeing and there certainly seems to be an increase in prospective job coming to market. It will obviously take time to redress the balance between opportunities and number of people out of work, though. The other overwhelming truth will be one of subdued salaries for the foreseeable future. The necessary cutting of costs has resulted in large wage drops, anything between 10–30%, which are going to take years to recover. The cost of finding work will still be a turbulent road back to previous normality. It would be wise to alter your expectations to this new normal.
Contractors have obviously been detrimentally affected by the cuts but they are neither factored into the unemployment figures or afforded much sympathy. The prevailing sentiment at times of uncertainty is to seek the solace of a staff position and this would certainly be advisable. That said, in times of such a crash, is there really that much more protection in a staff position? Regardless of whether you make the switch you job may still be under review and you may just be dying a slower death.
What jobs will be hot in the next year
With the on-going market conditions, the economic infeasibility of certain platforms and wells has immediately been called into questioned. Their continued use is studied vigorously and decisions are made to shut down operations and cap wells. What has ensued is the burgeoning growth and flourishing of the decommissioning marketplace. We are already seeing this seed begin to grow and it will only become more prominent the longer the price remains low.
Large engineering projects are already beginning to proliferate through to the market and companies who integrate into this market early will be able to position themselves as the market leaders for the years of work which are estimated. Existing companies will be able to supplement the existing work they are doing with a new stream of income undoing the work they were responsible for installing. The opportunities will be huge: Nearly £17bn is forecast to be spent on scrapping 79 North Sea platforms and plugging 1,200 wells over the next 10 years, according to an industry survey.
Taking all of the above into an account you could perhaps be surprised by my growing sense of optimism for the industry as a whole. We’ve been through oil price crashes before and we will go through them again, that is inevitable. I personally view them as corrections reestablishing normality to an industry which has become overrun by waste an opulence. Oil may be lower for longer but I hope and believe, it will result in a more efficient and economically viable industry. At least until the times of peak oil return…
The sun’s not setting on the Oil and Gas industry. It’s merely the begging of a new day.
