Plunging Oil Prices – Is it All Bad?
This tantalising question was the theme for an evening event at the Norwegian-British Chamber of Commerce in Aberdeen on 27 May 2015. The evening included excellent presentations from Jan Erik Berre of DNB and Birgitte Karlsen & Rob Jardine-Brown from Wikborg Rein.
Some of our takeaways from the evening:
- Downturns are not uncommon, but this is the third largest in a generation
- The real questions on oil price are: how low? and for how long?
- A price ‘in the 70s’ is likely for several years, but energy demand will still grow (predicted to rise 35% in the next 25 years)
- This means now is the time to look ahead and transform
- The US shale business (whose success triggered this crisis) is on its way to being profitable at $60/boe but more mature basins have an even greater need to transform
- In such times industries tend to go through 3 stages:
- Stage 1: Immediate – Cut Costs (3-9 months – worth 10-15% savings)
- Stage 2: Adapt – Drive Efficiency (6-18 months – may reach 15-25% savings)
- Stage 3: Transform including M&A, restructuring and changed operating models (12-36 months – could achieve 25-40% savings)
- The industry generally is probably near the end of Stage 1, starting Stage 2 but Stage 3 still offers the biggest prospects
- Currently initiatives on standardisation, applying less complex, more practical solutions and being fit for purpose rather than gold plating are coming to the fore
- A range of scenarios when customers try to renegotiate, suspend or terminate were discussed, with interesting differences between English and Norwegian Law noted
- Critical however is good contract management discipline, plus remembering its cheaper to get good legal advice than to take legal action…
- There are still many project awaiting Final Investment Decisions
- Unlike the last big dip the banks are in a position to lend and the cost of financing is low
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