First published in Energy Voice (April 2016)
As greater and greater detail emerges about the OPEC meeting in Doha on Sunday 17 April 2016, only one fact seems to matter – there is no agreement to freeze production.
The churn of analysis and speculation as to what happens next and about the motivations of the key players will go on but oil and gas executives internationally must accept the news and plan accordingly (all the while keeping one eye on the oil price as it bounces along – ever lively, rather than volatile – around its ‘new normal’ level).
In light of the failure to reach agreement in Doha, it is to be expected that pressure on industry executives to do something, or something more, will only increase as this news is digested alongside Q1 financials.
Proposals to shelve high-cost projects and dispose of non-core assets will become concrete plans for some and others will have to cast the net more widely than before to find cost savings or new opportunities to generate revenue.
While the market and the International Energy Agency (IEA) talks about supply and demand “rebalancing” in the second half of this year, executives know that business will not prosper (or perhaps even survive) in this environment without some action from them on the ground.
Our research tells us that around three quarters of international senior oil and gas executives regard OPEC policy as the most significant geopolitical concern for oil and gas businesses in 2016.
The 78 senior executives we surveyed at the start of this year, based across the UK, Europe, the Middle East, Russia, Asia, Africa, South America and North America, ranked OPEC policy as a concern for them above the slowdown in the Chinese economy (rated by 50% of respondents globally and 67% of those in Asia) and the impact of sanctions (rated by 41% of respondents).
The reason for this is evident: decisions by OPEC about supply still have a direct impact on the oil price (whether or not, as you may decide, its global dominance may be waning). So, there are no surprises here and it is easy to see why this is rightly identified as a major concern as budgets and bottom lines remain under sustained pressure.
As we reviewed our survey results, it surprised us only that OPEC policy out-stripped other concerns by such a wide margin. The IEA has predicted that China alone will account for a third of the increase in consumption of global oil over the next five years. Our respondents in Asia seem more attuned to this fact and, we suspect, for many stakeholders globally the focus in 2016 will be on managing shorter term horizons.
The geopolitical issues facing oil and gas companies are not easily divided, either – the absence of Iran from the discussions in Doha became a decisive factor in the failure to reach a new agreement on OPEC’s production policy.
It is to be expected that scrutiny of Iranian production and export activities will build in coming months, and the appeal here for IOCs is obvious. They will need to be well prepared and well advised and act with due caution and due diligence in this market, however, to navigate the patchwork of remaining sanctions.
Perhaps most importantly though and whatever the sources of market uncertainty and potential opportunities they face, senior executives also told us that their strategic plans in response to the challenging conditions in the oil and gas industry are varied. While almost a third expect to restructure business or assets (32%), a wide range of other tactics were cited by our respondents – from focussing on smaller, less capital intensive projects (21%), to entering new growth markets (15%) and generating efficiencies within supply chains (10%) as well as numerous others.