What is driving the soft oil price we are all experiencing?
High oil prices created the conditions for unconventional (or “tight”) oil to grow and challenge OPEC’s market share; thus, prolonged low oil prices must be part of OPEC’s solution!
By keeping prices below the marginal cost of unconventional production (approx. $75 per barrel), OPEC hopes that expensive oil production will decline along with the fortunes of the companies engaged in this practice. In Economics, this play is well known, and referred to as “margin squeeze”—OPEC is the Squeezor, unconventional oil is the Squeezee, and oil & gas industrial assets are caught in the middle.
The governing factor is that OPEC exists to serve the long-term economic interests of its members. For this reason, OPEC is more concerned with long-term demand and maintaining its market share than it is with short term profits.
Oil is the only major source of revenue for many OPEC countries, and low demand, potential competition from other fuel sources, and the effect of a perceived link between oil use and climate change are full-blown existential threats.
Last month (July, 2015), Chevron, ConocoPhillips, and Exxon Mobil each lowered their long term price outlooks after reporting “disastrous” earnings for the last quarter. The World Bank crude oil commodity forecast, issued July 2015, sees a slow recovery, with average yearly prices remaining under $74/barrel until 2025; the IMF forecasts paint a similar picture, expecting prices to remain under $70/barrel until 2020.
Make no mistake: soft oil prices are here to stay!
What this means for oil & gas industrial assets
Prolonged low oil prices mean tighter margins, and tighter margins means a shakeup in the industry, where only the lean and progressive can prosper and expand.
As market share (for conventional oil) and oil prices decline, the proportion of revenue needed for production increases; as a result, the importance of efficiency increases.
It is no coincidence that the price per barrel is settling at a level below the cost of production for tight oil ($75 per barrel), and there is no question that the tight oil industry must increase efficiency to weather the storm. Meanwhile, cost of production for deep water ($41 per barrel), shallow water (approx. $19 per barrel) and conventional land extraction (approx. $12 per barrel) will continue to account for the lion’s share of revenue, and it is here also that savings must be made to survive and thrive in the tougher market conditions.
According to Swift Worldwide Resources, an oil and gas industry staffing firm that has been tracking the industry job cuts, layoffs in the oil and gas industry in 2015 to date have topped 176,000 worldwide.
Multinational oil giant Chevron recently announced plans to slash 1,500 jobs, including 950 in Houston. Royal Dutch Shell plans more than 6,500 redundancies worldwide in the coming year Qatar Petroleum is reportedly cutting 12,500 jobs.
This paints a picture of an industry desperate to cut costs in response to lower revenues and profits.
Perhaps more tellingly for the long-term prospects, the slowdown in hiring (worldwide job listings for upstream oil and gas companies dropped from 24,000 to 11,600 between November 14 and July 15, according to OilPro) shows that major oil companies are positioning themselves for a “new normal.”
Ultra-efficiency through streamlining operations
The oil & gas industry has been notoriously slow to implement efficiencies made possible by advances in technology. There was an “if it ain’t broke don’t fix it” philosophy, largely justified by long-term high margins. So, while other industries forged ahead with implementing the huge increases to efficiency made possible by the digital age, the oil and gas industry has resisted change.
This is no longer possible in the Soft Oil Price era! Oil & Gas must embrace the digital age to counter risk from head count reduction and to streamline its processes to enable margin retention.
IAMTech has been a pioneer in improving asset efficiency through streamlining maintenance, operations and safety processes in the oil, gas and chemical markets for the last 15 years. We are proud of our contribution to the industry and our growing track record of excellence. Our products are proven to
Counter the risk created by head count reduction
Significantly lower operating margins
Boost asset knowledge retention
It is our mission to modernize industrial asset management, and by adopting IAMTech’s products both oil & gas operators and service providers can counter the continuing market conditions driven by the soft oil price.
Unlike our competitors, we do not seek to inflate our prices, applying an unjustified tax when selling our product to oil, gas and chemical customers. We have a low-cost, high-value approach to pricing our software solutions. Our software can be bought from as low as £99 for a year’s license, unlike some our competitors who charge 500x more for the same, and often inferior, offering!
Our goals are closely aligned with those of responsive leaders from other industries, such as aviation, where we aim to enrich our products with our learning, improving safety and knowledge share for all of our customers and in turn raising the standard of the oil and gas industry!
Our mobile apps;
Counter the recent risk increase caused by head count reduction by enabling supervisors to spend more time on site managing their personnel, increasing safety & productivity through improved situational awareness.
Our maintenance & operational software solutions;
Enable increased efficiency, knowledge retention & increased margins as a basis to counter the margin squeeze from the softening oil price. Routine maintenance budgets should not spiral and Shutdowns, Turnarounds and Outages (STO) can be delivered on time, preventing hits to earnings caused by plant downtime.
Our risk solutions;
Enable risk reduction and insurance premium reduction, helping readdress the risk scale imbalance caused by rapid head count reduction over the last 12 months.
Our products have been painstakingly refined through years of listening to our customer requirements to tackle industry-wide problems, for companies including Air Products, BP Chemicals, BP Exploration, Certas Energy, Chemoxy, Hertel, Huntsman, ICI, Ineos, Interserve, Jupiter Insurance, Kaefer, NesteOil, Oiltanking, Perenco, Petronas & Sembcorp.
Combining this first hand industry experience with our ever-growing partnerships with world-leading industrial organisations enables IAMTech to understand the technology needs of oil, gas and chemical industry.
What are you waiting for? Our offering is ready to help you today to counter the soft oil era over the next 5–10 years www.iamtech.com/#products