Tuesday, 26 May 2015

Low oil prices: An opportunity for GCC oil firms to change

In Oil & Companies News 26/05/2015

Although they have the lowest production costs in the world, the national oil companies (NOCs) of the GCC region are dealing with maturing fields and resources that are becoming more difficult to extract. A combination of operations that are becoming increasingly complex and costly, and the recent drop in oil price, means that NOCs will have to meet production targets whilst increasing focus on costs and profitability. This will require adapting operations and ways of working, and developing more commercial behaviours.
Within this context, low oil prices create a rare opportunity for GCC NOCs to improve their cost base, talent profile, operational portfolio, and decision-making ability. For example, NOCs may need to review key internal processes, such as how they evaluate the technical and commercial aspects of new projects, to ensure that they will not be jeopardised by on-going volatility in prices. Strengthening such processes will require that NOCs’ technical and commercial disciplines work in a more collaborative and integrated fashion than they typically have in the past.
NOCs will also need to benchmark their costs internally and against competitors, while making costs far more transparent across the spectrum of their operations. Managing costs is a tricky balance to strike—GCC NOCs have a unique role in ensuring long- term production capacity for their home countries and international markets.
In turning their attention to costs, they must ensure that they do not compromise the reliability or integrity of their assets and their ability to meet future demand requirements.
Given current market pressures—and the fact that most NOCs have largely kept their development and investment programmes intact—they have an opportunity to take steps that might have been difficult in the past.
For example, the costs of essential oilfield services and development activities have increased steadily in recent years. Now that other regions are seeing a marked slowdown in development, many international oil companies (IOCs) are renegotiating their service contracts. NOCs should take a similar approach.
In fact, given their long-term and stable investment plans—and the weaknesses that service providers are seeing in other parts of their business—NOCs can bargain from a position of strength, commanding the highest service levels at the best cost from their providers. Other options to improve service and/or reduce costs include strategic alliances and integrated service offerings.
In addition, the low-price environment gives NOCs a chance to systematically address talent gaps.
Maturing fields and complex field operations mean that NOCs must secure access to the right technical capabilities. Weaknesses in the global oil and gas market mean that the time is right to intensify recruitment activities. As with costs, strategic alliances with service providers and IOCs may help bridge gaps in core capabilities.
Moreover, there is a window of opportunity for NOCs that are active internationally to acquire capabilities through targeted mergers and acquisitions. These NOCs can strengthen their domestic operations by identifying and targeting companies that possess needed technical and technological capabilities.
The decline in oil prices should spur NOCs to consider their portfolio of activities as well. GCC NOCs still allocate more than 70 per cent of upstream investment to oil resources. As low prices reduce the immediate pressure to develop new oil capacity, NOCs can rebalance their active portfolios toward gas. A greater focus on gas, particularly gas that is not associated with oil production, would help diversify revenue streams and address the growing gap between gas demand and supply in the region.
Lastly, NOCs can capitalise on the current market by strengthening their decision making process. Oil prices are driven by an increasingly complex range of variables that directly or indirectly influence supply and demand – meaning that oil prices will remain highly uncertain and volatile for the foreseeable future.
As a result, all industry participants will need to become more adept at handling uncertainty and making key decisions in an unstable environment. For NOCs, such decisions include determining the right level of oil production capacity to install, the pace and scale of unconventional oil and gas development, and whether to pursue gas imports or develop domestic resources. To make such decisions, NOCs will need to adopt a dynamic approach to strategy that can incorporate a wide range of potential scenarios.
Recent developments in the oil market provide a timely reminder and incentive that GCC NOCs can do more to maximise the value of their resources. By seizing the current opportunity to make necessary changes in their cost base, talent profile, operational portfolio, and strategic decision-making, NOCs can ensure that they are positioned to thrive no matter what the future may hold.

Source: Gulf Business