The strain of low oil prices will lead to cancellation or suspension of investments worth $257billion in the oil and gas industry over the next two years and could create inducements for mergers and acquisitions, according to Wood Mackenzie, a Global oil sector consulting firm.
A breakdown of this indicates that investments worth $112bn will be cancelled or suspended in 2015 while another tranche of $145 billion will be affected in 2016.
Also, exploration budgets will nosedive and new ventures will be the focus.
According to Wood Mackenzie, 2015 will not be a vintage year for exploration but a window of opportunity will open to capture high-impact acreage and discovered resource opportunities.
The Wood Mackenzie report covered 46 international oil companies globally, some of which have significant presence in Nigeria. These companies include Royal Dutch Shell, Exxon Mobil, Total and Chevron.
The Nigeria operations of these companies are not exempted from this trend.
On account of this development, the Nigeria local content development programme will suffer set backs, as international oil companies operating in the country will be forced to suspend some projects that would impact directly on local companies’ growth. This will likely affect activity, revenue and employment within the Nigerian sector.
Oladiran Fawibe , chairman and chief executive officer of International Energy Service(IES) commenting on the development, said it is only to be expected that the oil companies would react by suspending projects , especially new ones, when they are faced with such challenges .
Read also: Low oil prices may hinder development of Africa’s new discoveries
Fawibe added that the companies would naturally prioritise and drop off or suspend fringe projects in situations like this.
Another industry operator told BusinessDay that Nigerian indigenous companies would likely suffer significant setbacks because the cost of new capital for smaller companies will rise sharply in 2015.
Wood Mackenzie, looking at oil industry business prospects for 2015 said the financial performance of oil and gas companies in 1Q 2015 would deteriorate as the impact of a full quarter of low prices hits earnings.
The report stated crude hedging programmes and integration would provide temporary protection for some, for a quarter or two; as will lagged oil index LNG and European gas contracts which will start to adjust to December/January crude prices by 3Q 2015.
The fall in revenue, the report says, will be exacerbated by higher net debt. Debt has risen by 20% ($53 billion) for the 46 international oil companies Wood Mackenzie has followed since 2010.
The cost of new capital for smaller companies will rise sharply in 2015. Asset write-downs will lead to higher leverage ratios and increased financial stretch for some companies.
It stated that refinancing could prove difficult in certain cases and covenants based on reserves, cash flow, and market cap ratios could come into play.
The company noted that cost cutting would be intense. “The industry will plunge into full-on capital discipline”
Wood Mackenzie estimates companies need to cut costs by $170 billion or 37% to maintain net debt at 2014 levels at $60/bbl Brent. This will hit new project investment, exploration budgets, operating costs, and shareholder distributions.
Total investment of $1.2 trillion in this suite of new projects during this decade could contribute more 7.8 MMb/d of liquids to global supply by 2020. Only the most economically robust projects will proceed, leading to a tighter oil supply/demand balance in a few years.
Distressed sales could result in a true buyer’s market in 2015.
Financially strong players will put rationalisation programes on hold but some companies will find little choice but to sell, unable to achieve the cuts in discretionary spend required to balance the books. Large scale consolidation is more likely than any point since the late-1990s. History shows that value creation through M&A is largely driven by commodity prices – for buyers who believe in long-term oil above $80-90/bbl, 2015 will be a year to go long.
It will not be a vintage year for exploration but a window of opportunity will open to capture high-impact acreage and discovered resource opportunities. Exploration budgets will nosedive and new ventures will be the focus. Specialists explorers will continue to retrench under intense financial pressure and some will become acquisition targets for players short on high-impact acreage. It could be an opportune time for national oil companies to get more active in exploration while financially strong majors and independents will focus on high-potential acreage at low cost.
Olusola Bello, with wire report
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