Some of the main operators in the oil sector in Malta are upbeat about their prospects. They are convinced that the normal cycles will eventually bring the price back up – and that there are opportunities to be had during the current period of belt-tightening.
Oil companies are cutting their forecasts and expenditures and oilfield services companies are cutting their workforce. The biggest spending cuts are expected to be in exploration. The squeeze is also having an impact on oil rigs, with a Bloom-berg analyst saying that around 140 would need to be scrapped to make way for the 200 that will delivered by 2020, ordered at a time when the future looked bright.
But local players see opportunities as well as challenges – and cautioned that patience was the key as the price would undoubtedly rise again.
Medserv explained that as a result of price fluctuations, new projects are being delayed waiting for the price to stabilise.
“That means new investment is held back with a knock-on effect on contractors that service the industry. Pressure on price and redundancies are experienced by those firms that service or plan to service exploration projects that have as yet not commenced. The industry is looking for ways to reduce the cost of production as the new price realities hit home,” chairman Anthony Duncan said.
However, this does not mean doom and gloom. Medserv ‘s ‘order book’ is at record levels. It is servicing medium- to long-term operations into which investments totalling hundreds of millions of dollars have already been ploughed. Both its bases in Malta and Cyprus are working at capacity and it expanded the Ħal Far facility by 10,000 square metres to cope with demand this month.
There are opportunities to be had during the current period of belt-tightening
“Our relatively new engineering and maintenance arm did notice a delay in the start of projects lined up for immediate commencement as companies stall on maintenance investment and more equipment is mothballed.
“But this delay has not affected Medserv’s financial performance as the delayed maintenance projects have been replaced by other new business,” he said.
Ablecare chairman Paul Abela also sees this drop in oil price as a “cyclical downturn”.
“This phenomenon is not new to the industry and, if anything, forecasts are that this downturn will be reversed in a shorter period than previous cycles,” he said.
Mr Abela predicts more consolid-ation of drilling assets, as well as renegotiation of rates and operating costs. Although some operations will be delayed, other opportunities will be created due to lower operating costs, he pointed out.
“The industry will not go into hibernation but will exploit this market reality to improve and reorganise its operations and investment opportunities. One can also foresee some buyouts and mergers, but all this is healthy in a dynamic industry like oil and gas,” Mr Abela said.
“Looking ahead, cold-stacked drilling rigs will need lots of maintenance and re-certification before they are redeployed while older units are being taken off the market, decommissioned and replaced.”
Jonathan Borg, the director of Bluhull, pointed out that the new rig build programme was the result of relatively high oil prices.
“This has increased current and future rig availability, which created a ‘buyers’ market’, and oil companies can pressure rig owners to lease rigs at lower day rates,” he said.
“No doubt services relating to rig stacking or scrapping will enjoy a boom over the next year or two, should the oil price remain low. Those relating to new drilling contracts will possibly undergo a certain level of strain. Rest assured, today’s winners are tomorrow’s losers, and vice versa.
The new rig build programme is the result of relatively higher oil prices
“We must bear in mind that the price of oil has been very unpredictable over the past decade, and all those who tried to predict such price fluctuations have got their fingers burnt. It is not dependent on supply and demand alone. Oil price is heavily influenced by government policy, in particular of the largest producers, as well as speculation.
“Who knows? Twleve months down the line the oil price might be double today’s. Between 2008 and 2009, prices slumped from around $130 to $40 in the space of a couple of months, only to recover to $80 within 24 months.”
He too pointed out that each action generates a reaction which may be indirect.
“The renewable energy market is currently going through a slump because of the decrease in oil price. What’s bad for the renewable market is often good for the oil market. And finally, cheap oil drives demand for consumer goods, decreasing costs for consumers with lower pump prices and increasing spending power. Factory inventories are rapidly depleted, in turn driving up production and demand for oil.”