56 oil companies have manage to adapt their operations to be able to ensure that they can still produce a positive cash flow at the new lower price of $50 per barrel.
In the last two years 56 oil companies have manage to adapt their operations in order to be able to ensure that they can still produce a positive cash flow, not only at the $90 per barrel price they have enjoyed in recent years but also at the new lower price of $50 per barrel, which was the price being achieved in July 2016 following the continued slump in worldwide oil prices. Oil prices are not expected to rebound dramatically over the next few years, in fact prices are currently being forecast to remain at around $50-$60 per barrel in 2017 and below $80 per barrel in 2018.
Spending cuts and amended project timelines
Whilst companies are still managing to generate profits, it has not been a simple or painless process. A number of layoffs have had to be made, as well as significant spending costs, particularly in the fields of exploration and production. In fact, exploration and production spending has been reduced by up to 49% by some companies, equivalent to $230 billion when compared to the amount of money being spent in 2014.
Whilst the companies’ abilities to continue delivering a profit has proved their resilience and therefore allayed some of the fears being expressed by investors, there is still quite a lot of nervousness surrounding all the investments still being made by the major companies, and as a result a lot of questions are still being asked about every projects cost efficiency.
Africa’s upstream sector
Following a boom in both production and exploration for companies in the upstream sector, including significant investments during the early 2010’s and late 2000’s, the recent drop in oil prices has been especially difficult. The oil sector in Africa is however still considered an attractive prospect, although investors are now being significantly more cautious before committing to any short or long term investments. The preexisting problems with this regions infrastructure are adding to the nervousness, with a recent exploration license made available at the beginning of 2016 in Uganda, failing to attract any interest from any of the big international oil companies.
Companies continue to work hard to reassure investors
Due to recent problems with attacks on some of the oil pipelines in the Niger Delta, Angola has recently retaken the title of “Africa’s largest producer” from Nigeria. Nigeria are however working hard to retake the title, in fact in October 2016 it was announced the last tracking of the Petroleum Industry Bill. Whilst this news was received positively, there are still many sceptics due to Nigeria’s past history of delays.
Oil companies in Angola have to date had less success with driving down their costs as they have not got the local resources available to them that Nigeria has. They are however continuing to work hard to try and reduce their operating costs, in turn improving their profit margins.
An analyst at Wood Mackenzie, Gail Anderson recently said, “In both countries companies need to build efficiencies into the project design to make long-term cost savings,”, “It’s about rethinking these projects so they’re cheaper from day one and that’s really challenging industry.”.
New Hydrocarbon basins are however planned to be opening up across Africa, particularly in East Africa, in the next 18 months. These will not only drive the economies of the countries concerned but will also create job opportunities across large swathes of the continent.
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