The global oil
sector is incredibly resilient with some best minds working in this industry. Since 2014, the industry has seen turmoil with the prices plummeting to levels rarely seen. Many had predicted the collapse of this industry but the sector has sustained the low price momentum that has impacted it for the past two years. However, the impact of this downturn is likely to have long-term effects on the industry in a number of areas like capital allocation and manpower.
First half of 2016 was a very difficult year for the oil
industry as upstream capital spending remained under extreme pressure. The challenging environment in the industry led to consolidations and layoffs. This also impacted the midstream segment which maintained a holding pattern as retrenchment upstream reduced the need for new pipeline investments. In the downstream sector there was a concern with refiners but was still a good year for the downstream players. This was mainly due to increased domestic demand in new markets and refined products and crude oil
However, the overall downturn in the industry has led to projects worth billions being cancelled. According to Deloitte, industry estimates $ 620 billion of projects through 2020 are either deferred or cancelled. After a beating the industry has taken, there is an appetite for shorter cycle projects as it reduces the risk of individual companies in the industry. However, the big question is ‘Are there enough short-cycle projects to fill the supply gap?’; which can have a supply impact till 2020 and beyond. The answer perhaps lies in big players bringing a long term perspective to investments in addition to the short cycle players and more pure play exploration companies, to meet the future supply needs.
On the manpower front, prior to 2014 there was a challenge in finding skilled work force, however after massive layoffs these troubles are not an issue with the industry. The challenge would be getting the people back to the industry once it starts recovering.
As we start the year 2017, we expect oil
prices to range from $ 52 to $ 62, which as per our estimates, might be just enough for companies to break even. For supply and demand to return to a sustained equilibrium level, the production cuts by OPEC
countries and the extent to which the US shale oil
drillers respond to by resuming active drilling programs would be key factors to be considered.
In India, the oil
demand growth rate in 2017 is expected to eclipse China again. The rise in oil
demand shows no signs of faltering and, according to analysts, India would be the driver of Asian growth in 2017. For the third year in a row, India's oil
demand growth will outpace China's demand growth, which is expected to grow at about 7 percent in 2017, compared with 3 percent in China.
The impact of demonetisation would be short lived to the first half of 2017 and LPG and transport fuels’ demand would rise. In the second half of 2017, the oil
demand will see limited impact from the demonetisation scheme as the initial economic impact wears out, and government spending on infrastructure will rise due to increased tax collection. We would expect the demonetisation drive to lead to a rise in private investment and more public spending on welfare measures.
Alireza Moghaddam, chairman, AMIDT
According to Platts Analytics, the government's clean fuel drive, anticipated growth in transport demand and air travel, and the country’s insatiable growth for petrochemicals
will act as a boon for gasoline, jet fuel, LPG and naphtha, helping oil
products to post close to double-digit growth in 2017 - similar to that seen last year - if not higher.
The second half of 2017 would also see rise in the sale of passenger vehicles which would again support buoyant gasoline sales. Even though the demonetisation drive has impacted the rural incomes, the naphtha
demand is expected to show a double-digit growth.
India has been making concerted efforts to lower its reliance on imported crude. The government is promoting renewable and improved refining processes, and trying to boost domestic production. Even so, India imports 80 percent of its crude requirements. Thus, international price volatility has serious repercussions on the nation’s current account balance and the economy as a whole.
The lower oil
price has had severe repercussions in the oil
producing countries. The Gulf countries which have a heavy burden of spending on social welfare have had to borrow money for the first time in their history. Countries like Nigeria, Russia and Venezuela are running huge account deficits and have registered negative GDPs.
But lower oil
price has had a positive impact on the economies of the oil
importing economies like India. These countries have not only reduced their current account balances but are taking measures to reduce their dependency on oil
imports by making sustainable strategies for the near future. This is keeping in mind that the price of oil
is volatile and an increase can severely impact their economic growth prospects.
Certain challenges that the industry faces are uncertain prospects for the global economy, international geopolitical dynamics, and managing advances in technology for efficient exploration and production; and environmental and sustainable development. These challenges will continue throughout 2017 and beyond.
For India, as long as the price remains below $ 70, it stands to gain. The Indian market will also benefit from lower international prices of oil
and petrol, making the cost of energy affordable. It would also help India make the sources of energy (oil
and petrol) easily available and accessible, and reduce its current account deficit and channel more resources towards the development of the economy.
Alireza Moghaddham is the chairman of AMIDT Group