The Impact of Financial Market Developments and the Economic Downturn on the Oil and Gas Industry

Much has been written on the impact of the current turmoil in the financial markets and the associated global economic downturn. The effects of these developments can be seen directly in the dramatic drop in the oil price from a high of $147/b in July 2008 to levels below $40/b in December 2008.

Chris Bredenhann, PricewaterhouseCoopers director and South African Oil and Gas industry leader, indicated that there are three major forces that drive change and development in the global oil and gas sector – geo-politics; industry consolidation and realignment; and finally climate change. These major forces, combined with volatility in the financial and petroleum commodities markets, will significantly influence the actions and fortunes of all oil and gas industry players.

A number of key issues and trends resulting from the current developments have been identified by Bredenhann.

• Cash-rich Oil and Gas companies are expected to ride out the downturn and falling petroleum prices much better than others. They will be in a position to capitalise on the downturn and may take the opportunity to make strategic acquisitions. These companies are also expected to continue to invest and innovate to achieve strategic advantage.
• Companies servicing the oil and gas majors, be they International Oil Companies (IOC’s) or National Oil Companies (NOC’s), will feel the pinch as the majors will be seeking operational efficiencies, business simplification, cost base reviews and potentially delaying major infrastructure investment projects. When these suppliers and service companies come under pressure, oil and gas majors will also weigh up their options, and balance the cost of rescuing strategic suppliers against the cost of project delays.
• Major capital projects, particularly those based on high oil price assumptions, or low yield and high extraction cost projects, will be deferred pending a recovery in commodity prices and increasing liquidity in the financial markets to fund these projects.
• Energy trading will take on new dimensions with power utilities becoming more active as they seek to hedge against increasing market volatility and secure supplies.
• There will be increasing political plays in the market, with the role and impact of OPEC and NOC’s rising