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The geopolitics of oil price and the changing landscape of Australian oil and gas

Posted by: Andy Mant
14/10/2016
If there’s one thing that’s sure to start a debate amongst oil and gas workers it’s the price of oil and the reasons behind its fluctuation.  Andy Mant, Fircroft’s Senior Account Manager in Perth, makes his own contribution to this debate in his latest blog which explores the geopolitics behind oil prices and the impact that this is having upon the Australian oil and gas market.

Over the last 18 months we have seen oil price bottom out at $23 per barrel, steadily rise to $40-$45 per barrel and plateau out around the mid-$40s for several months. What we have all been a part of is an economic environment that has been peppered with overproduction by OPEC and Russia coupled with the US innovation in fracking which has resulted in cheap oil hitting the global market. This in tandem with record production levels in Russia and the 14 nation cartel which makes up OPEC has caused a glut in the market.

As employees in the oil and gas industry we are all part of a global geopolitical game of negotiation to curb production and push oil prices higher in order to make new development more economically favourable. However, geopolitics is the key word here; it’s not just the simple case of lowering output to reduce the oil surplus. In response to the cheap oil flooding the market by the US fracking companies we saw a knee jerk reaction from OPEC which saw them adopt a strategy of flooding the market with their product in order to lower prices so much that it would send the US fracking companies out of business. OPEC, and more specifically Saudi Arabia, thought they could do this as their oil reserves are high and their price of production is low, meaning that flooding the market would only affect their short term economic strategies, hopefully eliminate the competition and pave the way for a future without product from fracking. This policy backfired as the US continued to pump out oil from fracking sending the price of oil lower and lower.

In a press release at the end of September it was announced that OPEC had agreed to cut production from already agreed figures of 1% to 2% and have this implemented by November. It is predicted that this will have a positive effect on the global oil price with some commentators speculating north of $60 a barrel by the end of 2016. However, the country with the highest production rates (over 11 million barrels per day) is Russia. President Putin has recently been quoted staying that he will come to the table and support OPEC's oil production reduction strategy for November, which is positive talk. However, head of the Rosneft (the majority government owned oil company), Igor Sechin has stated the opposite and advised Russia will not even freeze current production levels in the wake of OPEC’s reduction strategy. So is the current oil price spike over $50 per barrel based only on rhetoric and not definitive action? It appears so.

Russia is not part of OPEC and has failed in the past to live up to promises of reducing production output. We only have to look at the September 11th terrorist attacks and the 2008 global financial crisis when they promised to reduce production and on both occasions failed to follow through with their promises. With the recent statement by OPEC to curb production it will be a tall ask given that in September Russia produced a new global production record of 22.6 million barrels per day!

Putin made comments in early October which suggested that he will talk to OPEC about curbing production, which led to a temporary spike in Brent prices. But for long term sustainability in such increases we need to see Putin come to the table and actually start reducing or at the very least freezing production levels.

I think it is clear to see that OPEC simply does not have the clout in the global oil markets that it once used to (or thinks it still has), with the USA and Russia now on a near equal footing with the intergovernmental organisation. For any sustainable increases in price per barrel it is evident that rhetoric is not the solution. Instead either Russia, OPEC and the USA all curb or maintain current production levels or oil demand starts to increase enough to outstrip reserves. However, both options look very unlikely in the short term in my opinion, but more than feasible in the medium to long term.

I was fortunate enough to attend a speech and a subsequent one to one meeting with Peter Bennett (CEO of Clough Engineering Services) in September where the topic was innovation. Some fantastic points were raised about those in the industry needing to innovate to make certain of our futures and to adapt to a low oil price environment. Whilst some great points were mooted around innovation in design processes, process optimisation and exploration it’s clearly evident that we need to couple this with sustainable agreements of production reductions by OPEC, Russia and the United States to ensure that a sustainable and profitable future for everyone is realised.

Despite the geopolitical issues we face on a global level it is interesting to report that we have witnessed what we feel may be the shoots of recovery in the hiring space, in relation to manpower requirements. We say this as we have seen record levels of new hires (the best since the end of 2014) across a wide range of clients. Shell and Inpex are gearing up for commissioning of their respective facilities which requires a peak in manpower. ConocoPhillips are still assembling their core teams on Barossa, Hess continues to develop EQUUS and the EPCMs in the maintenance space are starting to hire for upcoming work on the nearing completion of the mega LNG facilities in Western Australia, offshore and Darwin.

It’s always hard to predict the future, as nobody has a crystal ball, but below would be our best guess based on future manpower forecasting and a bird’s eye view of the industry.

As you can see from the graph above different stages of projects are occurring at different times, showing that there shouldn’t be a vast decline in the number of personnel required on various projects but instead a shifting landscape. It is up to us to follow each client's strategic growth plans over the short, medium and long term in order to successfully talent pool in areas on predicted manpower shortage. This is the approach Fircroft takes very seriously when it comes to partnering with our key and future clients, and something which will enable our clients to have access to the best talent in the market at a given project stage. This innovative approach to manpower forecasting and supply should see our clients benefit from improved manpower planning, adherence to project budgets and ensuring the best available talent is job ready when projects move across phases, a strategy which will mean that our clients maintain their competitive edge in a very volatile market.
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