Brent hitting $50 is nothing more than a “mental benchmark”, according to an industry leader.
Dan Jackson, the chief executive of io, said industry’s true marker of success is not associated to any dollar sign.
“After a depressing start to the year in terms of oil price, we have seen some glimmers of hope lately. Though the industry as a whole will be very pleased to see delicate signs of an escalating oil price, this is fragile and does not necessarily mean the recovery toward $100 oil is in any way guaranteed,” he said.
“The promise of $50 oil is simply a mental benchmark for the industry – in reality, it doesn’t mean anything. The industry should not be pinning its hopes on a particular dollar figure, but needs to transform how business is done to enable projects to be economically viable at consistently low prices, particularly sub $40/barrel. In fact, at io, we believe that $20-$30/barrel oil is possible and are indeed working on projects for clients with just that range in mind.
“The price downturn has allowed an opportunity to transform the industry and completely rethink how projects are brought to life.”
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Jackson, who heads his team of consultants backed by GE, said firms would take a “skittish” approach to its activity portfolio at $50 oil.
“After a prolonged period of low oil prices, it is natural that the industry may be skittish to jumpstart projects at the tenuous prospect of an increasing oil price. We at io do not see much changing in the short term, particularly as the oil industry can be slow to react. There remains a high level of uncertainty about the future, which is why we are unlikely to see significant immediate change despite a positive turn in pricing,” he said.
“Though price will always be a key driver of projects and top of mind for operators, the impetus should be on the industry to change its mindset regardless of oil price. Even before the downturn, it was becoming evident that the industry needed to transform to develop innovative new ways of thinking to guarantee certainty and now it has become paramount.
“If the oil price holds steady or continues to slowly increase, we will see more assets being developed as companies want to kick-start projects again and have been waiting for a positive sign that the industry is improving. Should this happen, operators will be trying to secure tier 1 contractors and competitive prices for services as the market begins to tighten.”
Despite $50 having little influence on the short-term, Jackson said the mental benchmark could be enough to set the tone of the long-term planning.
“Increasing prices matter to the whole industry,” he said.
“Arguably those companies who have struggled with free cash flow in recent years, unable to progress their hopper of opportunities, could particularly benefit. In addition the mature basins of the world with existing infrastructure and established service sector expertise, such as the North Sea, could see an uptick in activity to quickly capitalise on improving oil prices.”
He added: “As the oil price creeps upwards, the industry should not lose this opportunity to reform and must resist slipping back into its old habits, but should learn its lesson from this and previous downturns. Now more than ever, it is imperative to keep the cost base low and use transformational business models to ensure a steady future.”
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