Oil’s price collapse presents both challenges and opportunities, with Maersk Oil well-positioned to weather the current storm.
From June 2014 to year-end the price of Brent fell by more than 45%, briefly dipping below $60 in December, levels last seen more than five years ago. Anyone hoping for a swift turnaround in the New Year, was disappointed, with further steep declines delivering sub-$50 a barrel trading in early January.
Analysts and commentators have been quick to cite a confluence of declining industrial output and growth in the Eurozone and China, at the same time as huge volumes of American unconventional oil has come on stream. The desire to cut production, at least in any sense which could make a meaningful impact, requires a consensus amongst the OPEC member states, a group which collectively controls around 30 million barrels of production a day .
At its general meeting of the secretariat at the end of November, the signal was clear – despite grumblings of discontent from members with higher budgetary break-even requirements, production would not be cut.
The connection made by most in the media was that this signaled a race-to-the-bottom. Some producers, notably Saudi Arabia, which face extraction costs of around $4 a barrel , appear content to suffer a squeeze on revenues in exchange for maintaining market share. North American unconventional production was expected to continue growing towards 2019 or 2020, however, the diminished returns available in a sub-$80 market may halt that growth sooner.
Graham Talbot, Chief Financial Officer, sees the obvious hurdles, but also opportunities in the current market for Maersk Oil.
“Before the oil price decline began in June, there were already challenges we were conscious of in the market. For example, the need to control and optimise spend has been a major issue for the whole upstream community,” explains Talbot “We have seen development costs, particularly in deep water and the North Sea, for example, soar in recent years.”
Talbot asserts that the Maersk Oil portfolio, and project pipeline, means the company is in a robust position.
“We have a good portfolio of producing assets and are less exposed to the higher cost activities some firms have gotten quite deep into. In a sense we are better positioned to face choppier waters than many in our peer group.”
The timing of the oil price fall is likely to herald a period in which supply chain and development costs fall, to the advantage of some of Maersk Oil’s major projects. Culzean, Johan Sverdrup and Chissonga are all pre-Final Investment Decision, and each requires significant capital outlay to bring to fruition. Cost savings that can be realised ahead of putting ink to paper could improve the economics of complex projects such as these to a significant degree.
“A low-margin market outlook will likely also provide opportunities for renegotiating vendor contracts in drilling and offshore services for example, benefitting our existing operations and longer-term growth ambitions,” Talbot states.
Oil companies grow through exploration or acquisition. The current climate may offer up a number of attractive opportunities for companies or portfolios where Maersk Oil sees the potential to enhance the value on offer.
“Upstream players the world over are facing capital constraints, the likes of which we’ve not seen for half a decade or more. We have already seen an uptick in levels
of divestment and portfolio consolidation. If we demonstrate cost discipline and efficiency, we will strengthen our position to take advantage of opportunities in the market,” he adds.
“Through the financial firepower of the Group, Maersk Oil is in a strong position to weather the turbulence we are witnessing in the market today. Where we see the opportunity to leverage that cash position into an investment, which will yield more than 10% over the cycle, then we have a strong capacity to invest, which is matched by an ambition to grow,” Talbot concludes.