John Koob, Partner and Global Oil and Gas Segment Leader for Mercer
Keric Morris, Partner at Oliver Wyman
Published on 05 February 2016 on BRINK
When the U.S. Congress voted in December to lift the 40-year-old ban on crude oil exports and President Barack Obama signed that change into law, the landmark legislation capped a year of hurricane-force headwinds for the oil and gas industry. With the price of crude oil—both WTI and Brent—tumbling more than 70 percent from 2014 highs, most, if not all, oil and gas (O&G) companies have had to make hard decisions with short- and long-term ramifications.
In addition to major cutbacks in capital and operational expenditures, most O&G companies have cut permanent and contract staff, totaling more than 250,000 jobs worldwide, according to joint Mercer and Oliver Wyman research and client experience. And while there is an underlying net positive for O&G across the value chain due to the lifting of the ban, it’s not a time for leadership to breathe easy.
While most economists agree that the ability to export crude will lead to greater U.S. production, it is important to understand that the bill alone will have little immediate impact on production levels. Global economic conditions and the global supply-and-demand balance must support and enable crude to be produced, sold, refined or otherwise put into final use to generate energy.
Awash in Oil, In Search of a Market
From a world supply standpoint, we are awash in oil at historic levels. Even if the U.S. can export, it needs to find a market. Oversupply still remains the most critical factor of the current low-price environment. Forward demand, while continuing to increase, is not going to raise the price of crude alone without addressing overproduction. Consider the price of WTI: Open competition will likely cause a nominal rise of WTI while drawing down the price of Brent, essentially eliminating much of the spread between the two and doing little to address—if not exacerbate—“lower [price] for longer.”
While in the short term we see little opportunity, exports may present an advantage in the long term, but companies must be in a position to seize that advantage.