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Friday, 22 January 2016 19:30

Upstream – on verge of survival Featured

On the eve of the annual shareholders' meetings dedicated to the accounting period of the last year, oil companies announce about record decline of net profits for 2015. Royal Dutch Shell PLC, which announced about a 50 % decline of its profits in the IV quarter of last year compared to the same period of 2014, was the first among them. 

Shell says that profits of the 4th quarter are predicted to total from $1.6 bln up to $1.9 bln compared to $3.3 bln fixed in the same period of 2014.

According to the forecasts, profits will also decline and reach the level between $10.4 bln and $10.7 bln compared to $22.6 bln fixed in 2014.

French Totals SA, will probably, report about a 20% decline of net profits in 2015 because of the oil price collapse, CEO of the Company Patrick Pouyanne said.

Besides, the company reported about a decline of adjusted profits – a major indicator excluding one-time expenditures, including write-offs, - approx by 20% during the first 3 quarters of the year. 

Earlier, ExxonMobil Corporation has announced results for the third quarter of 2015. Net profit totaled $4.24 bln or $1.01 bln per share compared to $8.1 bln or $1.01 per share fixed a year earlier. A considerably low rate in the field of production (upstream) was compensated by high profits in the field of processing (downstream).

Net shareholders’ profit of the Chinese energy giant PetroChina fell by over 5 times in the third quarter of 2015 compared to the same period of 2014 and reached 5.195 bln yuans (about $815.75mln), says the report of the company.

Net loss of Eni SpA, the biggest global energy companies, attributable to shareholders of the company, totaled 257 mln EUR in the third quarter of 2015 vs profits worth 1.169 bln EUR fixed in the same period of the past year, says the company. 

To all appearances, there will be a record amount of deals of mergers and acquisitions reach in the industry last year. According Dealogic, the oil-gas industry has already set the record – the cost of M&A that have been announced and offered in this sector since the beginning of 2015 reached $323bln. This sum is not just a historical maximum for the period under review but also exceeds the previous record almost by $100bln, says the material of The Wall Street Journal.

The palm of victory of this year belongs for now to the outstanding transaction worth about $70 bln between Royal Dutch Shell and BG Group.

Dealogic noted in August that the global volume of M&A transactions can reach $4.58 trillion at the end of the year and outrun the previous record that totaled $4.29 trillion in 2007. Transactions in the present instance will stimulate a low growth of economies, low interest rates of major financial regulators and quite high-rate shares of oil-gas companies in terms of their reported operational performance.

In this way, the market situation is similar to that of 1998-99 when prices at global markets fell down to $8-10 per barrel. At that period this crisis caused merging and acquisitions mainly of companies which had their assets focused basically in the upstream sector - Amoco, Unocal, Elf Aquitain, Fina, Pennzoil, Texaco, Mobil. The crisis of that period was a starting point of further prosperity of vertically-integrated majors. There are about 7 of them left today.

Even today when the focus of the global oil gas industry shifts from oil to natural gas and bi-products, we see the reoccurrence of the situation observed later in 90s. Oil-gas companies continue refusing from investments into new projects. According to Wood Mackenzie, 68 projects in the field of exploration and production for an overall amount of $380 bln, have already been cancelled. Deepwater drilling has faced the biggest impact. These projects are very expensive. Therefore, oil-gas giants refuse them first.   

Oil companies rescheduled most of the projects to 2020, hoping that an oil price will substantially increase by that time. The number of canceled projects increased by one third within a year, says the research.

An average number of operating drilling rigs at oil-gas fields reduced by 1.241 thou units (down to 2.337 thou units or by 34.7%) in 2015, Baker Hughes informs.

As a comparison, a total of 3.578 units were under operation in 2014, which had been a maximum figure since 1985. The number of rigs totaled 3.412 thou units in 2013. A total of 1.969 thou rigs were under operation in the world in December of 2015, which is 78 units lower than November 2015 and 1.601 thou units lower than December of 2014.

If the situation with prices, similar to December of the last year, will be observed in the first half of 2016, high-tech companies, which overcame the previous crises, will to all appearances face a new turn of bankruptcies, merging and acquisitions. As a result, they will have to forget about new deepwater investment projects (account for 405 of global oil production) in coming ten years. One may talk about the deep crisis of the whole global upstream as most of state companies (about 80% of global reserves) do not possess technologies for deepwater drilling, experience in exploring shale resources, have limited state financing or no access to free investment capital markets. Even if the optimistic scenario comes true and prices reach $50-60 per barrel in the first half of 2016, the current crisis will considerably raise risks of exploration projects, making companies seek new integration models of business doing, less capital intensive and more flexible business-schemes increasing operational profits rapidly and improving major financial indicator. Therefore, as Barclays assumes, oil prices will increase much faster than investors expect. In the opinion of analysts of the British Barclays, the growth of prices is unavoidable because of reduction of oil production investments and potential problems with a reduction of supply. Regarding the raw materials markets, Barclays analysts, noted in their Upward bound report, dedicated to further prospects of oil segment, that current expectations of the oil futures market are too low for maintaining stable oil supply at global markets in coming years. 

 “Oil prices, regardless of further development of further demand and considering scenarios of annual increase of demand from 0.9 up to 1.4 mln barrels during 2016-2020, must show a more considerable growth than the present forecast of the oil futures market. Otherwise, there will be a shortage of supply in the market. Our basic scenario expects Brent oil price to reach $85 per barrel in 2020. It is approx $20 higher than present estimates of the market.

According to other scenarios, oil prices will reach $100 per barrel this year. Meanwhile, it is not the reduction of investments into production, but a competitive fight between the USA and OPEC in the oil market, will be a major factor of their growth.


Natalya Aliyeva

President and Editor-in-Chief of Caspian Energy International Media Group


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