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Against a backdrop of falling oil prices, companies in the oil and gas industry are increasingly considering reducing their exploration activity and finding ways to cut costs, including through large-scale retrenchments.
Advisory firm PwC Africa Oil and Gas leader Chris Bredenhann on Wednesday told attendees at a Barloworld Power Oil and Gas seminar, in Cape Town, that oil companies facing rising costs, low operational and capital efficiency, undiversified portfolios and high debt levels were most sensitive to low oil prices.
African countries that were heavily reliant on oil revenues were also feeling the heat. These included Angola, Nigeria and the Republic of Congo, where the contribution of oil production to gross domestic product was the highest in Africa, at over 70%.
Bredenhann stated that a lower oil price could put a squeeze on new developments in high-cost environments and new frontier countries in oil and gas such as Mozambique, South Africa, Tanzania and Namibia.
Oilfield services companies were also battling.
With the current low oil price climate, Bredenhann suggested companies in the oil and gas sector would have to reassess their long-term strategies.
Among the steps being considered by companies was how they access their capital, how to optimise their portfolios and whether to divest their noncore assets.
Taking a look around the African continent, Bredenhann said Algeria was battling with an already negative current account situation, while there was little appetite for exploration in Ghana. He said additional exploration could be put on hold in Nigeria, with appraisal and development in the mature oilfields taking precedence over exploration.
“You may see a shift from the frontier territories to more mature territories.”
Bredenhann noted that countries like Angola could face austerity measures as the government was highly dependent on oil revenues.
He further suggested that South African offshore exploration could be delayed as a result of high costs and regulatory uncertainty, although shale gas plans were likely to progress.
However, Kenya offshore was seen to be a cost-friendly area for exploration and this was likely to continue this year.
“So everyone is stressed, but at different levels,” stated Bredenhann.
He recommended that clients in the industry perform a ‘Fit for $50 Stress Test’ to measure the level of stress from a financial, strategic and operational point of view.
“Manage stress points, but not in a shotgun, overreact mode, but in a very focused and targeted manner,” he said.
“Look at your asset base and how you integrate across the value chain.
From a financial point of view, working capital is king. Free up working capital.”
Bredenhann commented that there were a few supply chain value levers that could still be pulled. These included considering whether to rent rather than buy equipment, tightening up on delivery efficiency and managing contract management and ownership. Companies should look at whether to have different arrangements for managed services for all agency staff.
“As the margins erode, companies must move from a growth strategy to a flexible position that will support the return to a growth strategy or enable a position to endure a downturn.”