Sus­tain­ing prof­itabil­ity with low oil prices

The Dig­i­tal Oil­field

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The oil in­dus­try is no stranger to volatile oil prices but we are cur­rently look­ing at lev­els of $ 60/ bbl or po­ten­tially lower and this will def­i­nitely threaten the prof­itabil­ity of many op­er­a­tions. The chart be­low shows the vari­a­tion of WTI ( West Texas In­ter­me­di­ate) crude over the last few years and it demon­strates that we have not seen $ 60 oil since late 2008.

So how did the up­stream in­dus­try re­spond back in 2008?

The quick an­swer is that it hun­kered down: projects were can­celled, pro­duc­tion and ex­plo­ration were cut se­verely, pe­tro­leum rev­enue taxes de­clined sig­nif­i­cantly and many staff in op­er­a­tor, ser­vice and sup­port­ing com­pa­nies left the in­dus­try through re­dun­dancy or early re­tire­ments. In short, the in­dus­try felt ex­tremely sorry for it­self. The big ques­tion is whether we are go­ing to see the same re­sponse in 2015? Back then in 2008 the world econ­omy was very dif­fer­ent. In the early part of the year, the global de­mand for oil had been grow­ing rapidly as coun­tries such as China and In­dia were evolv­ing as ma­jor con­sumers and start­ing to add sig­nif­i­cantly to the tra­di­tional de­mand from well- de­vel­oped coun­tries. In the mid­dle of 2008 the world oil mar­ket was thrown into fi­nan­cial chaos as many global economies fell into re­ces­sion. There was sud­denly a glut of oil as con­sumer de­mand plum­meted. OPEC, which at the time con­trolled about 40% of global oil out­put, re­sponded by im­ple­ment­ing its deep­est ever cut in sup­ply but even this did not pro­tect the price. There was just too much oil avail­able com­pared to global con­sump­tion re­quire­ments.

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