A time of adjustment

We have all read and heard about the "collapse" in oil prices and how it will badly impact various parts of the economy. Without clear understanding of what is unfolding in the bigger picture, it is easy to feel a sense of ‘gloom and doom’. However, there is a silver lining to this cloud as the low oil price challenge delivers both risks and opportunities.

Interestingly, today's crude oil prices are not "low" if you look at the historical averages (refer to chart 1). For example, between 1997-2006 the average oil price was around US$31 dollars per barrel and the industry has been able to cope and even flourish then.

In reality, the current downturn is about industry players undergoing a period of adjustment from an unusually long stretch of abnormally high prices, which began in 2008. In the beginning of that period, irrational expectations from the market drove prices to highs beyond $100 per barrel. Prices collapsed in December 2008 to US$39.95 per barrel when the global financial crisis of 2008 hit, led by fears of a global economic meltdown.

In response to the financial crisis, the world's financial regulators opened the funding taps with hopes that the infusion of cheap capital would help stimulate the world economy., The influx of capital resulted in tremendous investments and a boom within the oil and gas industry, given the optimism of high economic growth of developing economies.

Additionally, the sustained higher-than-normal oil prices in 2009-2014 also triggered greater focus and investments in the following areas:

  • Renewable energy sources such as solar, wind and other, more exotic sources of energy
  • Greater energy efficiency in power generation, transport and buildings
  • Alternatives to conventional oil and gas sources, such as shale oil and gas, oil sands and coal bed methane

High energy prices accelerated the take-up and commercialisation of new technologies in these segments, pushing them "over the hump" where economies of scale kicked in to push prices downwards. A combination of greater investments leading to oversupply and the availability of alternative energy sources, coupled with greater efficiency in consumption gave rise to the "perfect storm" that resulted in the quick reversion to the "normal" oil price range of around US$50 per barrel. The scales were further tipped by the rise of non-OPEC shale players in the US who were able to challenge the OPEC's exclusive control on oil prices.

Today, energy consumers are somewhat spoiled for choice not just in terms of oil and gas suppliers. They also have the option of competitively-priced renewable energy sources. Coupled with the US shale players’ lightning-quick ability to respond to market prices, pricing power has shifted to consumers of energy for the foreseeable future. Apart from being a boon to the consumer, this is good news for the global economy, as energy fuels economic development.

However, this also means that oil and gas producers and their service providers will need to adjust to the new US$50 per barrel reality. As expected in situations where a bubble bursts drastically, the drop in oil prices two years ago sent shockwaves across the global oil and gas industry. After going through the motions of the correction, acceptance has gradually set in. The ‘lower for longer’ environment is here to stay and industry players recognise that they will need to do what it takes to adapt.

In Malaysia, the oil and gas ecosystem spanning PETRONAS, other oil companies based in the country as well as the oil and gas services and equipment (OGSE) industry are currently in adjustment mode. With cost-effectiveness becoming key in this new environment, more competitive companies will be better poised to weather the downturn and emerge stronger once recovery occurs. In the meantime, the Government will continue to facilitate the creation of a more resilient and efficient OGSE industry capable of responding to the country’s future needs.

Datuk Shahrol Halmi is the President & Chief Executive Officer of Malaysia Petroleum Resources Corp. Fair and reasonable comments in response to this article are welcome at ceo@mprc.gov.my