Tough Times set to Continue for the Oil Majors
The past weeks have seen a raft of results announced by the major oil companies, and for most, earnings have been impacted by lower crude prices and depressed refinery margins. Michiel Soeting, Head of Energy and Natural Resources for KPMG Europe LLP comments on the biggest challenges facing the oil majors.
Some analysts have been caught off guard by just how much of an impact the massive decline in refining margins has had on the big oil producers. The global recession has squeezed the amount of money available from processing a barrel of crude oil to its lowest point in nearly 15 years and it doesn't look as if the situation is going to rectify itself any time soon.
In part this is the resultant of a lower demand for transportation and industrial fuels and low demand in mature markets and with global governments now focussed on low-carbon policies and energy efficient measures, the demand for petroleum products will only decline in the West in particular over the coming years.
While the oil price has come back from its lowest point of $30 per barrel a year ago, the price of gas remains weak and this is likely to stay that way for at least the next three or four years. There are several factors keeping the price of gas low, but the game changer has been the cost efficient methods now being used to extract previous trapped gas deposits in US shales. The potential for this increase in US production and in other gas shales deposits around the world like Western Europe, has meant that there is now a cap on any gas price recovery happening anytime soon.
Therefore, the biggest challenge facing all of the majors will continue to be the question of how to shrink their capital expenditure and cost base; without jeopardising strategic long-term investments; which will be crucial to their profitability over the next decade. Most of the majors suffer from short term inflexibility due to committed capital expenditure and dividend expectations, making it a tough environment for oil companies. As the world gradually starts to emerge from recession, investors will continue to rely on the oil companies converting their profits into dividends and buy backs. BP and Shell for example, account for approximately 25 percent of the total dividends distributed by public companies in the UK.
It is apparent that after the cost cutting rounds we have seen over the last 18 months or so, the majors need to go beyond their initial targets and find even more efficient ways to run their operations over the next couple of years.
Please contact Michiel Soeting or one of your usual contacts at KPMG in the UK if you have any queries on the issues raised in this article.
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