A recent report by investment firm Bain & Company Inc. announces a hard look at the year to come. In what it calls “The Davos Energy Brief” it outlines some possibilities for 2009, most importantly average crude price of $40 per barrel.
Industry spending is expected to decline by 20%; activity and employment is predicted to drop by 10%; and overall production will be reduced by 5 MMbbl/d. It’s not news to say that the oil and gas industry is now experiencing a painful contraction. The report adds that 30 key energy companies (10% of the top 300) will be acquired or consolidated during 2009. This could be a good thing or bad depending on the motivations of the move.
How fast things have grounded after July’s record high crude price? The good news is resilient companies will survive and may even improve their standing. Those who have overspent during last year’s boom or failed to secure their investment standings will most likely perish. The key to surviving this downturn will be decisive action coupled with the ability to be patient.
According to Bain & Co., timely action will help companies to set a strategic direction through turbulence, steer major projects forward, manage costs, and sustain dialogue with stakeholders. On the other hand, patience will be necessary to ride out price volatility, survive capital market, and overcome supply uncertainty.
In spite of the economic problems facing the industry today, oil and gas will remain an attractive sector for investors in 2009, the report said.
The major unknowns for 2009 include oil prices, production capacity, and sector consolidation. Bain & Co. asserts that companies have drastically changed their short term strategies as a result of recalibrating their investment plans with $30 to $50 per barrel estimates. For oil producers this means new portfolio priorities. For consumers it presents new supply and storage needs.
The long-term prospects are also challenging, but a dramatic contraction in the oil and gas industry seems inevitable at this point. Reductions in demand and capacity are currently visible. This will continue to have a definite effect on the unconventional resource boom. Planned expansion projects for new infrastructure will be delayed by rebids. Other areas under threat in current economic situation include new exploration, new market and technology developments.
In light of everything that will come to pass in 2009, this downturn is only a test. CEOs, Chairmen, and board members will find ways to win during these turbulent times. As for the rest of us – the consumers – we have to assume that no matter how bad things get they’ll always get better over time. When the oil price has normalized we’ll start complaining about the price of gas again.
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