Highlight ‘Lower oil price is a reality check’

by **Cals** Fri 12 Dec 2014, 01:09

Highlight
‘Lower oil price is a reality check’

By Cynthia Blemin / The Edge Financial Daily | December 11, 2014 : 9:30 AM MYT

KUALA LUMPUR: An oil industry veteran has come out to say that while there was no need to panic over the dramatic fall in oil price, industry players should take it as a wake-up call to find a more stable business model.

The former director of projects and technology of Royal Dutch Shell plc ([You must be registered and logged in to see this image.] Financial Dashboard), Matthias Bichsel, said the prospects of prolonged low oil price are a great opportunity for the oil and gas (O&G) industry to shape up.

“[Lower] oil price is not something to be panicked about,” he said at the executive plenary session of theInternational Petroleum Technology Conference here yesterday.” [But] this is a wake-up call for our industry to really move forward.”

Bichsel, who has over 34 years of industry experience, advised industry players to plan ways to manage their businesses and find a model that is more stable and less sensitive to the ups and downs of oil price, rather than being too worried about the impact of these oil shock cycles.

Bichsel, who will retire from Shell at the end of this month, did not say how long oil prices, which have dropped some 40% in the last three months, will stay low.

However, he did say that drilling in high-cost places like deep-water locations could be casualties of the current down cycle as the big players cut back on explorations to save costs.

This week, it was reported that analysts at investment bank Morgan Stanley warned that oil could fall to US$43 a barrel in the second quarter of next year unless oil producers’ group, the Organization of the Petroleum Exporting Countries, bolsters the price by cutting production. Prices have fallen from around US$110 a barrel in August to around US$65 a barrel currently.

Speaking at the same conference, SapuraKencana Petroleum Bhd ([You must be registered and logged in to see this image.] Financial Dashboard) president and group chief executive officer Tan Sri Shahril Shamsuddin felt that the lower price of oil will force players to innovate in order to deliver affordable energy to the mass market.

Shahril said it was important for industry players to realign their costs due to the lower oil prices and go back to the drawing board. He acknowledged that shareholders who invest in O&G companies expect high returns on their investments and this will be a challenge in the current environment.

Petroliam Nasional Bhd (Petronas) senior vice-president of upstream Datuk Mohd Anuar Taib also shared similar sentiments that lower oil price was “something the industry needs” for it to come back to reality after profiting from the sharp rise since 2010.

He noted that in the past, it was typical of companies to start cutting capital expenditure and initiate retrenchment exercises when faced with difficulties in order to protect profits and returns on investments.

“I would like to think that the industry has wised up over the years and [accept] that we have to invest in key projects with a long-term view,” he said.

“If [we do] not the industry will be caught again when another shock cycle comes around.

“The issue with R&D (research and development) is that everybody knows that you have funds and want to do business with you,” he said, which was why Petronas believes in the continuity of projects that ensures stability rather than short and quick returns.

Later at the opening ceremony, Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar said Malaysia will be able to withstand shocks following the low oil prices.

“This is because 55% of our gross domestic product is driven by the services sector, 25% from manufacturing, 8% in mining including O&G, and another 8% in agriculture.

“Our dependency on O&G has been reduced over the years,” he said, adding that Malaysia is now a broad-based economy which will help to ride the current fluctuations in the oil price.

Wahid said that the country has also managed to reduce its dependence on oil revenues. “Back in 2009, we were at 40% in terms of contribution from oil revenues and that has been reduced to 36% in 2011 and 31% in 2013,” Abdul Wahid added.

[size=14]This article first appeared in The Edge Financial Daily, on December 11, 2014. [/size]