Georges Chehade is a partner in the Energy Group at Booz & Co. In an interview ArabianOilandGas.com Chehade says that Middle Eastern NOCs have showed real leadership in pressing ahead with vital capacity building projects.
What does $70 oil mean for the Middle East’s oil companies?
I think $70 oil is much better than $35 for both the Middle East and the world. Many leaders have clearly mentioned that the fundamental difference is that $70 oil can fund investments in unconventional and more difficult resources. This is absolutely needed in order to avoid another spike in prices. Compared to $147, its not that comfortable, and local governments have shrunk their budgets accordingly, but enough of the national oil companies in the Middle East actually generated enough cash that surviving the $30 bump in the road was not too painful. The price recovered quite fast, and that has been quite positive for the region.
Is it safe to assume key upstream projects will go ahead in the current price environment?
$70 is ample for most Middle Eastern oil projects to go ahead, even $35 would have seen the majority go forward. I think the current price environment is good because it allows a lot of other projects around the world to go ahead, and that’s fundamental to the opverall oil industry health. A lot of projects have been delayed or put on hold because the national oil companies realised now was the time to reassess project prices and look at their budgets. Raw materials, EPC contractors and oilfield service companies have seen a lot of projects put on hold and they have reduced their prices too. They have brought headcount down, but they also seem to have reviewed pricing expectations too.
How have the major national oil companies dealt with the drop in revenues?
The NOCs in general have taken a very strong position throughout the recession. The signal that the national oil companies have sent to the world – that they are investing in future projects – was exactly the right one. The major risk is that as we emerge from the recession and demand picks up, the gap between supply and production may be too high and cause another spike. It all depends how fast demand will recover. NOCs have delayed some upstream projects, but independents have significantly cut back on their plans. When you look at those two together, I think the impact of all of this is a significant reduction of new supply coming onstream. The main question is how fast demand is going to recover.
What are the principal challenges facing the NOCs in the Middle East?
NOCs are in a position where they have accumulated cash and they had some structural gaps, mainly around know-how and technology. Today there is a unique opportunity to address these areas and strengthen their capabilities. The Middle East oil and gas industry is in a unique opposition and it has shown some real leadership.
What is your forecast for project activity in the region?
It’s too early to say, but the next six months won’t necessarily be much easier than the last five months for a lot of upstream service providers. I think we may see some companies running out of cash, and either filing for bankruptcy or being bought out. I think we are seeing two types of activity going on. The first is around cash and costs. For the first time in the region, companies are really focused on reducing costs, and that is a positive step towards being more competitive generally. Right now, and for the next six months, it is a fantastic time to invest in oil and gas related companies. I think some of the national oil companies will come forward and take some of these opportunities to build their portfolios.
