Comment: Weathering the Hard Times

In the current market conditions, companies' defence survival strategies must be proactive

Ekaterina Kalinenko.
Ekaterina Kalinenko.

By Luisa Sykes and Ekaterina Kalinenko of Euro Petroleum Consultants

The oil and gas industry is in turmoil and companies are implementing measures to streamline their operations by primarily reducing their manpower resources. The scale of the recent layoffs in the oil industry has been unprecedented. By the end of 2015 oil companies had laid off more than 250,000 employees around the world.

These extreme measures are being implemented by many oil companies as ‘defensive survival strategies’. Oil and gas companies are also cutting the budget of non-core activities including research and training. But is this the best way to respond to the challenges facing the industry?

To face the uncertainty and challenges of the future, companies must be well equipped to face market competition –companies must devise the best strategies to reduce costs and maximise their returns. However, cutting training and research may lead to unintended consequences of preventing innovation and the pursuit of operational excellence. Looking at the contribution of the upstream and downstream sector in overall company profitability it is interesting to observe that the refining business helped vertically integrated companies offset the losses of their upstream sector – maybe the first time in many years.

ExxonMobil overall earnings for 2015 declined by 58% compared to 2014 with downstream results partly offsetting the losses in the upstream sector. BP experienced even more dramatic earnings downfall in its upstream sector but reported a record pre-tax earnings of $7.5bn in its downstream operations - a 68% increase over 2014. Interestingly enough, the company expects to achieve annual savings of $2.5bn up to 2018 by restructuring upstream and downstream costs.

We can identify significant improvements in refinery performance in Europe - the increase in refining margins have given European refiners a chance to regain some strength and has ultimately saved a number of European plants from closure. One specific example; the French major Total decided to invest more than 600mn euros in refinery upgrading prompted by the boost in refining margins. There are, however, some experts suggesting that refining margins are unable to overpower the negative effects of falling crude value. Contrary perspectives highlight the unsustainability of high refinery margins in the future. Fitch Ratings point out that current high levels are unlikely to be sustainable taking into account issues such as overcapacity, competition and unequal level of technological complexity– these issues will inevitably impose considerable risks and undermine refiner’s competitive position and profitability levels.

However, refiners in all regions, particularly US refiners, are increasing profits and raising market capitalization. In the US refinery margins benefitted from strong domestic demand and strong export markets. The majority of oil analysts are cautiously optimistic regarding the refining sector but expect that some refiners could continue to prosper from market opportunities and auspicious economic conditions. Competition issues and supply and demand balances are crucial factors which will impact global refiners in the future – European refiners will be particularly vulnerable to competition challenges from other regions. Export of middle distillates to Europe from Russia and the Middle East are threatening to overwhelm the European market creating oversupply pressures. Confronted with weaker distillate markets, European refiners are relying on gasoline to strengthen their margins during 2016.

The oil industry will continue to face a roller coaster of uncertainties. To face the challenges companies must thrive to be competitive - maximise returns through technological innovation and efficient running of their operations. Investment in human resources will continue to play a crucial part in the survival and prosperity of the industry - current defensive strategies of cutting training may cost the oil and gas industries dearly in the future.

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