The year 2014 has turned out to be an eventful year for the global oil and gas sector, with record low oil prices significantly impacting players across the entire oil and gas value chain.
Record Low Oil Prices
The fall in oil prices was relatively swift, catching many players off their guard towards the last quarter of the year.
This sudden decline in oil prices was largely a result of the shale oil revolution in the US, flooding the markets with plentiful supply while global oil demand remained tepid amidst economic uncertainty. The fall was further accelerated by the decision of the Organization of the Petroleum Exporting Countries (OPEC) in November to maintain oil production levels, in a bid to protect its market share from US players. Oil prices have almost halved since the start of the year, with the benchmark Brent crude oil touching US$60 a barrel in December.
In a media interview, Saudia Arabia Oil Minister Ali al-Naimi – whose country is the lead producer for OPEC – stated that OPEC will not cut oil production even if oil prices drop to US$20 a barrel, pointing out that it was unfair to expect the group to reduce output if non-members do not. A Bloomberg survey of analysts conducted in December has predicted Brent crude oil prices to fall to US$50 a barrel in 2015, with some respondents saying that prices need to fall further to clear the current oil glut in markets.
Emerging Issues
While cheaper oil is seen as providing a boon for the global economy, its sharp decline has also stoked geopolitical tensions worldwide. As a result of falling oil prices, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE – which form the Gulf Cooperation Council (GCC) – are bracing themselves to lose around US$350 billion in oil revenues in 2015.
Oil producers such as Venezuela, Nigeria, Iran, Iraq and Russia are in an altogether more precarious position, and are hoping for prices to rise so that they can balance their budgets and rescue their economies. Russia has been hit particularly hard, with falling oil prices and ongoing Western economic sanctions – a result of the Ukraine crisis – having triggered a collapse of the Russian ruble.
Meanwhile, US oil and energy firms are also grappling with the current state of oil markets. Tumbling oil prices have forced banks to reassess their credit lines to some US energy firms, while US shale drillers who failed to hedge against a drop in oil prices are facing a dramatic fall in revenues. The oil slump has also driven US oil drillers to idle the most rigs in two years, with oil majors such as ConocoPhilips International and Chevron putting much of their capital spending plans on hold.
Riding it Out
The Singapore economy is strongly linked to the oil and gas industry in many ways. For one, the Republic is the region’s premier hub for oil and gas – a valuable sector, which contributed almost 5 per cent of GDP in 2007. Despite its relatively small geographical size, Singapore is one of the world’s top three export refining centres, while also being involved in oil storage, trading and pricing. The oil refining sector has also been the catalyst for the chemical industry, providing advantaged feedstock as well as other spin offs including oil & gas equipment and oil rig manufacturing sectors.
Despite the turbulence in the oil and gas industry at the moment, the long-term outlook for the industry here in Singapore still remains strong. In an interview with The Business Times in December, ExxonMobil’s new Singapore chairman Mr Gan Seow Kee stressed that his firm was not focused on where oil prices are headed, but rather improving their operations here. While acknowledging the challenges brought about by the US shale revolution and record low oil prices globally, Mr Gan stressed the need to take a long-term view. He also pointed out the Asia-Pacific region’s strong economic growth, and how it has accounted for more than two-thirds of oil demand growth since 2000.
In his opening address at the International Oil and Gas Industry Conference and Exhibition (OSEA 2014), Singapore’s Second Minister for Trade and Industry Mr S Iswaran also echoed the sentiments, noting that strong economic fundamentals in Asia-Pacific, together with rapid population growth and economic development, will continue to drive energy demand and thus expenditure on exploration and production (E&P).
He also pointed out that Singapore’s well-established marine and offshore ecosystem offers an attractive value-proposition to companies seeking to serve the growing offshore E&P activities in the region. More than 3,000 marine and offshore players, including oil majors, drilling operators, specialised equipment manufacturers, service providers and shipyards, have chosen to establish a presence in Singapore, achieving a total output of S$21 billion and value-added of S$5.9 billion for the Marine & Offshore Industry in 2013.
Taking Stock and Moving Forward
In conclusion, while the global outlook for the oil and gas sector remains cloudy, with a high degree of uncertainty, there is still room for Singapore to ride out the turbulence by keeping its focus on improving business fundamentals and operations efficiencies for oil and gas-related industries. The strong economic growth outlook for the Asia-Pacific region should also prop up demand, and insulate industries here from the worst of the fall-out from the current slump in oil prices.