Changing Landscape of Global E&P Industry

Last week marked a significant point in the current petroleum industry downturn. The more than $100 a barrel oil price decline, coupled with a 70%+ drop in U.S. natural gas prices during the second half of last year, signaled energy industry participants that their world would be significantly different in the future from the view they held as late as July 2008. There was little recognition of this change in the early stage of the price decline, but after the credit crisis exploded in mid September, about the same time that Hurricane Ike landed on the upper Gulf Coast of Texas, the realization about the future became real.

What made trying to figure out how the industry view would be changed was compounded both by economic and financial developments. A more important factor was the potential for a radical shift in the political landscape due to the presidential election. It was in the aftermath of the credit crisis that presidential candidate Barack Obama regained the public sentiment lead from his opponent, John McCain. While Mr. Obama was professing changing the culture of Washington and reversing the perceived anti-middle class policies of the Bush Administration, energy executives realized that the anti-oil company movement fostered by $4 a gallon gasoline prices earlier in 2008 would likely lead to changes in energy regulation.

The loss of access to capital markets for many smaller oil and gas companies and independent operators meant that companies were forced to radically re-plan their spending activities. This pressure came as commodity prices around the world collapsed – partly in response to pressure on financial funds to raise cash to meet client redemption requests and because prospects for global economic growth imploded.

Given a lack of clarity, or even a hint about the future petroleum industry environment, corporate, and even individual, financial survival became the immediate focus. The impulsive response for corporate executives was to stop current spending, slash future spending commitments and work to shrink the enterprise to a scale that can be supported by future cash flows, even though confidence in estimating what they would be was extremely low. The drilling rig count began to fall and with it the volume of oilfield activity and petroleum industry employment, also. The Bush Administration’s floundering response to the growing global credit crisis generated little confidence in how quickly this recession would be reversed. As Europe, and then Japan, and finally China and Southeast Asian countries experienced the impact that an absence of credit had on their commerce, fears about a repeat of the Great Depression dominated the popular press and media commentary. Fear became the watchword!

Rigzone