INTRODUCTION
The bearish tentacles of low oil prices have stretched far and wide in the global business sector in what is a particularly uncomfortable chapter in an age-old story. Unbalanced supply-demand levels and turbulent pricing have characterised the world’s financial architecture for more than 5,000 years as early civilisations detailed price and delivery terms on clay tablets. Over the millennia, economic policy and technologies have evolved, but an essential ingredient that underpins successful business has not: confidence.
While tricky to quantify, it is fair to say that investor confidence has taken a heavy hit since oil prices started falling from well-above US$100 a barrel (bl) in the first half of 2014, to below $30/bl in January this year; marking a 12-year low. Oil prices are now hovering around $50/bl, with a weak promise of upward movement causing greying energy accountants to continue using ancient cash management strategies. Newspapers are drowning in ink detailing energy companies’ asset sales and shortened payrolls.
BP posted its worst loss in two decades last year, with $8.1 billion profit in 2014 flipping to a $5.2 billion loss in 2015 and Abu Dhabi’s National Oil Company (ADNOC) is slashing 5,000 jobs from its payroll this year, roughly 10 percent of its workforce. Numerous examples of economic strife are echoed throughout Europe, the Middle East and beyond. Very few are immune. Brexit did little to ease the jittery energy markets and financial institutions blindsided by the UK’s 52 percent majority for a lone-ranger profile from the 24 June meant the FTSE 100 closed the day at 3.2 percent lower.
Cash injections and debt packages are vital to energy producers’ increasingly ambitious plans to cater for the 48 percent increase in global energy demand by 2040 that is outlined by the US Energy Information Administration (EIA). Sharpening energy-related businesses’ competitive edge is also particularly relevant today as emerging oil & gas producers threaten to elbow established players – including some in the Gulf and Europe – to the edge of the global energy stage. The US and Australia are vying to steal Qatar’s crown as the world’s largest LNG gas exporter by 2020, while Iran is a capable contender for much-coveted Asian supply contracts following the lifting of many western-imposed sanctions on 17 January.
FRESH THINKING
Energy companies’ traditional cash management strategies must increasingly be complemented with innovative approaches that boost efficiency and reduce costs: two cornerstones of an effective business model. The growing frequency of red pen across balance sheets means the need to innovate is front and centre of energy companies’ strategic maps. An innovative ecosystem consists of two parts.
First, innovation is borne from excellent human capital, with governments and companies increasingly focused on enhancing science, technology, engineering and mathematics (STEM) learning and critical thinking in school curriculums, and staff training. Rote learning has lost favour to creative thinking.
Secondly, a culture of innovation requires investment in research and development (R&D) to create and commercialise new technological solutions. Shell illustrates the importance of shrugging off the profit-squeezing impact of low oil prices and pursuing innovation by safeguarding its $1 billion annual R&D budget. According to LR Energy’s Technology Radar report in late-2015, 51 percent of industry respondents expect automation to have the greatest impact on the energy sector by 2020. Other technologies that are widening their commercial footprint include big data and the internet of things (IoT), which is the computational analysis of huge data sets to reveal patterns, and the network connectivity and data transfers of everyday objects, respectively.
A unified approach within the energy industry – and with sectors that experience boom-and-bust economics, like aviation – makes sense. Embryonic discussions between industry stakeholders to establish an R&D strategy for the Gulf Cooperation Council (GCC) can be explored by members’ Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the UAE. Ways to protect intellectual property (IP) and data privacy must also be investigated as sharing cannot translate into revealing competitive advantages in an opponent’s boardroom.
SILVER LINING
Storage providers and traders are locking-in greater profits thanks to periods of contango of the oil price – when the spot price is lower than the forward price – and decimal points on airlines’ fuel bills are shifting left. Plus, the GCC countries have introduced unprecedented subsidy reforms. The political sensitivity surrounding plans to slash subsidies, which are largely considered a national right in the region’s psyche, meant the conservation was frequently abandoned. But, populations have generally accepted that change is inevitable as low oil prices have yet again put the spotlight on Gulf countries’ economic Achilles heel.
In the next chapter of the predictable narrative, rising oil prices will trigger recruitment rallies and large energy projects funded by cheap and hefty debt packages. Those that resist fattening up and embrace traditional and technological cash management strategies when oil ticks into triple digits will ride out the next inevitable wave of volatility with relative easy. Efficiency is king.
