Resilience Abounds

Publication March 31, 2016

Welcome to this spring edition of the Oil and Gas NewsWire—we hope 2016 has started well for all of our readers, notwithstanding the continuing volatility of the oil price and the international markets.

The resilience of the upstream sector is quite something. While prices remain low, bouncing around a US$35-45 per barrel figure, operational activity and the pursuit of joint venture partnerships continues and shows no sign of slowing. There is no doubt that these are very challenging times, particularly for the smaller players in the upstream sector, but deal activity is certainly on the rise.

There is undeniably a massive amount of pressure on E&P companies to reduce costs and to streamline their operations, especially as the price drop has outlasted long term hedging strategies. However, new discoveries and projects continue to be pursued across the globe.

Kosmos Energy and the Dodsal Group have both recently announced sizeable natural gas discoveries offshore Mauritania and onshore Tanzania respectively. Each of these discoveries is of a scale that will be transformative to the region with the discovery in Mauritania in particular warranting potential LNG development. Elsewhere in East Africa, investment continues with multiple bidders in the recent Ugandan licensing round and two potential pipeline projects being slated for development as export routes for Ugandan crude oil. Restructuring continues apace in Nigeria with NNPC being broken up into separate operational divisions with a view to improving transparency and enhancing profitability.   

The US has also exported its first shale gas volumes to Europe with 27,500 m3 of ethane arriving in Norway this month. Cyprus has also announced its first upstream licensing round this year, no doubt hoping to capitalise on the prosperous geology of the Eastern Mediterranean which has yielded the enormous Leviathan and Tamar gas discoveries.   

The UK Government has also taken heed of the oil price warning signs and responded to advice from North Sea industry bodies by significantly reducing top line tax rates for North Sea projects and clarifying the situation regarding decommissioning liabilities and the ability of investors to offset decommissioning costs against tax liabilities in the latest budget. These changes have been applauded by investors as a big step in the right direction. Whist there may still be challenges in terms of converting exploration and development assets into producing assets in the North Sea (and undoubtedly further tax allowances designed to alleviate these challenges would be welcomed) the recent budget is undeniably a supportive move for the sector.

In the US, the oil and gas investment market is also more active with signals that the bond market is rebounding no doubt as many of the shale players seek to raise capital to fund drilled but uncompleted wells onshore. We obviously still have some way to go before capital is deployed for exploration drilling but the re-emergence of investors for onshore development in the US is a very positive signal, especially when coupled with the news that US shale exports to Europe are commencing.

It is not, however, all good news and many companies are undergoing restructuring and reorganisation as they default under the banking facilities and seek protection from creditor activism. This does, however, mean that corporate activity is on the rise as sellers look to de-risk their non-core asset portfolios. This is creating a market for new entrants with a lower cost base to acquire assets and optimise existing production figures and it is very much a buyer's market, as sellers are looking to dispose of assets quickly to realise cash in the door. This is opening up the market to different investors (such as those that are technologically innovative).

In terms of the long term price watch it is still too early to say where things will land during 2016 but the lifting of Iranian sanctions and opening up of Latin American markets in Argentina and Mexico and a new investor friendly parliament in Venezuela will inevitably add to the over-supply problem and put more pressure on the price so it’s unlikely that we'll see a continued rise in the next 12 months.

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