COPENHAGEN, Denmark -- Expect capex cutbacks next year from oil producers in Latin America, China, Russia and other oil producing regions around the world, analysts said during a general session Wednesday morning at the EuroFinance International Cash & Treasury Management Conference.
Treasurers of companies in oil-related businesses should brace for tougher borrowing environments as a result of low oil prices, centralizing their commodity risk management function to better handle the situation. But they should also prepare for the impact of an inevitable rise in oil prices.
Amrita Sen, Chief Oil Analyst, Energy Aspects, UK, noted that oil prices have remained low for about the last 12 months and that is expected to continue for quite some time. Given that sharp drop in oil prices over that time, suppliers are beginning to react.
“It always takes time for the major oil companies to cut capital expenditures, simply because they need to make sure that this is not a short blip,” Sen said. “This is something that’s going to be a long-term change in industry dynamics. We have identified 5 million barrels a day of oil projects that have either been cancelled or deferred. And that is going to create a gaping hole down the line from 2017 onwards.”
Energy Aspects also identified many capex cutbacks among American shale oil producers. “They tend to be a lot more nimble; they are a lot quicker about making decisions,” she said. “We’ve seen about a 30 percent reduction in capex from the shale oil industry. The U.S. production has already peaked at 9.7 million barrels per day in April this year. It’s already down to 9.1 million. We think it’s going to go below 9 million barrels per day by the end of this year.”
Sen added that shale production also hinges on credit and the interest rate environment. “Obviously, with low oil prices, banks are not that keen to continue lending to the shale producers,” she said. “If lending is constrained, you will see a sharper drop in shale production in the U.S. because it is extremely capex intensive.”
Sen expects capex cutbacks next year in Latin America, China, Russia and all other oil producing regions around the world. “Capex cutbacks are huge at the moment,” she said. “We’ve taken out $200 billion from the system, so this will have an impact. It’s not going to impact us this year, it probably won’t impact us next year. But we do think by 2017, prices could shoot up to $90 a barrel again. So expect volatility.”
Sebastian di Paola, partner and head of the global treasury consulting practice at PwC, noted that with volatility looming, treasurers cannot simply view oil prices as being low; they are ultimately going to come back up. “So it’s not just a story of low oil prices and low commodity prices,” he said. “So for companies that are affected by low commodity prices, this may be good news.”
As for what this means for corporate treasury in the broader sense, companies are looking to centralize their commodity risk management function; to locate it where it can be easily managed, di Paola explained. “Let’s be honest, for most companies, that’s not the procurement function where it is today,” he said. “So I think for some treasurers, they’ve already taken on those responsibilities. For others, there’s probably an opportunity to really get into that discussion, because procurement is probably more focused on keeping the sourcing costs low. But that isn’t necessarily the right angle from a risk perspective.”
Di Paola added that many multinationals are establishing procurement hubs in regions where they incur lower corporate tax rates. “For those of you whose companies are doing that, I think that creates a tremendous opportunity for treasury function to be part of that process,” he said.