OIL PRICE HITS $80 A BARREL FOR THE FIRST TIME IN THREE YEARS, WHAT ARE THE IMPLICATIONS FOR THE UPSTREAM PETROLEUM EXPLORATION (EPS) INVESTMENTS?

Jointly co-authored by Mohd Faisal Hawar and Mohamoud Faisal Hawar, both Oil and Gas Management Graduates, specialized in Oil and Gas Fiscal Regimes, Oil and Gas Economists, Trainers & Consultants on all the Extractive Fiscal Regimes.

Crude Oil, the black gold as it referred to sometimes is the economic essence of every industrialized nation and has remained thus far the world’s most vital source of energy since the industrial revolution. With all the doom and gloom that Oil went through in its glorious past, this week, it has hit the $80 barrel mark for the first time in three years. The Oil industry as an economic enabler catalyst is so massive that it’s divided into three different sub-industries, namely, Upstream, Midstream and Downstream. The by-products/goods that are derived from the oil also powers our modern societies throughout the world, whether it be to fuel energy to the power industries, heating homes, and providing fuel energy for all types of modern machinery, for the advancement and welfare of humanity.

Oil has seen remarkably low prices in recent years in what economists dubbed as ‘the period of abundance’. This is due to America’s increased oil production through the advancement of hydraulic fracturing more known as fracking and also high efficiency attaining in shale oil production technologies, which all sawed the seeds to its self-dependence. This blissful period of low oil prices has caused investors to be wary in supplying their capital towards new upstream petroleum exploration projects in a time where the world is yet to experience a gargantuan transformation. The arrival of the covid-19 pandemic and its associated worldwide lockdowns has further exacerbated the situation by further reducing overall fuel usage, and thus hit the supply-demand equilibrium by as much as 30% which translated to the price falling to a 35 year low of 9 dollars per barrel. The pandemic has inflicted complications on the oil market that none could’ve ever foreseen. The disruptions it caused from job losses to unease in the return on investment of oil markets were vigorously felt.

As the planet was recovering from the covid19 pandemic, the investments in new oil exploration and drilling have yet to reach pre-pandemic levels. Total oil market capital has contracted from 750$ billion in 2014 to merely around 350$ billion this current year, as reckoned by Saad Rahin of Trafigura. As investments were beginning to dwindle throughout the years, since no new green fields were added to the global production capacity, it was only a matter of time before the prices could surge up. The pandemic was not but a brief pause to this incline in oil price.

The oil price as of last month hit its highest in the last three years post a pandemic period. As of Sep 28th (Rod Nickel, 2021), Brent Crude soared past $80 per barrel for the first time in three years. As the oil demand slowly recovers, with hope next year that it is likely to reach pre-pandemic levels. The question that still lingers around in this mega-industry and ponders us as oil economists is whether the increase in oil price could positively correlate to newer upstream exploration investments and when the inevitable higher oil prices will tickle the interest of the deep-pocketed Oil investors like the giant NoC, IOCs, Banks and other oil hedge funds.

Some international oil companies are still fidgeting over their budget despite the resurgence of oil prices. Their cautious attitude will allow them to pay down their debt after a period where they incurred monumental losses due to the drop in oil prices. The combined losses of the oil majors, namely Chevron, ExxonMobil, Shell, Total, and BP, were $77 billion for 2020 (Demand Is Recovering, But Oil Investments Are Not, 2021). Many of these factors influence IOCs (International Oil Companies) to make tough decisions to either have massive layoffs or significant reductions in the upstream investments. Despite the erratic fluctuations in oil prices, there still seems to be a glimmer of hope in the form of the Brent Crude hitting a high during this period at $81 per barrel, but the oil industry is still expecting a return in upstream oil investments by International Oil Companies or National Oil Companies.

Another major factor influencing the oil price is the major producers (Opec and Russia) demeanour towards capping the oil production rate stimulate the ever-increasing prices. The period of abundance for the consumers has heavily depleted the treasury reserves of producing countries, inciting them to first fill up their coffers and maintain high oil prices. This does not bloom well in a world that is still heavily reliant on fossil fuels.

On the flip side, there seems to be some hope in the fossil fuel sector as it has portrayed to us over decades that it is a reliable and steady source of income to investors. Some folks may ask themselves whether it would be beneficial to invest in the oil market in this current period but when it comes to oil and gas investments, timing is everything. The industry’s performance in 2021 demonstrates this. Crude oil prices were soaring in the first half of the year, with WTI surging by more than 50% from January to June. This aided a similarly spectacular recovery in oil stocks, which saw several of them rise more than 50% in the first half of 2021. The reopening of the world economy as the COVID-19 epidemic faded was the primary driver of the comeback, resulting in increased demand for oil.

Advances in the Oil-Well drilling and completion technologies have allowed the energy sector to tap into new supplies of oil and natural gas to fulfil the increasing global demand. By allowing more oil and gas to be produced with fewer wells, new technologies have also helped to decrease the environmental effect of energy production. Technological advancements will be essential in fulfilling global energy demand because they allow for the discovery of new resources, access to hostile or inaccessible regions, and the development of challenging well that were previously unprofitable to produce. This offers great newer opportunities and possibilities in the potential regions like the Horn of Africa, and we might be blessed with a newer scramble for Africa.

Other positives await those that invest in the recently maligned oil industry. According to the Financial Times (Hedge funds cash in as green investors dump energy stocks, 2021), hedge funds have recently started picking up the shares of the unpopular oil and gas companies relinquished by the environmentally-minded bigger investors, and these hedge funds are now accumulating and reaping the huge gains as the price of the energy surged. All the massive institutional investors that are more liable for good environmental governance and committed to the universal climate change commitments are so eager to relinquish their oil assets. This in turn leaves a massive gap in the oil market where those looking for returns are sure to take advantage of.

Our parting conclusion in this Oil economy analysing article is investing in the oil industry can provide decades if not centuries of passive reliable income and a strong Return-on-Investments. Newer and upcoming methods to drill alongside the improved technology has certainly shifted the dynamics of drilling to a more positive outtake. It has significantly lowered the risk while simultaneously improving the success rate setting up the stage for strong investment performance. Thus, offering the potential for higher returns than your normal/traditional investments. Oil projects typically also offer the most attractive tax incentives for investments allowing well costs to be depreciated over time. All in all, it is worth remembering that “investments drive up the economy”, aside from offering potentially high returns investments has a chance to drive the local market by offering the communities the chance of being employed as well as being exposed to new advanced techniques. A catalyst for change cannot occur without investments, and whenever such opportunity knocks on the door, only fools deny entry and do not welcome it!

The authors, young graduate brothers, Mohamed (24 Yrs old) and Mohamoud (23 Yrs old). Specialized in Oil and Gas Fiscal Regimes, Oil and Gas Economists, Trainers & Consultants on all the Extractive Fiscal Regimes.