Falling Oil Prices To Throw Gov’t Budget Off Gear

A renowned Chartered Economist, Dr. John Gatsi, has warned that if the trend of the falling oil crude prices on the international market continues into the second quarter of this year, it will pose a challenge to the 2015 budget.

He explained to The Chronicle in a telephone interview that: “we are exporting crude oil which is projected to fall in the regime of $90 per barrel. But it is now being sold around $50 per barrel, implying that if the trend continues into the first and second quarters of 2015, then revenue from petroleum will reduce about 50% “.

DAMNING EFFECTS ON REVENUE
This, Dr. Gatsi, who is also a Senior Lecturer at University of Cape Coast noted, meant a lot of projects in the 2015 budget in the area of road infrastructure, agric modernization and educational infrastructure may be affected.

“Allocations to heritage and stabilisation funds will be reduced far below the projection, which also will affect the international reserve position of the country. Which may pose risks to currency stability in Ghana,” he added. This development, Dr. Gatsi argued, calls for the need to ensure balance management of the reduction in oil prices in the country, which produces oil and gas in commercial quantities.

For him, it was prudent to set our eyes on fiscal management effect of reduction in crude oil prices and that considering the risk of the fall in crude prices on petroleum revenue, budget execution and international reserve should be matched with fiscal management at the downstream reflecting in marginal reduction in the ex-pump price instead of huge reduction.

EFFECTS ON ECONOMY

Touching on the effects on the falling oil prices which began in the third quarter of last year till date, on the Ghanaian economy, the renowned economist noted: “It has helped to reduce refined product price marginally of which consumers will benefit from volumetric effect (that depends on the quantum of consumption”.)

At the same time, the fall in oil prices is helping the country in fiscal management in the sense that debt owed to private sector participants in the petroleum sector including Bulk Oil Distribution Companies (BDCs), and Oil Marketing Companies (OMCs) are being paid.

The Senior Lecturer was quick to add that declining oil prices should also be seen as an opportune time for payment of subsidy cost and possibility of accumulating some money to manage future rise in prices.

EFFECTS ON UPSTREAM SECTOR

The upstream oil sector is also commonly known as the exploration and production (E&P) sector. The sector includes the searching for potential underground or underwater crude oil and natural gas fields, drilling of exploratory wells, and subsequently drilling and operating the wells that recover and bring the crude oil and/or raw natural gas to the surface.

In Ghana, the Jubilee field of Cape Three Points in the Western Region of Ghana is an upstream oil sector. It is situated in the Deepwater Tano and West Cape Three Points blocks of the Tano Basin, which is one of the three offshore sedimentary basins in Ghana. The field is jointly owned by a consortium of companies called Jubilee Joint Venture and managed by Tullow Ghana Ltd, a subsidiary of UK-based Tullow Oil Plc.

Other four members of the consortium are – Kosmos Energy, Anadarko Petroleum, Petro SA and the state-owned Ghana National Petroleum Corporation (GNPC), which discovered the Jubilee field in 2007 at the time Ghana was marking its 50th anniversary. Players in the upstream oil sector, which is capital intensive, normally depend on crude oil pricing to invest. So, very low crude oil price becomes disincentive to investment, according to Dr. Gatsi.

However, the comments that Ghanaians have received so far from major players in the upstream sector such as Organization of the Petroleum Exporting Countries (OPEC), Russia, and Total all indicated that there is no immediate plan(s) to reduce production. The University of Cape Coast senior finance lecturer warned that; “when the trend continues there is the likelihood that future investment in the upstream will be cut”.

Moody’s Investors Service, a United States-based leading provider of credit ratings, research and risk analysis also warned in its latest report that global oil and gas industry was entering a challenging 2015, based on stubbornly low oil prices. Exploration and production (E&P) companies will be hit first, while oilfield services (OFS) and midstream energy operators will feel the knock-on effect of reduced capital spending in the E&P sector, according to the report.

Offshore contract drillers are likely to have their toughest year since 2009, and integrated oil majors are the best positioned to react to lower prices. The drop in crude oil prices to around $55 a barrel from about $95 a barrel in July 2014 reflects a number of factors, including growing supply from non-OPEC countries, particularly the US; a slowing increase in global demand and Saudi Arabia’s decision not to continue acting as OPEC’s (and the world’s) swing producer.

“If oil prices remain at around $55 a barrel through 2015, most of the lost revenue will hit the E&P companies’ bottom line, which will reduce cash flow available for re-investment,” said Managing Director — Corporate Finance, Steven Wood. “As spending in the E&P sector diminishes, oilfield services companies and midstream operators will begin to feel the stress.”

If oil prices average $75 a barrel in 2015, North American E&P companies would likely reduce their capital spending by around 20% from 2014 levels, while if they go below $60 a barrel spending could be cut by 30% to 40%, Wood said in the report, “Lower Oil Prices in 2015 Reduce E&P Spending and Raise Risk for OFS Sector.” Outside North America, E&P firms would likely reduce spending by 10% to 20%, depending on prices.

OFS sector earnings would fall by 12%-17% if oil averages $75 a barrel, while an average price below $60 a barrel could drive earnings down by 25%-30%.

Although the world’s largest OFS companies — Schlumberger, Halliburton and Baker Hughes — are all sufficiently strong to weather a sustained drop in oilfield activity, smaller companies such as Basic Energy Services and Key Energy Services would come under greater stress.

Slumping oil prices amid a surplus of new rig deliveries spell difficult times ahead for offshore contract drillers. Low oil prices will put intense pressure on dayrates in 2015, but for the many companies that will have to renew contracts on existing rigs at significantly lower rates, 2016 could prove even more painful.

Major integrated oil companies will fare better, Moody’s added. “Integrated oil companies have been more measured in their response to falling oil prices, typically making investment decisions assuming prices of no more than $50-$60 a barrel, since projects can take years to complete. That said, Exxon Mobil, Royal Dutch Shell and Total have announced spending reductions for 2015, while cuts at others, including Chevron and BP, look likely.”

In the midstream sector, a spending cut of 25% or more would make it difficult for operators to maintain EBITDA growth at current levels of 12%-15%. And early in the capital budgeting season a number of E&P companies had already signaled spending cuts of 25% or greater.

The new report also discusses the impact of lower oil prices on China, Mexico and Russia. China is the world’s largest net importer of crude and will benefit from the drop in oil prices. Mexico’s development as a result of energy reform will be delayed. Russia’s lower oil export duties help its oil companies, but add to an already oversupplied market.

Source: The Chronicle