The Grade II-listed club house and the tree-lined fairways of the Fulwell Golf Club in Middlesex might expect more midweek activity this spring as the oil price crisis triggers a wave of redundancies at a nearby business centre.
Sunbury on Thames is a long way from Aberdeen but it is where BP employs more than 4,500 well-paid staff who work in almost all aspects of the company’s operations both in the North Sea and around the world.
BP unveiled a month ago that it was making $1bn (£660m) worth of cuts globally in response to falling crude prices and to take account for an earlier shrinking of the business as it sold off $40bn of assets to pay for the US Gulf blowout of 2010.
Almost all the money is being spent on redundancies and some of those middle managers or others employed at the Sunbury offices will fear – or hope – 2015 will give them more time on the manicured fairways of Fulwell and other nearby golf courses.
BP has unique problems resulting from the Deepwater Horizon accident and its huge investment in Russia but it is far fromnot alone in wielding the axe – with rivals Shell, Chevron and ConocoPhilips all announcing redundancies in Scotland.
A new report co-commissioned by the Department for Business, Innovation and Skill recently warned that as many as 35,000 oil- and gas-industry jobs could go in the next five years.
Iain Reid, an oil analyst with BMO Capital Markets in the City, says the first question that investors want answered by oil companies at the moment is what action they are taking to counter the impact of $50-per-barrel oil. He explains: “In the near term all major oil companies will be looking to reduce their operating costs and cut their headcount.”
Research from BMO, a Canadian-based investment bank, argues that Shell, ExxonMobil and Total are among the financially strongest companies best placed to handle a prolonged bout of low oil prices.
BP, Rosneft of Russia (which is 20% owned by BP) and Petrobras of Brazil are among the most vulnerable, given political and other risks over and above the value of crude.
Fadel Gheit, analyst with New York brokerage Oppenheimer & Co, says some of the small-scale shale frackers in North America who helped cause the oil glut have already been forced to halt operations for cost reasons.
“An oil company that stops drilling is like a human who stops breathing. You cannot survive for very long. If oil prices do not exceed $70 by the summer then you will see an awful lot of pressure on small producers followed by a wave of mergers and acquisitions. Investment bankers (who make money out of advising purchasers) have been waiting a long time for this and now its here.”
He believes the oil price slump is an overreaction and that prices should eventually stabilise around $70, but in the meantime the future of firms with high cost structures and debt levels will depend on the attitude of their banks.
Another London-based energy expert, who previously worked for one of the large oil companies but asked not to be named, said the industry was used to going through commodity price cycles but always found itself surprised by a huge downturn like the present one.
“However much you know oil prices can change dramatically after a period of three strong years, like we have had, it’s just natural that you get used to $100 oil. When that situation suddenly alters its a shock.”
With January being the traditional time to prepare budgets for the new financial year starting 1 April, there will be more work than ever going into how to balance the books over the forthcoming year.
Some organisations, including the International Monetary Fund, are clinging to average oil price forecasts for 2015 of $85, but BMO Capital Markets is down to $67 and some are even talking about $40 or lower.
The uncertainty causes huge problems for executives in oil company boardrooms. “Whatever assumptions you had about prices in the past you cannot make a new budget without referencing the current price and if that is $50 and not $100 that makes a huge difference,” says the energy expert.
“There will be a massive focus on getting rid of anything that can be scrapped or shelved. Headcount is always a key consideration as will be postponing projects that no longer make commercial sense or deferring maintenance where possible,” said the expert.
“I was working through the 1998 price collapse and my friend at the local golf club said he suddenly saw a huge influx of mid-week players as one of Britain’s biggest oil companies paid off staff, often those close to retirement.”
BP argues that the $1bn downsizing decision unveiled last month was taken following 18 months of planning, and preceded the current price slump – leaving it ahead of the game rather than disadvantaged to rivals.
A spokesman added: “We have spent the last three years delivering a strategy of divesting $40bn [of businesses and assets] but investing at the same time in higher value projects. This has simplified structures and left BP more efficient.”
Not every small oil or gas company will be hit by the commodity downturn. Analysts at Edison Investment in a note released today are even upbeat about some of Britain’s future frackers, arguing environmental and planning issues are more important than current energy prices for this nascent industry: “We see a positive year ahead for [the] UK shale-gas business, with catalysts in place for 2015 offering the potential to advance the sector towards commercially viable status.”
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