The following article presents an excellent viewpoint on the boom/bust mentality of the commodities industry. In every boom and bust people think 'this time it is different'.
Haydn Black CARNARVON Petroleum CEO Adrian Cook says the current downturn in oil prices won’t last and the industry must hold its nerve as demand isn’t going backwards. According to Cook, the supply glut isn’t as deep as prices suggest and if the sector sacks too many stuff to cost costs it will set itself up for the next skills shortfall.
Speaking at a packed keynote lunch address at the AOG Expo in Perth yesterday, Cook said that rather than cut costs to the bone oilers should be taking advantage of service company and supplier rate cuts to do more with less – setting themselves up for an inevitable upswing. “In my view, this is ultimately good for the industry as a whole, as it should help bring Australia’s cost profiles in line with other major oil and gas producing regions, and ensure that we don’t price ourselves out of the market,” he said. “Remaining internationally competitive is one of the keys to stimulating the next round of exploration investment in Australia.” Demand isn’t going anywhere, with the International Energy Agency predicting the point of supply/demand equilibrium will occur around the third quarter of this year. “What is interesting is that the current gap between global oil consumption and global oil production is not presently as large as prices would suggest,” Cook said. “There is an estimated production surplus of approximately two million barrels of oil per day, or roughly 2% of global production. “This surplus is likely to remain in place only for as long as it takes higher-cost producers to be driven out of the market.” He believes OPEC will force high-cost US shale oil producers to cut their production, putting the extra four million barrels a day they are producing under the gun. However, Cook said prices will likely fall before they rise again due to the way shale oil fields’ ramp up. “Current consensus forecasts suggest short-term oil prices are likely to stabilise within a range of $US60-$US80 per barrel. This would clearly be good news for low-cost oil producers like Saudi Arabia and also for the majority of Australia’s oil producers,” he said. Carnarvon is bullish on long term price and remains concerned that industry redundancies are an over-reaction to a relatively short-term drop in oil prices. “My current concern is that the redundancies that are happening right now within our industry are an over-reaction to a relatively short-term drop in oil prices, which will see careers and businesses impacted, reputations and relationships damaged and hundreds of talented, dedicated and experienced people permanently leave our industry,” Cook said. “This aggressive attitude is potentially creating the conditions for the start of the next skills shortage that could arise when oil prices stabilise and companies decide to start exploring again. It drives up costs and perpetuates the “boom/ bust” mentality that characterises our industry. “As an industry we need be more strategic and develop resilience to both the short-term oil price volatility and also to the longer term macro-economic trends that will shape our economies and our lives for decades to come.” Carnarvon has $100 million in the bank thanks to its Thai asset sales and has potentially opened up an entirely new oil play on the North West Shelf. Yet Cook’s point is well made when you consider that the world only has about 50 years of oil left to produce (depending on who you ask). This means it will be impossible to continue to find the oil to meet demand, as well as anticipated growth in demand over the coming decades, if the sector doesn’t support its most experienced oil finders.
STO Price at posting:
$7.28 Sentiment: Buy Disclosure: Held
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