$40 oil to 'increase world's dependence on Gulf oil exporters'

New report says prospect of new era of cheap oil will also eliminate most US shale oil production
$40 oil to 'increase world's dependence on Gulf oil exporters'
By Staff writer
Fri 08 Apr 2016 10:10 AM

The prospect of oil prices being below $40 a barrel until 2020 would raise the world's dependence on Gulf oil because exporters would remain among the few nations to stay profitable, according to a new report.

International management consultancy firm Oliver Wyman said the continuing low prices would also eliminate most US shale oil production.

It said in its second annual Energy Journal that the global energy industry will need to forge new strategies to overcome significant challenges ahead.

"Change has become the new constant in the energy industry, with continuing pressure from record low oil prices, an excess of supply and not enough global demand," said Francois Austin, head of Oliver Wyman's Energy Practice.

"Unprecedented shifts are forcing oil and gas companies, utilities, governments, investors, regulators and even consumers to rethink basic assumptions that have guided the energy sector for decades worldwide.

"To stay ahead of the profound transformation under way, business and government leaders must forge new strategies, operating models and risk mitigation tactics."

The report said that oil does not work at $50 per barrel. The price needs to be at least $65 or the industry is not going to see the investment required to offset impending decline.

It added that demand growth has been stronger than anticipated, especially as oil prices are so low:

"In 2016 we expect to see demand growth slow to 1.0m b/d (thousand barrels of oil per day), most notably in the second half of the year, as the commodity sees some improvement in pricing," Austin said.

The report also said that deal-making in the oil and gas industry has been subdued as highly volatile oil prices have led potential buyers to sit on their hands:

"Though low oil prices typically produce more M&A, potential buyers may decide to wait for greater stability that may better align buyers and sellers on asset valuations," Austin added.

On US shale prospects surviving in the new era of low oil prices, Austin said: "While some niche assets and conglomerate operations may be able to endure, many smaller mature assets are headed for decommissioning unless significant cost-saving technology emerges. Regulatory efforts to foster cooperation and cut costs have had limited success so far."

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