Plummeting oil prices...Who is at risk?

While we are busy looking at Aberdeen; Bahrain and Oman may be most at risk from plummeting oil prices.

 

Based, as we are, in the UK, there is a natural tendency to look toward the gloomy headlines emanating from the North Sea oil and gas (O&G) industry. However, whilst this parochialism might be understandable, especially in our local media, this is a global industry and as such prey to a host of endogenous and exogenous variables, from geology to geopolitics - and all points between.

 

That said, one of the biggest problems in the O&G labour market today is the continuing shortage of talent in key disciplines and geographies. And with the persistence of low oil prices, it’s likely that the oil majors (and others) will take the opportunity to ‘retire’ some of their highly experienced, big earners and then backfill from within, identifying their next layer of talent and tying these people in via attractive packages in promoted positions. While this makes sense on an individual company basis, it may make it even more difficult to create the fluidity of movement that the recruitment market needs to ensure the future success of the oil and gas industry as a whole.

 

What does this mean for recruitment? Human capital in the O&G world can be exceptionally mobile and overall the market functions well enough. However, in this global talent market, difficulties in one (geographical) area are likely to encourage candidates to explore opportunities elsewhere.

 

Perversely, arabiannews.com had reported, just a few weeks before, that the Gulf States ‘have less to worry about’ over the low oil price, according to experts from Crédit Agricole Private Banking. In particular, Crédit Agricole suggested that the current situation provides opportunities for these countries to reform their economies, strengthening and increasing the diversity of the economic base and building a structure that will underpin their success in the future.

 

However, Bahrain (with a BBB/Negative rating) required a fiscal breakeven oil price of $130 per barrel in 2014 and was placed on a Negative Outlook in December. Oman, despite sovereign wealth fund assets and a low debt burden, needs more than $100 per barrel to balance its budget.

 

The agency makes it clear that 'AA' rated Abu Dhabi, Kuwait and Saudi Arabia have massive financial buffers in place to withstand any medium-term problems created by a continuation of the current low oil price. The smooth transition of the Saudi crown has helped too, as does the low level of the kingdom’s debt.

 

In a report in arabianbusiness.com, Fitch is generally sanguine about the prospects over the next few years, but notes that the response of the policymakers in the Middle East will be vital.

 

It now seems accepted that unless there are external shocks, such as a wholesale expansion of the war in Ukraine or a Grexit from the EU, the price of Brent crude will average c. $70-$80 per barrel in 2015/16. Capacity to sustain a country’s O&G industry therefore varies depending on the underlying strength of the national economies in question, as revealed in the ratings given by agencies such as Fitch.

 

Fitch, the ratings agency, has set us right, noting that, from their perspective, political and economic variables are (as always) at the core of the problem.