how to get through a downturn - Rigzone

FEBRUARY JULY 2015 2016

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HOW TO GET THROUGH A DOWNTURN 06

TRUST CRITICAL FOR MEXICO ENERGY REFORM SUCCESS 08

SCOTLAND’S OIL INDUSTRY MIGHT BE DOWN, BUT IT ISN’T OUT

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JULY 2015 CONTENTS

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HOW TO GET THROUGH A DOWNTURN

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Trust Critical for Mexico Energy Reform Success

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Scotland’s Oil Industry Might be Down, but It Isn’t Out

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Low Oil Prices Likely To Lighten Political War Chests

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FEBRUARY 2016 EDITION

ASST. EUROPEAN EDITOR

RAndreasEExarheas A

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CAREERS EDITOR

MANAGING EDITOR

Valerie Jones

Saaniya Bangee

APAC EDITOR

DESIGNER

Chee Yew Cheang

Marcus Tenette

SENIOR EMEA EDITOR

CREATIVE DIRECTOR

Jon Mainwaring

Eric Duenas

SENIOR EDITORS

VP CONTENT

Deon Daugherty Karen Boman

Bertie Taylor

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RZNEWS DIGITAL READER

How to Get Through a Downturn Andreas Exarheas, Assistant European Editor

@Andreas_Ex

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T

he latest fall in oil prices has

“We grew our investment in R&D [research

now, five years from now, ten years from

hit the energy industry hard.

and development] last year … we’re

now and you’ve got to take the actions that

Figures have dropped from

working on financing to try to provide bet-

really protect the future.”

over $100 per barrel in 2014 to as low as

ter CAPEX [capital expenditures] to OPEX

$27 per barrel this year and a variety of

[operational

transitions

lieve they can get through the downturn by

oil and gas companies have responded in

… We haven’t blinked during this crisis.

doing nothing in the hope of a speedy oil

different ways in a bid to survive the down-

We’ve kept investing, we’ve kept driving

price recovery, Immelt stated that the situ-

turn.

and we’ve made the company better and

ation is unlikely to improve any time soon:

we plan to continue that progress in the

“We live in a time of slow growth and

Some energy firms have reacted to the dramatic price reduction by streamlining

expenditures]

future.”

In a warning to oil and gas firms that be-

volatility. It’s unlikely to change anytime

their operations while others have largely

Immelt, who became CEO of GE in 2001,

soon … You have to just keep driving pro-

resisted this path, taking a more relaxed

also emphasized that companies should

ductivity and investment in the cycle we’re

approach in the hope that the value of

just “focus on what they control” during

in today. You have to learn to act in the face

crude bounces back soon. While both tac-

the downturn, in reference to the current

of uncertainty.”

tics have their supporters, GE’s Chairman

low oil price. The GE frontman told energy

When concluding his talk, Immelt im-

and CEO Jeff Immelt has suggested that oil

firms to only look at data and facts too, as

plied that the current oil price crash did

and gas companies looking to weather the

speculation can often lead to confusion,

come with some positives. The GE leader

current crash should be more inclined to

which is unhelpful in the current business

claimed that these downturns are “good

the former method, rather than the latter.

climate.

for us” and that they toughen up the in-

Speaking at the 17th GE Oil & Gas Annu-

Self-reliance was another trait that Im-

dustry, producing “better leaders” as a

al Meeting in Florence, Italy, at the start of

melt urged oil and gas companies to adopt.

result. If this is true, at the very least the

February, Immelt outlined GE’s efficacy at

The GE CEO suggested that energy firms

oil and gas sector can look forward to a

surviving market crashes, highlighting the

should depend on themselves to imple-

more robust structural system in the years

firm’s aviation business in the process:

ment structural change rather than wait

to come.

“We know cycles. We’ve lived through cycles, we know how to lead a company

around for external industry pressures to influence their behavior:

through cycles … [After 9/11] we saw …

“At GE we believe in self-help, we be-

the destruction of the commercial aviation

lieve in action. Taking costs out on our

business around the world. We saw as

own. Having a strong balance sheet on our

power deregulated in the United States,

own. Taking opportunities on our own … I

we went from shipping more than 200 gas

look at deals like Shell and BG as self-help.

turbines in the United States to four in one

They’re going to get a bunch of people that

year.”

criticize them, we’re not going to know the

Turning his attention to the current energy sector crisis, Immelt outlined the

answer for a couple of years, but they’re moving, they’re acting.”

need to cut costs and highlighted his own

Speed and flexibility were also cham-

company’s “lean” nature. Despite this

pioned as vital characteristics a company

cost-cutting, Immelt has advised oil and

will need in order to survive this downturn,

gas companies to follow GE’s approach

as well as future market crashes:

and continue investing in their own brands:

“You’ve got to stay fast and flexible … We’re going to be here three years from

GE Chairman & CEO

Jeff Immelt

Source: GE Oil & Gas

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FEBRUARY 2016


Trust Critical for

Mexico Energy Reform Success Karen Boman, Senior Editor

T reform.

@KarenBoman

he increasing lack of trust in Mexico’s governmental

Without trust of authorities, no public policy or reform can really

institutions and their ability to apply rules presents a

succeed, said Ana Elena Fierrao Ferraez, dean of the masters in ad-

challenge as the country continues to implement energy

ministration and public policy program and professor at Centro de Investigacion y Docencia Economics A.C., during an event at Rice University in Houston. The event, “The Rule of Law and Mexico’s Energy

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Reform”, explored how the rule of law in Mexico and energy reform

issue of what happens if someone is faced with a situation, such as

intersect. Ferraez and other experts shared findings from essays

an official wanting a bribe, and what happens if that person does or

they had written on the subject.

doesn’t give the bribe, is another issue.

In 2015, The Corruption Perception Index published by Transpar-

Ponce, who defined the rule of law as the definition of a govern-

ency International ranked Mexico 95 out of 167 countries in terms

ment’s power and what allows the government to limit the actions of

of being perceived as corrupt; Mexico had a score of 35 on a scale

various members of its society, said the World Justice Project mea-

of 0 to 100, Ferraez noted. The lack of trust stems from the belief

sures the rule of law in countries around the world. According to the

that business contract awards are based on personal relationships,

findings of the group’s Open Government Index 2015 report, Mexico

rather than rules and processes of institutions, Ferraez said. This has

ranked 42 out of 102 countries in terms of the openness of the na-

created concerns that fair trade cannot occur.

tion’s government. In terms of publicized laws and government data,

Mexico has taken steps to address corruption issues; earlier this

Mexico received a score of .43 – with zero being the least open and

year, Mexico’s Congress passed an anti-corruption law, amending

1 the most open – and ranked 64th in this area. In terms of right to

it’s Constitution to strengthen oversight of public officials and desig-

information, Mexico scored a .61, or a global ranking of 29. In terms

nate a special prosecutor to tackle corruption. However, some critics

of civic participation, Mexico ranked .56, or 67th worldwide, and for

expressed concern that the law was just a “facelift” for existing insti-

complaint mechanisms, Mexico came in at .62, or 34th globally.

tutions and won’t address the low rate of prosecutions for corruption in Mexico.

“An open government – conventionally understood as a government that shares information, empowers people with tools to hold

“It’s not enough to prosecute bad civil servants,” Ferraez noted.

the government accountable, and fosters citizen participation in pub-

“The legal system must give equal treatment to all, and give access

lic policy deliberations – is a necessary component of a system of

to public information to all. We have to guarantee that the rule of law

government founded on the rule of law,” the group said in the 2015

is the rule and not an exception.”

report.

Transparency and accountability of public institutions and pro-

According to Cambridge, Mass.-based National Bureau of Eco-

cesses will be particularly important if Mexico is trying to attract for-

nomic Research, transparency in government institutions and pro-

eign and private investors to make significant financial investments

cesses encourages foreign investment.

in Mexico’s energy sector, Ferraez stated. Part of having transpar-

“Without exception, a country’s lack of transparency is associat-

ency and accountability includes publishing information on energy

ed with lower exposure of emerging market funds,” according to

reform to meet international standards that is accurate, reliable and

a NBER working paper “Transparency and International Investment

usable by all parties. This is needed to ensure fair competition.

Behavior”, written by R. Gaston Gelos and Shang-Jin Wei.

Another change that needs to occur in public resource manage-

According to Gelos and Wei, in terms of attracting needed foreign

ment is accountability for audits. Right now, the law isn’t clear on

capital, a lack of transparency indeed may affect economic perfor-

what would happen if an audit uncovers bad results, Ferraez said.

mance by repelling international investors.

Mexico’s general accounting office needs to able to effectively audit companies, and set incentives for public companies to act in an effective and productive manner, as outlined in Article 25 in the Constitution.

“There is relatively clear evidence that low transparency … tends to depress the level of international investment.” Rigzone reported last year that anti-corruption strategies would be critical for companies looking to navigate Mexico’s energy sector.

Alejandro Ponce, chief research officer with the World Justice Project, also touched upon how trust and investor perspective could impact energy reform. The possibility that a state may not follow the rule of law poses a risk for companies investing in that state. The

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Scotland’s Oil Industry Might be Down, but It Isn’t Out Jon Mainwaring, Senior Editor, EMEA

R

@oiljon

ecently, I read the distressing news that former oil

First of all, there is a very large amount of decommissioning work

and gas workers in Aberdeen were having to rely

to be done in the North Sea over the next decade. During this peri-

on food banks – the UK’s charitable solution to food

od, some GBP 17 billion ($25 billion) will be spent on scrapping 79

poverty – in order to help make ends meet. Apparently, local char-

platforms and plugging 12,000 wells, according to figures from

ities in the Scottish city saw double the number of food parcels

DecomWorld. Such an amount of work should keep many oilfield

delivered to the needy during 2015 than in 2014. Meanwhile,

engineering and services firms busy.

there was a sharp rise in people claiming out-of-work benefits in northeast Scotland towards the end of last year.

Then there is the fact that oil and gas is not the only source of energy that the North Sea produces. The offshore wind industry is

The low oil price has had a devastating short-term effect on

continuing to grow significantly in the UK and Netherlands zones

Aberdeen and northeast Scotland. So much so that both the cen-

of the North Sea, and offshore oilfield services companies are

tral UK and Scottish governments have been spurred into action,

becoming increasingly aware of the opportunity to employ their

with various tax-payer funded initiatives being announced during

know-how within this sector. Earlier this month I had a chat with

the past few weeks that are designed to both support the oil and

one such firm, whose business was wholly dedicated to oilfield

gas industry in the region and help train its former workers so

services just four years ago, but today has around a third of its

that they can gain new skills that may help them find work in

turnover accounted for by the offshore wind sector.

other sectors.

Finally, northeast Scotland remains an oil and gas hub that gets

But although these hurried measures are no doubt needed to

a large chunk of its revenues from international markets. Scot-

help the Scottish oil and gas industry and the people of northeast

land’s oil and gas supply chain sells its products and expertise

Scotland through a difficult period, they should not be seen as an

to markets as far away as Australia, while exports to oil and gas

indicator that the game is up for the region when it comes to its

projects in Africa account for several billion dollars annually.

involvement in the energy sector.

The Scottish oil and gas industry may be down at the moment, but the game is far from up.

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LOW OIL PRICES

Likely To Lighten Political War Chests Deon Daugherty, Senior Editor

W

@DeonDaugherty

hile the rhetoric heats up and candidates

hind folks like the junior senator from Texas, Ted Cruz or the

vow to lure more voters into the arena of

upstart GOP senator from Florida, Marco Rubio.

presidential politics, one part of the race for

But although a lot can happen during the next few months,

the White House will likely see a clear decline: money donat-

it’s unlikely that oil prices will rebound to a level that moves

ed by energy companies that are fighting their own financial

the needle for political donations, he said.

battles.

“Establishing a new normal – not $110, but somewhere in

Historically low oil prices – currently resting below $30 per

$60s – will happen slowly, over the course of a couple of years,

barrel – have led the vast majority of oil and gas companies

as opposed to the next several months,” Jillson explained.

to cut back on their key expenses: projects, equipment and

“Generally, economic impacts affect politics with a six-month

people. For those in the oil patch to open their companies’

lag. If oil prices, or economic growth in general, begin to tick

coffers to politicians – even when the U.S. presidency is at

up, people don’t believe it initially. They’re not ready to bank

stake – appears to be a longshot.

on it.”

Cal Jillson, a leading political expert and professor of polit-

And with production in the Texas shales still pumping out

ical science at Southern Methodist University in Dallas, told

hydrocarbons and the prospect of other global production

me in recent weeks that a retrenchment among those in the

increases, a pick-up in prices – and public faith that they will

oil patch is all but inevitable.

stabilize – remains unlikely, he said.

“A lot of people who were flying high four or five years ago are now fighting to survive,” he said. However, the handful of companies with strong balance sheets won’t completely abandon the process, he said. They’ll

“I expect oil and gas will play a role [in the election] as a part of the public’s concern with the economy, but I don’t think it will be a central role or a significant part,” as it has in the past, he said.

naturally remain active, contributing to the super pacs be-

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