Blessing in disguise: Oman’s reaction to the low oil price

Oman

Raoul Restucci, managing director of majority state-owned Petroleum Development Oman (PDO), talks to TOGY about major challenges and opportunities that low oil prices present to domestic upstream and oilfield services companies. PDO produces 70 percent of Oman’s oil and operates the block 6 concession, comprising almost one-third of the country’s geographic area.

How do you assess the overall impact of low oil prices?

Governments that are dependent on high oil prices to balance budgets will generally be concerned over the source and distribution of funds and emerging fiscal deficits, while executives of exploration and production companies in this region will increase their efforts to enhance and drive business efficiency.

There is a silver lining in falling prices. Operators tend to revert to more rigorous activity-based pricing and escalate efforts towards contract optimisation and efficiency. The decline compels the industry to reassess the incremental value generated across every facet of expenditures, and often to reinvent itself where returns are inadequate. This helps the company become more robust, sustainable and efficient.

How else can a company respond proactively to the price drop?

Many opportunities can emerge from the current oil prices that simply reaffirm the need to get the basics right. Leveraging operator and contractor resources, rebalancing the apportionment of risks and aligning procurement efforts are some of the practices that will, no doubt, be implemented more effectively across the industry to generate savings and sustain profitability and investment return goals at lower price levels.

PDO is well positioned for the current oil price reduction. The company initiated zero-based costing, contract optimisation reviews and continuous business improvement by adopting lean methodologies several years ago when oil prices were high. It is therefore able to stay the course in today’s economic climate and continue to develop and grow its resource base.

PDO continues with its enhanced oil recovery (EOR) programme and growth projects. Only a few EOR pilot tests and some high-risk exploration projects have been deferred.

Indeed, in a bid to help the government meet its target of producing 980,000 barrels of oil per day (bopd) in 2015, PDO aims to increase upstream activities and gradually raise daily production to 600,000 barrels of oil per day (bopd) by 2019, ensuring a 10-year production plateau thereafter at the same rate.

The oil price downturn can be considered a blessing in disguise for the oil and gas industry, as it provides the opportunity to drive greater efficiency and cut waste. The industry should never waste an oil price crisis and should seize the opportunity, recognising that following each downward price cycle, it has become leaner, stronger, more innovative and less complacent.

Why are many local companies struggling to develop?

First, it is important to highlight that there are many success stories, as demonstrated by the several billion-dollar contracts awarded to locally registered contractors, including the super local community contractors in the last few years.

To drive longer-term sustainability, we are placing increasing emphasis on core business development education to ensure a better understanding of what it takes to be competitive in the oil and gas industry.

The four government-established super local community contractors that are assigned to PDO are a great example of sustainable development in Oman, and we are closely working with them to ensure long-term competitiveness, so critical to our mutual development and growth ambitions.

However, some local community contractors are indeed less well placed to compete and either have to reinvent themselves and address new niche services or partner with other such contractors to strengthen their scale and capabilities. Local companies need to understand that there will be more scope, tenders and opportunities in the oil and gas industry, but this will not necessarily lead to all local companies winning contracts.

Are there adjustments that need to be made to government policy to increase local content?

The Ministry of Manpower and Ministry of Education spend significant resources on human capital development and vocational training programmes. We are increasingly working effectively together to improve the alignment between those programmes and oil and gas industry needs.

Development of the contractor community and up-skilling of Omanis is key to increasing employment opportunities and ensuring the development of local supply chains, covering locally produced goods and services utilised in any given project. There is also considerable engagement to clarify to the Omani Labour Law and especially for shift work schedules that impact industries such as ours that operate around the clock.

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