Impact of Low Oil Prices

Interestingly, just as I had completed writing this blog I got a mail with two questions -
What is the likely impact of the low oil prices on the Oil sands companies? Which will lead to another question . What can we all do, in our own small ways in IT , to help reduce impact? So I have added a paragraph trying to mention how IT can contribute.

Impact of Low Oil Prices

Generally low oil prices means less expenses and lower inflation. But how would it impact various countries? I have also tried to find the answer to this question. I was trying to co-relate the impact it would have on the Canadian dollar. When I landed in Calgary the CAD was trading at Rs.40.65 , now it is Rs.38.34. From what I have been reading in the media the oil price is expected to dip to USD35 by the last week of December '08, but is expected to recover to upto USD50 in February. Now that the oil prices have dipped there are bound to be some who will benefit and some losers.

The ones to benefit-
Based on the data available till November 2008 for the USA, oil @ $50 per barrel means a saving of about USD1.95 billion and oil @ $40 per barrel means a saving of about USD2.1 billion. US has also started to invest in energy saving automobiles. Japan has also tried to reduce its dependancy on oil but will benefit with any fall in prices.

Italy, Germany and Spain depend a lot on oil imports and they too would gain. UK may be neutral as it a producer as well as user. France Belgium and Sweden have over a number of years reduced dependancy on oil and would not be impacted in a big way. But with the recession approaching fast all the European nations would be happy with the low oil prices.

Among the emerging economies – China and India will obviously benefit as a huge chunk of forex is spent on oil imports. Russia will be hit but that will be compensated through sale of natural gas and metals. And inspite of spending USD150 billion on the economy, Russia has huge cash reserves of almost US$750 billion. The Russians do not spend huge amounts on the population, so the internal spending should not be impacted. Infact, the Russians are now readying themselves for a situation where oil prices are below USD35 a barrel. Brazil has used Ethanol in a big way to reduce oil consumption. But any fall in oil price should definitely benefit it.

Now the losers –
The oil producing nations – Iran, Mexico, Canada, Nigeria, Middle East and Venezuela. The Arab nations are cash rich and have learn’t from the mistakes of the 1970’s but still low oil prices is not a very exciting situation for them.

Mexico and Canada both are geographically close to the US. Both export oil to the US. Based on a Financial times report, Mexico has secured derivatives contracts for 2009 so theoretically it should not be impacted. But what about beyond 2009? It will depend on Hugo Chavez' luck and how much support he is able to garner within the country to be the President forever.

Canada will be impacted significantly. The construction cost of upgradation in Fort McMurray is 1.5 times that in the US Gulf. Most of Canada’s oil comes from the tarsands of Alberta. There is thing that people say -The oil that comes from the Middle East costs about USD4 but that from the tarsands costs more than USD20.

In 2007 the Canadian energy industry accounted for 5.6% of the GDP and employed about 2% of work force. The energy exports valued at USD90 billion. This year the government has also decided to raise taxes. Under the new rules, the tax on extraction before the investment break-even point will rise from 1 percent to 9 percent, and after costs are recouped, the rate will rise from a flat 25 percent to a sliding rate of as much as 40 percent based on the price of oil. This bad news for Canadian oil sands.

Among all types of oil extraction, oil sands is the most capital intensive and technologically challenging. This means there will be very less investment in the oil sands which is bad news not only for 2009 but maybe also for 2010. Another bad news would be a remark made by Obama’s energy advisor that the greenhouse emissions of the oilsands are “unacceptably” high. (Is this an opportunity for green tech and technology companies?)

The Impact
Royal Dutch Shell has postponed a capacity doubling plan at their Asthabasca plant.
Nexen, Opti Canada and BA Energy Inc have also postponed investment.
Connacher has cut its production from 9000 bpd to 5000bpd and held investments.
Canada’s second largest oil sands operator Suncor Energy, has reduced its 2009 planned capital spending by almost 30% to USD4.9 billion. A $1 change in the benchmark crude impacts Suncor’s cash flow to the level of CAD 55 million.
Petro Canada has postponed a decision to invest USD19.5 billion in the oil sands for refinery upgradation.
Steve Laut, COO of Canadian Natural Resources Limited had recently quoted that their company would be able to sustain if oil is at USD30 but for any expansion oil has to be consistently above USD70.

The only silver lining is that jobs in the oilsands haven’t been cut yet. Its a tricky situation. The work force is ageing which puts limits on efficiency and there is also the risk of losing knowledge.

How can technology contribute in a small way to reduce this impact.

* Cost reduction is a major criteria in these days of global slowdown. IT can offer better contracts – offer more services within the existing cost and extend the current contract. Offshore delivery is the key to success.
* Finding out the pain points of the business and offering solutions. Emissions and green house gases are a major concern. IT can offer solutions to reduce or monitor.
* Water is a major element that's used and also gets contaminated in the oilsands. Two to 4.5 unit volume of water is needed to produce one equivalent volume unit of the synthetic crude. Can better technology be offered so that it reduces the water use and also reduces the amount of contamination in water?
* Knowledge Management – The business knowledge that is held by the ageing workforce needs to be captured and stored and passed on to newer and less expensive resources. Unless this is done the knowledge will just go away when the person retires. This tool can be on a web based interface to make it user friendly.
* Business Intelligence – Timely access to the right information enabling the business to track, measure, analyse, predict and standardize business performance. Provide dashboards to measure and display self, department and company performance. These dashboard can also be equipped with “Alarms” to keep tabs on lagging areas. It can prompt with the optimum level of production. e.g Online rates of crude can be tied with the daily production figures in real time. Monitoring the trend of the workers going to the health center for specific illness or injuries.
* In a C&P scenario the transactional processes used at ground level vary as per the local precedents. These can be shared, standardised or integrated across departments (maybe reservoirs) and be made available as and when needed. This will eliminate the lack of consistency in staff actions across plants.
* Use of varied applications is rampant in C&P sector. Most of the applications are local and are mostly spot softwares. These applications need to be brought on a common platform. This will help reduce the maintenance and upgradation costs significantly.
* Information repository/management – Finding the right application, right person or right information. A knowledge portal can help to reduce the time for management as well as staff.