An all-too-soon return to low oil prices

The oil and gas sector found itself in an all too familiar place this week with oil prices experiencing the single greatest one-day drop since 1991. It was just a few short years ago that companies battled their way back from a period of sustained low oil prices. They showed great organizational resilience at that time — and they’ll need to do the same now.

Digitalization and easy access to information are compounding the impact of shifts in crude oil supply with Russia and Saudi Arabia flooding the market. Similarly, global issues such as demand dynamics (Chinese demand dropped three million barrels a day, or 20%) and ever-growing global health complexities are being felt in real-time, making volatility swings seem more pronounced.

What can we expect following the biggest price drop in three decades? My global colleague, Andy Brogan writes about what’s happened to the oil market, what may happen going forward and how companies can consider responding. Here’s what we’re hearing in Canada:

- “The demand-side drop was expected but the more recent development of a price war is a supply-side issue that's hammering the market,” said Blake Shaffer, an assistant professor of economics and public policy at University of Calgary, in CBC News.

- “Companies that are efficient and low-cost producers that have strong financial hedges in place, locking in higher prices, will be set apart from the rest. A weaker Canadian dollar will also help provide a bit of a cushion, although not necessarily a lifeline for Canadian producers versus some of their counterparts south of the border,” commented Michael Tran, RBC Capital Markets managing director of global energy strategy, in the Calgary Herald.

- “While the lower oil prices could make a number of new U.S. shale-oil developments uneconomical, the impact on Alberta’s producers will be more limited—that’s because the province doesn’t have many new projects slated to come online in the near term,” the manager of North America supply analytics at S&P Global Platts, Rene Santos, told Global News.

The sense is that prices could rebound quicker than what we saw in 2015, but we’re still — without a doubt — facing a twisted path forward. Regardless, action needs to happen, and we can benefit from previous learnings of what worked and what didn’t.

Our 2018 Canadian oil and gas market study outlines six key resiliency dimensions — capital and finance, operational, market, portfolio, stakeholder and talent management. Companies should consider them to survive and thrive during these periods of uncertainty, and beyond. The path back to true resiliency will take some time.

Right now, companies should focus on the present and assess the near-, short- and long-term impacts of low oil prices on their business — and other emerging trends like clean energy, electric vehicles and tidewater access that may be put on hold, but are likely to come back strong. Immediate actions companies could be taking include the obvious stabilization of the business in terms of cash-flow by evaluating, prioritizing capital and other discretionary spend. Further considerations include new hiring freezes, building further organizational shock absorbers, staying connected to markets and external stakeholders with the latest up-to-date information and in some cases scanning for opportunity.

It’s an extremely challenging time for Albertan businesses and the community. Whether oil prices start to recover, or downward pressure prevails, the lessons learned from 2015 can help form a foundation for future changes that organizations will have to make. The sector has come together before and we can do it again. We’re here to help: to have open conversations and assist with tough business decisions.

By Lance Mortlock, EY Strategy Partner