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Government responses to low oil prices will impact long-term supply dynamics

Precise brings you the latest press release from GlobalData that looks at the long-term impacts of government decisions regarding oil price.

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Governments’ responses to low oil prices will have a significant effect on supply dynamics for years to come, depending on whether fiscal regimes are adjusted to provide a landscape in which companies can make big development decisions, says an analyst with research and consulting firm GlobalData.

According to Will Scargill, GlobalData’s Upstream Fiscal Analyst, relatively low costs and the design of fiscal regimes in a number of countries should mitigate the impact of the recent price drop in most mature basins. However, the threat to Exploration and Production (E&P) companies’ bottom lines means that improved recovery in high-cost mature basins is compromised, new developments in growth areas are being put on hold, and unconventional development is slowing.

Scargill comments: “Several governments have taken positive steps to adapt to lower prices in recent months, with Argentina’s measures especially improving project economics. Argentina has reduced the investment threshold for the Investment Promotion Scheme for Hydrocarbon Production and has decreased the rate of export duty, for when oil prices are below $80 per barrel (bbl), to 10–13% from 45%, meaning fields should remain profitable at $50/bbl.

“The impact of low prices in the short to medium term is likely to be felt most keenly by governments in countries that rely on hydrocarbon revenues, such as Russia and Venezuela, while the effect on supply should be relatively limited. The exception to this is in the North Sea, where high costs mean that tax cuts are required if lasting effects on the sector are to be avoided.”

However, the analyst notes that to enable companies to make large investment decisions in growth areas and frontier basins, governments should offer a fiscal regime that responds to prevailing price given the cyclical nature of oil prices.

Scargill continues: “Brazil’s pre-salt resources could add millions of barrels per day to supply by the 2020s, but this is contingent on E&P firms feeling confident enough to commit billions of dollars to development now.

“Additionally, deepwater discoveries in Mexico’s Perdido Fold Belt have generated significant interest, and with an anticipated breakeven price between $41-65/bbl for new licenses, including the additional royalty, the commercial viability of developing these areas will depend on the final fiscal regime design.”

Reference: GlobalData.