Impact of drastic reduction in global oil price on Africa outlook for Ghana – Part 3

The greatest opportunity in the oil industry at the moment seems to be within onshore, conventional plays. In contrast to offshore finds, onshore prospects are technically much easier to discover due to well-tested geotechnical approaches.

Apart from exploration, some players are moving ahead with development programmes, albeit with commitments not to expand exploration drilling. Where production is already ongoing, these plays are viable at almost any oil price. This is because most of the costs are already sunk.

We also see that there could be significant potential for firms that are strong in research and development (R&D). Schlumberger usually sinks US$1 billion annually into R&D. This investment could pay off if efforts are made to reduce the cost of drilling and production in a low oil price scenario.

Lastly, there is a big opportunity for new players with strong balance sheets to enter the African market, potentially at a low cost. For those who are “Fit for below US$50” this poses a potentially once-in-a-generation chance to pick up valuable assets at a bargain price.

Stress test

The key to surviving the ups and downs of the cyclical oil and gas market is to learn how to adapt quickly – be more agile! A number of issues must, therefore, be addressed. This can be done by starting with an organisational stress test.

The PwC Stress Test is a framework for developing relevant indicators to determine the level of “stress” or exposure and sensitivity of a company to weak hydrocarbon pricing environments. It includes strategic, financial, operational and commercial elements.

Drawing on the results of the stress test, actions that could be taken include cost reduction, portfolio optimisation, strategy review, improving access to capital and people management. 

More detail on these potential actions are outlined in the diagram above.

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In situations of low commodity prices, many companies respond with knee-jerk cost reduction programmes. 

This could be much more effective if they took the time to understand what specific costs are, how they compare to peers and what reductions are truly possible. Cost reduction programmes need to be targeted and realistic.

Email  vish.ashiagbor@gh.pwc.com and copy in Yaw Appiah-Lartey (yaw.appiah-lartey@gh.pwc.com).