Makers vs Takers

“We are a price taker. We are not a price maker, unfortunately. So, as we have just re-discovered, if you are not a price maker but a price taker, your job is to control breakeven,” Total chief executive Patrick Pouyanne told the World Petroleum Congress (WPC) this week.

He was referring to the past three years when oil and gas companies (aka price takers) have had no other choice but to introduce very strict financial discipline, boost the efficiency of their operations, defer or cancel quite a few development projects and in general learn again how to survive and thrive in a lower oil price environment.

“Most companies had breakeven points of about $100/bl three years ago, and today we are all proud to announce that we break even close to $50/bl. It’s a huge capacity to adapt,” Pouyanne said.

The International Energy Agency estimates that 50-55pc of the cost reductions achieved by oil and gas companies since 2014 “can be characterised primarily as structural”, meaning they are likely to stick, while the rest would probably reverse once oil prices head up.

Price takers are hoping that the past three years have changed — or started to change — the mindset of most people working in the industry, and that best practice, efficiency and financial discipline are here to stay as a result.

“The generation now, that has survived this downturn… is going to be much more resilient and much more innovative,” said ExxonMobil exploration president Stephen Greenlee.

But companies would still love oil prices to increase promptly, boosting their cash inflows immediately.

Those we are used to thinking of as price makers — producing countries, particularly those acting in (sometime) unison through Opec — have a battle to fight to preserve their title. Neither outpumping the tight oil new kids on the block, nor slashing production in concert with Russia et al has yet convincingly lifted crude above $50/bl. And global demand growth is less than ebullient. Global oil inventories declines are sluggish. Maybe we had better say ‘price makers’, rather than price makers.

This must be very annoying for price takers, who after “two difficult years” had finally started to “smile more than last year”, as Pouyanne put it at the end of April.

Russian energy minister Alexander Novak, Opec’s secretary general Mohammed Barkindo and top officials from Opec countries were bombarded with questions at the WPC on whether the current production cut deal between most Opec and 10 Russia-led non-Opec countries is working or not, and whether it is time to require Opec members Libya and Nigeria to start cutting now their output has recovered.

While the heavyweights maintain that the output cut deal has put the market on a trajectory towards rebalancing and that it is too early to alter it, Opec members have decided to start talking to their brethren in Libya and Nigeria. The official line is that those talks will not be about the two countries having to limit their output.

“We did not talk about capping, but at least we can talk about production plans right now”, said Kuwait oil minister Issam al-Marzouq.

Diplomatically, Nigeria today responded: “Nigeria remains steadfast in its commitment to global oil market stability… and would always be part of the action taken by other Opec member countries and contribute its quota once its production status stabilises.” But the recovery to crude production of some 1.9mn b/d in June remains fragile, it said. Oh, and the minister has a prior engagement so cannot attend the monitoring committee in St. Petersburg.

Many ‘price makers’ really want price takers to be generating enough cash for investments in their countries, and with oil prices below $50/bl this task is much more challenging. BP chief executive Bob Dudley again talked about his company’s tightly controlled projects budget when asked about the possibility of BP investing in Iran or a new gas project in Qatar.

“We’ve got our plate full for a while now, we have some other plans. So, I do not think you’d see us making those investments. We just have to stay on our capital diet right now,” he said in response to the Qatar question.

To complicate things further, oil and gas firms have now started making — or at least thinking of making — long-term strategic investment decisions related to the world’s energy transition to a greener future.

“Many of us are already today preparing ourselves for that transition, because the transition has started,” said Shell downstream director John Abbott. “The reality is, do not be complacent.”

“The pace will be determined by a number of things: federal regulation, state or provincial regulation… but also the pace of innovation and technology. Ultimately, the markets will decide at which pace they want to go relative to the solutions on offer. Our intention is to provide a range of products and let the customer choose,” Abbott said.

Does that make the customer price taker or price maker, or both?

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