In 2016 finally we saw OPEC blinking first and took the responsibility of enforcing production cut to rebalance the market. The compliance of such production cut from Opec led by Saudi Arabia and supported by few non Opec countries has been remarkable. In line with my last year’s message we indeed saw a strong recovery in 2016 after bottoming out at abysmal USD 30 levels and was well supported at USD 50 levels by year end. However equally remarkable as the Opec compliance, was the ability of the US Shale producers to cut costs and ramp up operations very quickly the moment the oil price recovers a bit. This has provided a ceiling to the oil price at around USD 50-55 levels in the short term, as the volumes cut by OPEC gets quickly offset by the US Shale production. Hence the year saw tightening of the demand supply gap, but the overall supply overhang remained.
I believe the industry has now also seen unprecedented levels of low spending on exploration and very cautious sanction of development projects. Clearly this is changing the supply landscape of the conventional oil and I do not believe the shale oil ramp up, can completely bridge the gap in the mid-term, even though it seems to be doing so in the short term. Also, I believe the dramatic drop in breakeven cost of the Shale oil is not sustainable. Currently the upstream players are arm twisting the service industry to marginal costing levels, which is not sustainable for the service industry in the mid to long term. Hence in the foreseeable future, I see the cost of Oilfield services increasing, pushing up the break even cost of shale production.
The complex economic forces including the geopolitical factors and speculative sentiments, makes the oil price prediction in the short term very difficult and we see varied commentaries from different analysts and experts. My humble submission to this is, whilst oil price will remain volatile for sometime, ultimately it has to recover as supply starts declining and the demand continues to grow. I see the oil price finding support in the region of USD 50-60 in the short term and then stabilizes at USD 70 levels in the mid to long term, a price that is essential for the entire hydrocarbon value chain to sustain.
As mentioned in my last couple of messages, Petrogas has historically managed well such down turns, through cost discipline and prudent operations and have actually come out leaner and stronger in the process, strategically positioning itself to ride the upswing.
In 2016, we continued to do that, where we embarked upon several cost cutting and operational efﬁciency measures, leading to material savings. Also we managed to optimize our financial facilities and working capital by refinancing our loan in Mazoon with improved terms and re-negotiated our oil lifting contract with improved working capital position. Also, we successfully negotiated our service agreement with PDO to improve our terms and also extended the tenor.
Despite the above measures to mitigate the low oil price environment, Petrogas continued its excellent performance by recording highest production. Almost 115 wells were safely drilled in the year, to support highest ever production, yet adding reserves.
2016 was another excellent year with regards to HSE performance for Petrogas with no major incidents reported in any of the operations performed by Petrogas E&P, its subsidiaries and their contractors. Petrogas’ continual focus on HSE improvements has resulted in such achievement.
Petrogas continued its Corporate Social Responsibility by supporting local communities and NGO’s in and around the areas of its operations. In addition, Petrogas continued its investment in the In-Country-Value (ICV) of the services, equipment and materials sourced for Omani oilﬁeld operations under the initiative and guidance of Ministry of Oil and Gas. Petrogas is committed for the improvement of Omani content by grooming and developing young Omani employees for its future growth.
Petrogas will continue with its production and development activities in 2017. Even though there are several cost cutting initiative undertaken due to low oil prices, Petrogas will continue its excellent production performance.
In Netherlands, Petrogas continues to successfully enhance production and add reserves and resources on assets taken over from Chevron. In 2017, it plans to drill three new offshore development wells to ensure, it continues to extend the maximum plateau production reached (facility capacity limit) and is developing a hopper of subsequent value adding project to maintain the production for many years to come. In this regard, it also plans to acquire 3D seismic in 2017, around it’s A& B block areas, to further identify and mature resources.
Finally, I thank the Government of Oman, the Netherlands, Egypt, Mozambique, Denmark, Germany and the UK, our partners and stakeholders for their support.
I also thank our management and staff for successfully negotiating the downturn, where we tightened our belt to weather the storm. I am conﬁdent that Petrogas is well positioned to meet the challenges of 2017, especially in this low oil price environment and also manage to grow through value adding acquisitions.