International oil companies (IOCs) have largely been quick to react to the new reality of lower oil prices since the middle of 2014 by announcing capital expenditure reductions of 15-30 per cent to offset smaller profit margins.

National oil companies (NOCs) in the GCC, which are not answerable to shareholders, can afford to take a more measured approach to price fluctuations, but still face major challenges to cut costs.

“Typically – and history has shown this over and over again – GCC NOCs take a long-term strategic view on their investments and so are not influenced by short-term price volatility,” Christophe de Mahieu, head of the Middle East oil and gas practice at the US’ Bain & Company, tells MEED.

Lowest-cost players

NOCs in the GCC are the uncontested lowest-cost players in the global oil and gas industry, and the majority of fields still operate with a production cost of less than $10 a barrel.

“While IOCs and many non-GCC producers have already announced major capital expenditure reductions for 2015 to overcome the cash flow crush they face following the collapse of oil prices… we at Bain & Company don’t anticipate NOCs in the GCC to fundamentally cut back on their planned upstream programmes, with the potential exception of marginal fields,” says De Mahieu.

Rather, downstream schemes such as refineries and petrochemicals projects are more likely to be affected and indeed, this is already proving to be the case.

In Qatar, two proposed petrochemicals complexes worth a combined $14bn have been shelved since mid-2014, leaving a disappointing pipeline of hydrocarbons projects in one of the region’s largest oil and gas markets.

Asking for discounts

Another impact of the collapse in oil prices in the GCC is the increased pressure being put on oil field service providers to lower their rates. Bain & Company says NOCs have sometimes reopened contracts with oil field services groups with a view to obtaining discounts in a range of 10-30 per cent.

“Prices for service providers and contractors are rapidly coming down globally and so also in the region,” says De Mahieu. “The pressure exercised by IOCs and NOCs is real and is already bearing fruit.

“Furthermore, material prices such as steel, chemicals and other consumables are also facing a downturn trend. We at Bain & Company anticipate price decreases of 10-20 per cent across these costs for oil and gas producers that properly mobilise their contracting and procurement departments.”

Slow increase

Although NOCs in the GCC can take a more long-term strategic view of oil price fluctuations, few are predicting a return to the $100-plus a barrel level seen for most of the four years preceding the 2014 price crash.

The Washington-based Energy Information Administration expects Brent crude to average $59 a barrel over 2015, compared with $99 a barrel in 2014. Prices are expected to rebound to $70 a barrel in 2016, but this is significantly below levels leading up to last year.

Major challenges

NOCs in the GCC have three major challenges: increasing production costs; the higher technical complexity of oil and gas production including enhanced oil recovery; and government policies that have increased the responsibilities of NOCs.

The latter has seen governments, especially in Saudi Arabia and Qatar, give NOCs a more active role in driving the diversification of the economy and contributing to the development of non-oil infrastructure. This has increased the capital expenditure and project management requirements of NOCs.

“I think as a consequence and like what we see and will see at IOCs, NOCs in the region will have to work diligently in reducing their cost base, [simplifying] their organisation and processes and refocusing their asset portfolios,” says De Mahieu. “There is a need somehow, somewhere to come back to fundamentals and to the core business.”