Oil ministers promise 2016 recovery

25 November 2015

 The region’s governments should seek to take advantage of the low-cost environment to drive investment

Richard Thompson

Richard Thompson

The region’s energy ministers were in a bullish mood when they met in Bahrain this week at the Apicorp Energy Forum

The men behind the region’s oil policies promised that, despite growing concern about an increasing oversupply of oil that is continuing to outpace growth in global demand, 2016 would deliver a turning point in oil prices.  

They argued that the fundamentals of the oil market were strong and made it clear that there would be no immediate change in Opec’s policy to maintain high levels of oil production.

But the optimistic outlook came with a sting in its tail as they also warned the recovery would take time and that patience was required (Oil & Gas Special Report).

In the meantime, they said, there was an opportunity to introduce structural reforms, such as subsidy cuts, and to increase non-oil revenues, ie, taxes.

Most crucially, they said, infrastructure spending must continue.

At the high levels of energy policymaking, this all makes sense. But at ground level, the painful ramifications of the current oil policy are becoming increasingly plain to see.   

Throughout much of this year, there has been a great deal of speculation about the impact of low oil prices on the regional economy. Now we are beginning to see the consequences.

This week’s news that Consolidated Contractors Company (CCC), one the region’s most active contractors, has felt the need to borrow $350m to mitigate the risk of payment delays by its clients is a significant indicator that the full impact of low oil prices is sweeping through the economy.

As Colin Foreman and Sarmad Khan report, CCC is not the only contractor reporting increased risk around cash flow.

Drake & Scull International (DSI) has also highlighted problems with payments. DSI says it will seek to increase its working capital and reduce debt by selling off assets.

Both CCC and DSI operate at the top end of the project supply chain and it is certain that their experiences are being mirrored at every other construction company in the region.

It is also certain that in the low-margin business of construction contracting, delays in payments at the top end of the project contracting chain are passed downwards to supplier and employee payments.

Ultimately, it falls back on the government, as increased economic insecurity results in lower consumer spending.

The long-term cure, of course, is for a rebound in global growth, which must come from the emerging markets. But this is uncertain, cannot be controlled from this region, and will take time.

In the meantime, however, the region’s governments should seek to take advantage of the low-cost environment to drive their commitments to investment, particularly in infrastructure projects.

Firstly, to ensure they do not lose sight of their long-term objectives of economic diversification and job creation. But also to prevent any long-term damage to the region’s projects delivery industry.



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