Back to the future
The oil price has fallen back to where it was in 2005. Companies have less cash to spend and investment opportunities look far less attractive than they did a year ago. Upstream spending plans are being reduced and diverted as a result. Even some production is now only marginally profitable.
The reality is that host governments and oil companies are facing similar challenges. Public spending plans forged on US$100/bbl oil price expectations have had to be slashed, with significant economic and political fallout.
The oil revenue 'cake' has shrunk and it is hard for governments reliant on oil tax revenues to agree to a smaller slice of what's left. However, the question remains: if they don't offer better terms, will the industry simply stop investing?
Several governments have already changed their terms since the price began to fall. Others have terms in place which automatically respond to lower prices. Many more were already reviewing their terms, some with the aim of reducing the fiscal take, others to increase it. These reviews now have to be revised in light of the new economics.
In this article, David Barrowman discusses the fiscal implications in the current environment by looking at key questions, such as:
- What have oil companies done to establish profitability?
- What changes can be made to fiscal terms?
- What are governments doing to introduce more lenient fiscal terms?