OPEC Cuts: What Now For The Supply Chain?

On Wednesday 30 November 2016, the Organisation of the Petroleum Exporting Countries (OPEC) reached an agreement that committed its members to introduce oil production limits for the first time in eight years. It is hoped that that the deal will aid recovery in the sector and help to address the turmoil that has engulfed the oil and gas industry for more than two years. Initial signs appear to be positive - oil prices appear to have stabilised (at least for the moment), after an initial surge following announcement of the deal, and OPEC's members are taking steps to enforce the production cuts, which appear to be holding. Oman itself has agreed to cut production by 45,000 bpd and the Ministry of Oil and Gas has set daily production quotas for oil producing companies. The Sultanate has also been appointed to a monitoring committee established by OPEC in order to oversee implementation of the cuts in production.

So what does all this mean for those companies operating in the oil and gas supply chain? The general consensus is that oil prices will remain "lower for longer" and that market conditions will remain challenging throughout the short to medium term. In Oman, the good news is that large projects are still being commissioned, demonstrating a continuing commitment to develop the Sultanate's hydrocarbon industry. For example, in November last year BP and Oman Oil Company Exploration & Production signed an agreement with the Omani government to extend the licence area of the giant Khazzan gas field, which will bring the total cost of the project (including its initial phase) to over US$20 billion. More recently, oil and gas services specialist Petrofac has been awarded a US$600 million EPC contract by Salalah LPG SFZCO LLC for the new Salalah LPG extraction project.

Oilfield service providers (and indeed any business connected with the supply chain) will undoubtedly continue to have to battle against a variety of different challenges from payment related disputes, redundancy situations created by cost-cutting measures and general difficulties with cash flow. However, there are certain measures that can be implemented in order to mitigate risk in these areas and, in some instances, opportunities to increase market share may present themselves.

Dentons has operated in the Sultanate of Oman for 35 years (and in the Middle East for over 80 years) and has extensive experience in servicing the oil and gas market for exploration and production...