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Editorial comment

Those looking for clarity on the outlook for the oilfield services this year might well have good reason to be bearish, in the short term at least. The turbulent nature of energy and financial markets has persisted into 2009 and has had a dramatic impact on the capital expenditure plans of all exploration and production companies.


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Those looking for clarity on the outlook for the oilfield services this year might well have good reason to be bearish, in the short term at least. The turbulent nature of energy and financial markets has persisted into 2009 and has had a dramatic impact on the capital expenditure plans of all exploration and production companies. After a sustained period of growth, the spending patterns of major oil companies are contracting as they respond to a sharp decline in commodity prices, constrained cash flows and challenges faced in the global credit market. The current economic climate is extremely difficult and E&P companies are having to constantly review and adjust their budget forecasts for offshore projects with some delayed or even cancelled.

Participants in the oilfield equipment and services sector, like any other sector, have two sources of external finance available to them, debt and equity. The financial crisis has made capital scarce and many banks have become unwilling or reluctant to participate in debt markets. The decline in available credit for companies that have been financed by banks who no longer have the capacity to lend will find it increasingly challenging to operate under these circumstances in what is inherently a capital and asset intensive industry. The oil and gas sector is no exception. Its reliance on debt markets to fuel its expansion has meant that a number of companies are feeling the effects of global financial constraints.

However, there remains a positive perception around the majority of larger NOCs and IOCs that it is essentially ‘business as usual’ in terms of project progression, despite the ongoing situation of lower priced oil and reduced availability of credit. What is less clear are the short term implications faced by the numerous smaller players and independents. Global debt markets remain in a state of distress and the ability to secure finance to maintain operations and for investment in the oil and gas industry continues to present problems for all companies. In the longer term, when the global economy recovers, it could become a much wider problem if the oil industry is unable to produce the volumes of oil required to meet demand due to inadequate investment in the industry coupled with a reduction in the number of the smaller supporting players providing equipment and services. The result of these outcomes is likely to be higher oil prices and constrained economic growth.

We expect overall offshore capital expenditure (CAPEX) to fall by approximately 3% in 2009 from the previous year to US$ 152 billion. However, the long term prospects for offshore expenditure are good. We believe that, despite reported falls in consumption of oil and refined products, there is still a very real supply and demand imbalance brewing that is likely to result in another supply crunch in the future. Extracting hydrocarbons is becoming increasingly difficult and the expenditure on oilfield services to recover each marginal barrel will only increase as a result. Ultimately we anticipate that overall offshore CAPEX will recover in the next two years and by 2013 could exceed US$ 190 billion. A long term view is vital - those that are able to weather the current storm and position for the future will reap the rewards.