Drop In Oil Prices Research Articles

E&P Notes (August 2020)

E&P Notes (August 2020)

Theoretical review on critical risk factors in oil and gas construction projects in Yemen

PurposeThe oil and gas construction projects are affected negatively by the drop in oil price in recent years. Thus, most engineering, procurement and construction (EPC) companies are opting to optimize the project mainly to mitigate the source of risks in construction to achieve the project expectation. Risk factors cause a threat to the project objectives regarding time, cost and quality. It is additionally a vital component in deviating from the client's expectation of productivity, safety and standards. This research aims to investigate the causes of risk in the oil and gas construction projects in Yemen.Design/methodology/approachA comprehensive literature review from various sources including books, conference proceedings, the Internet project management journals and oil and gas industry journals was conducted to achieve the objectives of this study. This initial work was predicated strictly on a literature review and the judgments of experts to develop the risk factor framework for the oil and gas construction projects in Yemen.FindingsThe authors found a few studies related to risk factors in oil and gas construction projects and shared a similar view about general construction projects. However, only a fraction of the factors accepted have included the variances of other studies on a regional basis or specific countries, such as the Yemen situation, due to the differences between the general construction industry and oil and gas industry. Moreover, the factors of these attributes were still accepted due to their applicability to the oil and gas industry, and no significant variances existed between countries. Research has indicated that 51 critical factors cause risks in the oil and gas construction projects in Yemen. Such risk factors can be divided into two major groups: (1) internal risk factors, including seven critical sources of risks, namely client, contractor, consultant, feasibility study and design, tendering and contract, resources and material supply and project management; and (2) external risk factors, including six sources of critical risk factors, namely national economic, political risk, local people, environment and safety, security risk and force-majeure-related risk factors. A risk factor framework was developed to identify the critical risk factors in the oil and gas construction projects in Yemen.Research limitations/implicationsThis research was limited to the oil and gas construction projects.Practical implicationsPractically, this study highlights the risk factors that cause a negative effect on the success of oil and gas construction projects in Yemen. The identification of these factors is the first step in the risk management process to develop strategic responses for risks and enhance the chances of project success.Social implicationsThe identification of risks factors that cause the failure of construction projects helps develop response strategies for these risks, thereby increasing the chances of project success reflected in the oil and gas sector, which is a main tributary of the national economy in developing countries.Originality/valueThis research is the pioneer for future investigations into this vital economic sector. Given the lack of resources and studies in the field of construction projects for the Yemeni oil and gas sector, the Yemeni government, oil companies and researchers in this field are expected to benefit from the results of this study. The critical risk factors specific to the oil and gas construction projects in Yemen should be further investigated with focus only on Yemen and its oil and gas industry players.

Pandemics and Oil Shocks

At the onset of coronavirus in January 2020, crude oil price was around $51.63 per barrel. But the subsequent spread of the virus across countries all over the world adversely impacted the day-to-day functioning of major industries, corporations, and economies. This adverse impact was amplified by the lockdown measures by governments who were justifiably concerned about the potential devastating effect of the pandemic. As the outbreak intensified, so did oil prices plunge into historic lows (at some point, negative). Is the precipitous drop in oil prices due to the COVID-19 pandemic or are there potentially other factors at play? In this paper, we investigate this question using a pentavariate structural vector autoregression (SVAR) model. Specifically, we identify an exogenous oil price shock arising from the pandemic together with the traditional underlying supply, demand, and financial market shocks to global crude oil markets. We find that a pandemic shock causes a delayed adverse effect on oil prices. In addition, our findings lend support to the view that changes in financial market conditions that affect financial investment decisions also play a significant role in oil price movements. There is however no evidence of a strong impact emanating from the brief Russia-Saudi price war. We also compute the forecast error variance decomposition and find that the impact of a pandemic shock together with aggregate demand and financial market shocks are not trivial in the short run. Taken together, the findings underscore the fruitfulness of research aimed at better understanding the effects of a pandemic shock on oil price movements and highlight the need for policymakers and market stakeholders to explicitly consider global health conditions when analyzing the causes and consequences of oil price shocks.

Comments: Tax Revenues Hit Hard by Downturn

While oil- and gas-related companies slash budgets and staff and operators pull back from production and exploration, the tax coffers of US local and state governments are shrinking fast and with hard repercussions. In North Dakota, taxes from oil and gas production in the Bakken were bringing in a whopping 53% of all tax revenue collected by the state. In March, the amount dropped by more than 50% from nearly $200 million to around $100 million. The effect on funding for education and other social services and infrastructure is significant. For example, the state’s 2-year budget included distribution of half of the total projected revenues, nearly $5 billion, to school districts and localities where the oil is being produced, i.e., the Bakken region. The rising unemployment rate in the state, which collects individual income taxes, will stifle budgets further. The US Bureau of Labor Statistics reported 8.5% unemployment in April, up from rates ranging from 2 to 2.4% over the previous 5 months. North Dakota’s revenue drop pales in comparison to Texas. The state’s oil and natural gas industry paid more than $16 billion in state and local taxes and state royalties last year, which was the highest total since tracking of the amount began in 2007 by the Texas Oil & Gas Association. Its report in January showed the 2019 amount surpassed the previous record of $15.66 billion paid in 2014. As recently as 2016, the revenue was $9.44 billion, and increased to $14 billion in 2018. During a conference call in April, the association’s President Todd Staples, said, “With production strained by prices, we may have additional bankruptcies and mergers and acquisitions as companies work to maintain a competitive [advantage]. Job growth may continue to lag further than we’ve enjoyed in recent years.” The Texas state comptroller Glenn Hegar said in April about 54% of the state’s general revenue during the current 2-year period would come from sales taxes. Although that’s the largest share of the general revenue, oil production taxes were forecast to account for 6.1%, and natural gas production taxes another 2.7%. In March, when the early effects of COVID-19 and the oil-price crash hit, Hegar said in a statement, “Certainly, Texas has exposure if oil prices remain depressed for a sustained period of time, and slowdowns in economic activity related to the COVID-19 outbreak could also be a headwind. We are still only 6 months into the current budget cycle, however, and it is too early to tell with certainty how current fluctuations will impact long-term economic performance and state revenues.” However, in May, Hegar’s office reported the oil production tax in Texas generated 75% less revenue for the state than last May, and the natural gas production tax was 76% less. All said, tax revenue from all sources was about 50% less than the same month a year ago. Cutbacks in budgets and spending extend far beyond those announced by operators and service companies soon after the oil-price drop in March. Our industry is by no means the only industry struggling and adapting. But when our industry falters, in this case during a sudden price drop combined with a pandemic, the dominoes topple quickly across related industries, individuals, governments, and society. Harnessing the freefall depends not only on the fiscal recoveries of businesses, but also on leadership in business, government, and us as individuals to build resiliency in order to weather a changed - and changing - global status over the long term.

Does the source of oil supply shock matter in explaining the behavior of U.S. consumer spending and sentiment?

In light of the U.S. shale oil boom and given that commercial shale oil production has been mostly confined to the USA, this paper disentangles the oil supply determinant into its U.S. and non-U.S. production components, and studies their impact on U.S. real personal consumption expenditures (PCE) and on U.S. index of consumer sentiment (ICS). First, I estimate a structural VAR model to identify and study the effect of structural shocks in the crude oil market on PCE and ICS. The results show that while PCE and ICS respond negatively to oil demand shocks, they respond differently to oil supply shocks. While ICS experiences transitory negative response to both oil supply shocks, PCE shows that the response of inflation and output differs depending on whether the oil supply shock is domestic or foreign. Second, I compute the forecast-error-variance decompositions to quantify the contribution of oil supply and demand shocks to the historical fluctuations in PCE and ICS. My findings reveal that most of the variation in PCE is explained by oil supply shocks—unlike ICS where most of its variation is explained by aggregate demand shocks. Third, I conduct a historical decomposition exercise to examine the contributions of structural oil shocks in explaining historical changes in PCE and ICS. My results indicate a strong presence of U.S. oil supply shock in boosting ICS during the 2014 period of the oil price drop. Finally, the results that not all oil supply shocks are alike are robust to alternative measures of real economic activity.

Effects of oil price fall on the betas in the Unconventional Oil & Gas Industry

We examine the consequences of the oil prices movements started in July 2014 on the financial systematic risk – proxied by Betas – of firms operating in the Unconventional Oil & Gas Industry, compared to that of the Conventional Oil & Gas players. The analysis is developed using two cross section regressions, performed before and after the 2014 oil price drop respectively. The results look coherent with the reasonable belief that a sharp and sudden decrease in the oil price can generally lead to higher Betas in the Oil & Gas Industry. Interestingly, it emerged that the market tends to attribute an additional risk to unconventional firms and, analyzing the regression coefficients evolution, it appears that this circumstance has been substantially amplified by the 2014 oil price shock. To our knowledge this is the first paper covering the topic treated.

Improvement of the mining technology in the diatomite mine, Algeria

Relevance of the work. After the recent drop in oil prices, which is Algeria’s main income, Algeria has been forced to increase production in the mining sector. Purpose of the work. Algeria seeks to increase the production of the Diatomite Deposit in the sig mine west of Algeria, but the geological conditions and geotechnics of rocks whose resistance to them is weak, are among the most important problems that hinder the increase in production. The currently used room-and-pillar development system does not meet the mining conditions of the development of the Diatomite Deposit, the conduct of preparatory and cleaning works is constantly accompanied by collapses of roof rocks. Results. To ensure an increase in productivity to 100 thousand tons of Diatomite per year and above, it is necessary to reequip the mine with a change in the technology of the method of its production. Conclusions. The introduction of a longwall development system with a mechanized treatment complex, which is widely used in the coal industry, will significantly help to increase Diatomite production, ensure the safety of underground mining operations and increase the resource efficiency of the field.

Do oil and gas price shocks have an impact on bank performance?

The paper examines the impact of oil and gas price shocks on bank performance in the major oil and gas exporting GCC countries, using data for the period 2000–2017. Results indicate that oil and gas price rises have a direct bearing on bank performance through the channel of price-induced bank deposits and related lending to business activities. The negative impact on bank performance due to a drop in oil and gas prices is greater than the positive effect of a rise in prices. Findings suggest that oil and gas price volatility has an asymmetric effect on conventional and Islamic banks. Conventional banks reap more benefit from the increased cash flow created by oil and gas prices, compared to Islamic banks. While Islamic banks are generally vulnerable to adverse oil and gas price shocks, conventional banks tend to benefit more from positive oil and gas price shocks. The association between oil and gas price shocks and bank performance in GCC has been distorted by the global financial crisis, the Arab Spring, and the ongoing Yemen War, which have lowered performance. The findings of the study have significant policy implications for the central banks as well as the governments in the oil and gas-exporting countries.

The economic crisis of 2020: Reasons, policies to deal with and further development of the Russian economy

At the beginning of 2020, the world community has faced the problem of the coronavirus, which, in the context of significant globalization of the world economy, quickly spread from China around the world, leading to a sharp slowdown in global economic growth. For Russia, the consequences of the pandemic, in addition to the decrease in export demand and strict quarantine measures, are compounded by a sharp drop in oil prices in the face of difficult negotiations with OPEC + and the need to limit oil production. All this necessitates active anti-crisis policy, which should include not only the support of the affected economic agents, but the intensification of different structural reforms aimed at accelerating the potential (structural) economic growth rates. At the same time, the possibilities of a significant fiscal stimulus are narrow due to the contraction of government revenues, limited borrowing opportunities and the rapid depletion of the National Welfare Fund in the event of a prolonged coronavirus pandemic.

The impact of oil shocks on the Russian stock market: an empirical study

The paper is devoted to the study of approaches to assessing the impact of external macroeconomic shocks on the Russian stock market. A sharp drop in oil prices (oil shock) is considered as a macroeconomic shock. The analysis of possible approaches to solving this problem is carried out, and their theoretical generalization is given. Based on an extensive sample of daily values of prices for Brent oil and the Russian stock index RTS for the period from 1998 to the first half of 2020, a study was conducted on the dependence of the domestic stock market on the global oil market. An approach to assessing the impact of oil shocks based on the use of vector autoregression models (VAR-model) is proposed. The VAR model has been developed and tested for the Russian stock market, its capabilities and limitations have been shown, and practical recommendations for its further development have been provided.

Hard Times in Canadian Oil Could Be Useful Experience

Combine a pandemic, plunging oil demand and prices, and a deep recession, and then consider how it may change things. It is not a question Steve MacDonald can answer, but the chief executive officer for Emissions Reduction Alberta (ERA) said it can be a useful way to get people to consider how things can change in un expected ways. “If you said to someone 4 months ago that oil could go to negative prices, they would say, it’s not going to happen. The range of what could happen is much wider now,” he said. A recent decision by the $1-trillion Norwegian Wealth Fund to exclude four major oil sands companies saying they have “unacceptably high greenhouse emissions” shows the need for change. The headlines in Canada have been harsh - the rising death toll from COVID-19, oil prices flirting with zero, job cuts, and the slow and unpredictable timeline to normal life. “Everything you’re hearing is true. It’s bad,” said Darcy Spady, but the 2018 SPE president is quick to add, “I see a ray of sunshine.” There is a connection between the bright and the dark sides, and it is forcing leaders from both inside and outside the industry to take a hard look at what works and what does not. “The pandemic has merely accelerated the disruption that was already occurring in Canada’s oil and gas sector,” wrote Kevin Krausert, the president and chief executive officer of Beaver Drilling, in an essay in a national newspaper, The Globe and Mail. The essay addressed a long-term future in which the industry undergoes fundamental changes, ranging from research into ways to make hydrogen fuel from gas to drillers digging geothermal wells to provide renewable energy. But at the moment, it is difficult to get the attention of decision makers about the future. “It is hard to focus on anything but the here and now. Where the next dollar is coming from rather than from 3-10 years from now,” said Mark Scholz, president of the Canadian Association of Drilling Contractors. Staying Alive The dramatic drop in oil demand and prices can kill jobs, companies, and ideas. MacDonald sees that threat firsthand. “Liquidity is an issue for everybody, cash flow has been a challenge, the ability to secure investors,” are all issues now affecting those trying to scale up promising ideas. Soon after the economic impact of the sweeping limits that were imposed to slow the spread of COVID-19 became apparent, Emissions Reduction Alberta (ERA) changed its policy to allow increases in progress payments to companies during this period when cash is hard to come by and when some lenders are delaying the release of loan funds, MacDonald said. By reducing the amount of money held back from progress payments, ERA expects to provide 74 companies with $10 million more in cash in the near term. The payments may help client companies pay some bills at a time when they are struggling to line up funding and customers for the large-scale tests needed to prove ideas that worked on a smaller scale.

E&P Notes (June 2020)

E&P Notes (June 2020)

Transmission of shocks between bond and oil markets

PurposeThis paper aims at looking into the transmission of shocks between bond and oil markets using a bivariate GARCH (BEKK and DCC) model. As lots of financial assets have been exchanged due to these index returns, it is essential for financial market participants to figure out the mechanism of volatility transmission through time and via these series for the purpose of taking optimal decisions of portfolio allocation. The outcomes drawn reveal an important volatility transmission between sovereign bond and oil indices, with great sensitivity during and after the subprime crisis period.Design/methodology/approachIn this context, we propose our hypotheses. Indeed, our study aims to see whether the financial crisis has been responsible for the sharp drop in oil prices since October 2008. To this end, we suggest, in this paper, the empirical study of the shock transmission between the bond and oil markets, using BEK-GARCH and DCC models. To our knowledge, this is the first document using the BEKK-GARCH and the DCC models in studying the shock transmission between a sovereign bond and oil indices.FindingsWe have noticed that in the event of a disruption in the bond market, oil prices respond to these shocks in the short term. It has also been emphasized, however, that this relationship has exacerbated if the period has extended. This makes us conclude that the financial market situation affects the oil price only throughout the crisis period; and that this situation is causally significant only in the event of a severe crisis, such as those of subprime and sovereign debt.Originality/valueThe global financial system has been going through an acute crisis since mid-2007. This crisis, initially occurred only in the US real estate market, progressively affects the global financial system, and is now becoming a general economic crisis. The objective of this work is to analyze the effects of the current financial market disturbance on oil prices based on econometric models in order to promote the proper functioning of this study.

Russian geopolitical objectives in the current oil price crisis, and implications for Canada

Following the end of unsuccessful negotiations in March 2020 at OPEC headquarters in Vienna regarding oil production cuts, in the early March in Vienna (headquarters of OPEC), Russia and Saudi Arabia de-facto launched a prise war that resulted in a significant drop in oil prices (just as the COVID pandemic caused a concomitant drop in demand for oil), which in turn led to earthquake on the global oil market. As a result, prices of oil that plays an essential role for economies of both countries have plummeted to record lows no seen in two decades. While suffering economic losses, both countries, nevertheless, maintain an assertive posture and seem willing to pursue this policy even further. This paper examines the geopolitical logic of the Russian side – a country that has been placed under western economic sanctions since 2014 as a result of its illegal annexation of Crimea and destabilizing steps via proxy forces in the Southeastern Ukraine – and consequences thereof, particularly for Canada, as the price of Western Canada Select reached historic lows amidst a COVID-19 induced economic contraction.

Comments: In Just Three Months, Our Industry Changed

Editor's column It has now been nearly 3 months since the one-two punches of an unprecedented modern-day pandemic and a free fall in oil prices due to the oversupply of oil resulting from a tremendous, sudden drop in demand. The domino effects across the globe continue to evolve in economies, industries, and personal lives. West Texas Intermediate hovers around $20/bbl (as of mid-April) after starting the year in the $60s: a drop in oil price of two-thirds while global oil demand continues to sputter. The International Energy Agency (IEA) forecast the demand to be down in April by 29 million B/D, a nearly 30% decrease from the world’s daily consumption a year ago of 100 million B/D. It added that demand has not been this low since 1995. The US Energy Information Administration expects global petroleum and liquid fuels demand to decrease by 5.2 million B/D in 2020. As the saying goes, “You do the math.” The math was done by the world’s operators, oilfield services companies, and related industry players—and the answers in far too many cases resulted in necessary, hard decisions. Furloughs and layoffs were announced early on, and capital expenditures were slashed as much as 30 to 50%. In many cases, companies soon thereafter announced further cuts in personnel and budgets. An example of a weighty cut was Abu Dhabi National Oil Company’s (ADNOC) termination of two contracts worth $1.65 billion granted to Petrofac for work to be done for the Dalma gas development project located off the north-west coast of the Emirate of Abu Dhabi. The contracts were awarded in February; in March, ADNOC notified contractors and suppliers it would review existing deals to find ways to reduce costs due to the steep slide in oil prices. On 16 April, the deal was called off. Petrofac said it is committed to working with ADNOC over the coming weeks to explore “alternative options” for the work. The oil and gas industry has demonstrated resiliency many times over in its long history, and as it kicks off the first-quarter earnings season, its guidance calls will reveal the plans and actions needed to move forward in the near term. The uncertainty wrought by the repercussions of the pandemic and supply/demand imbalance has introduced a host of unknown factors beyond anyone’s direct control. But companies can directly control their operations and business practices and will be presenting their full-year 2020 outlook in coordination with the first-quarter results. Diligence and resilience, based on experience and hard lessons learned, go hand in hand and will guide each company’s best attempts to manage the unique unpredictability it faces today.

The distributive impact of terms of trade shocks: The case of the oil price changes in Russia

AbstractThe halving of oil prices, during a short period between 2014 and 2015, has generated major terms of trade losses for oil exporting countries. This terms of trade shock has economy‐wide effects and significant distributive impacts. This paper, using a macro‐micro simulation model, describes and quantifies the channels of transmission from the drop of oil prices, to changes in welfare distribution at the household level for the case of the Russian Federation. The oil price reduction generates a reverse Dutch disease impacting sectoral employment, factor returns and consumption prices. It causes a contraction of employment and wages in more skill‐intensive (non‐tradable) sectors, and a reduction in consumption prices that is more pronounced for non‐food than for food goods. When these shifts are mapped to changes in incomes at the micro level, all households are affected. Poverty rates increase by 1 to 4 percentage points, depending on the poverty line used. At the US$ 10 a day threshold, 4.1 million additional people fall into poverty. Along the consumption distribution, richer people are affected more than those in the bottom 40%. However, this minor progressive impact may be reversed due to increases in unemployment and cuts in social programmes.

Chad

This paper presents Chad’s Requests for Disbursement Under the Rapid Credit Facility, Extension of the Extended Credit Facility Arrangement, and Rephasing of Access. In response to the coronavirus disease 2019 outbreak, the authorities have taken strong measures to halt the community spread of the virus. They are also scaling up health-related spending and are considering a set of economic measures to support households and businesses. Given the sudden nature of the shocks and their widespread impact, the authorities will be temporarily relaxing the fiscal deficit to allow for the scaling up of health care spending and to accommodate the impact of the sharp drop in oil prices. In order to safeguard debt sustainability, they remain committed to the medium-term fiscal path and will implement the needed adjustment measures as soon as the current crisis abates.

Accrual earnings management in response to an oil price shock

The aim of this study was to examine the relationship between the oil price shock of 2014 and earnings management of oil companies listed on the Oslo Stock Exchange. The results revealed a significant increase in earnings management following the oil price drop. Moreover, we found that companies adjusted their earnings and abnormal income-decreasing accruals were identified during the third and fourth quarters of 2014. We attribute this finding to the big bath strategy. The contribution of this study promotes the understanding of the effect of macroeconomic shocks on earnings management behaviour, and it supplements and expands the earnings management literature in this homogenous industry.

Coronavirus hits former-Soviet countries

The year of 2020 started a new chapter in the development of former-Soviet countries. The coronavirus epidemic, which began in the Chinese city of Wuhan, has spread to affect all countries throughout the world, including the countries of the former Soviet Union. Its influence has already affected the economic and social development of the countries in the post-Soviet space. Closing borders, stopping tourism, and imposing severe restrictions on transport services were the first measures that contributed to reducing the incidence rates. At the same time, these measures affected bilateral and multilateral trade and economic relations among the countries of the post-Soviet space.All countries of the post-Soviet space have taken steps to allocate additional funds to combat coronavirus. Ad hoc funds were formed, the review of budget expenditures and revenues began. However, in fact in the first few months the countries faced economic distress, the overcoming of which could take considerable time.The coronavirus epidemic is taking place against the backdrop of global economic crisis and a sharp drop in oil prices. Economic development models based on increasing consumption without economic growth, increasing the level of external and internal debt have shown their insolvency. In these conditions, the countries of the post-Soviet space, which are highly dependent on the external factor, have also experienced significant economic hardships.Finally, the «price warfare» in the oil market has a strong influence. The United States and Saudi Arabia’s attempts to achieve dominance in the oil market, by displacing Russia from it, as well, have had a destabilizing impact on the world oil market. This factor has had a direct impact on those former-Soviet countries that produce and export hydrocarbon resources.In general, the coronavirus epidemic, taking place against the backdrop of global economic challenges and oil competition, will have a negative impact on the economic and political development of former-Soviet countries. The impact of the epidemic, its consequences, will affect the former-Soviet countries for many years to come.

The Labor Market in Norway: 2000-2018

Norway has a rather high labor force participation rate and a very low unemployment rate. Part of the reason for this fortunate situation is the so-called “tripartism”: a broad agreement among unions, employers and government to maintain a high level of coordination in wage bargaining. This has led to downward real wage flexibility, which has lessened the effects of negative shocks to the economy. Reduced net immigration, especially from neighboring countries, also mitigated the negative effects of the oil price drop in 2014. A potential drawback of tripartism is the difficulty of reducing employee absences and disability.