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Risk factors amid volatile prices; INVESTORS.

Byline: Ewan Neilson

There are contrary views on forward oil and gas prices.

Some analysts believe that US/ Chinese trade disputes, European political and financial contagion, projected increase in US shale and potential surplus of oil stocks worldwide will drag down the price over the next 12 to 18 months.

The contrary view is that political tensions in the Middle East, a US shale bubble about to burst, a lack of capital expenditure in projects globally and a lack of investor focus on future energy supply will increase prices.

The price of oil could be anything between $30 to $100 a barrel. The response of finance directors and treasury departments in large operator companies will be interesting to watch.

There is an expectation that institutional investors may require a premium above normal rates of return for investing in such companies and projects.

This is driven by investors' clients, as investors themselves are challenged on climate change, environmental health and safety and governance and competing opportunities in other sectors.

There is in some places practice of risk management which addresses volatility in oil prices, political disintegration and unknown unknowns by taking the conservative position of reducing risk by believing that bigger is better.

Finance directors and treasury departments may be tempted to offload risk by employing only Tier 1 contractors, instructing only blue-chip advisers, reining in capital projects which do not lead to short-term production goals and relying on established technology.

They sometimes appear to present business models which are hedged, insured, engineered by large-scale corporates and verified by blue-chip finance advisers to present as risk-free.

With increasing monopolies, globalisation of products and services, capital allocation towards intellectual data and digital products, one survival plan is to be prudent, conservative and non-risk taking.

However, the industry is about prospecting, production, politics and applied technology. Small and medium sized technology companies, advisers and enterprises can keep down prices, introduce competition and stimulate diversity, risk taking and entrepreneurship - which Tier 1 companies and operators ultimately depend on due to their more conservative market approach.

Outside the big stands at Offshore Europe 2019 will be smaller companies operating in difficult climates with a lack of capital resources, hungry for business and with an appetite for entrepreneurship, risk taking and diversity. Operators and Tier 1 contractors may consider whether a conservative model where all risk is hedged and insured in elaborate business models in big corporate supply chains which exclude small and medium-sized companies (because they are perceived to represent risk itself ) leads to the ultimate unchallenged risk. That risk is that they are overtaken by new, disruptive technology not contemplated by a carefully-crafted business model or that investors lose interest due to lack of risk-taking and failure to provide the opportunity for investors to take some real risk and gain some real upside.


Ewan Neilson, partner, head of energy, Stronachs

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Publication:The Press and Journal (Aberdeen,Scotland)
Date:Sep 2, 2019
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