Eight of the 10 largest companies in the world by revenue make their money by sucking oil out of the ground. Clearly, it's an industry with huge pots of gold but, on the flip side, the risks are so big and difficult to manage that even the largest oil majors are just a step away from financial ruin.
As a result, chief financial officers working in the industry face an extraordinary set of challenges, from attempting to mitigate that huge bucket of risk to managing capital projects with a budget that can often resemble the GDP of a small European country. It's certainly not for the faint hearted.
As an oil industry veteran of more than 30 years, James Dewar is in a better position than most to talk about some of those challenges. Having spent 27 years with BP in a variety of senior finance roles, Dewar went on to become the group CFO of Dana gas, the largest publically owned oil and gas company in the Middle East, before taking on his current board roles at Canada-based East West Petroleum and Nigeria-based Seven Energy.
As a result, he's experienced all aspects of the industry – refining and marketing, trading, petrochemicals, retail and exploration and production (E&P); as well as several different regions. He has, in his own words, been around the block a few times.
Dewar sees the current climate – with sustained oil prices in the region of $90 - $130 a barrel – as having both positive and negative effects. "It represents opportunities and challenges," he says.
"The opportunities are that some of the [projects] in the past that were not deemed to be commercial ... become commercial. [But] it also brings challenges, in that when oil prices are high, the contractors who are in that space tend to be in high demand as well. There's a natural inflation."
But the high oil price has had another unwelcome by-product – the long arm of the taxman. Bruised by a slowing economy, an embattled high street and rising unemployment, chancellor George Osborne has had to be a little more creative in the search for the billions of pounds required to fill the gap in the UK's finances and, as a result, his head has been turned by the riches on offer in the North Sea.
A double edged sword
The introduction of a tax hike from 20 percent to 32 percent on production may have seemed like a good idea at the time, but the instant kickback from the industry, which saw ConocoPhillips, Total and ExxonMobil put up for sale at least some of their North Sea assets and Statoil halt work on two major projects, suggested otherwise.
The events illustrated a couple of points very well – the oil industry doesn't like to be pushed around, by anyone; and the capital projects that oil majors enter into are hugely complex, with even small changes in financial circumstance threatening to render some projects unviable.
"If you were to speak to the top E&P companies looking to do business in the UK, they would say – I think – that the high oil price is great but the government needs to look at the overall tax and royalty take," says Dewar. "If they make it more of an incentive for the companies to invest, then they could create some growth and employment in the UK. These conversations need to take place."
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