Analysts have contrasting views on the effect of the oil price war between Russia and Saudi Arabia on long-term oil and gas projects in Papua New Guinea. David James considers these, and the likely impact on domestic petrol and diesel prices.

Credit: Oil Search

Since March 3, West Texas Intermediate, the global oil price benchmark, has fallen by 34 per cent. It has dropped by 49 per cent this year and is currently trading at US$31.33 a barrel. LNG prices have also fallen 41.2 per cent this year, according to Kina Securities.

The global oil price plummeted after talks failed at the March 5–6 meeting of the OPEC+ group (which includes Russia). It was expected that there would be an agreement to cut production by 1.2 million barrels per day to support the price. Instead, when the talks collapsed, both Russia and Saudi Arabia resolved to increase production, flooding the market.

‘If the oil price war is expected to be ongoing for a sustained period of time, we could see a change in the investment mindset for some companies’

The oil price had already dipped by a fifth in the lead up to the meeting.

‘The market was primed for a cut,’ David Lennox, Resource Analyst for Fat Prophets, tells Business Advantage PNG. ‘But it was the complete opposite – that is why there was such a debacle on the market.

‘It won’t last forever. It is a tiff between two pig-headed countries. Russia is playing a different game to what they have been for the last couple of years.’

Consequences

West Texas Intermediate prices in 2020. Source: Macrotrends

What are the consequences for the PNG oil and gas projects?

David Low, Senior Analyst for Woodside Mackenzie, says it could have a negative effect on investment sentiment.

‘I think the primary sticking point is still the P’nyang Gas Agreement for PNG expansion to move forward,’ he says.

‘However, if the oil price war is expected to be ongoing for a sustained period of time, we could see a change in the investment mindset for some companies, as it will have a pronounced impact on upstream related cashflow generation.’

‘The domestic impact of the oil price drop in PNG should be positive, however, with the prospect of lower prices for petrol, diesel and aviation fuel.’

Low says a sustained drop in the oil price and accompanying ‘sustained drop in cashflow’ would especially affect Oil Search (PNG’s only oil producer) and Santos.

‘For these companies, it could have material impact on their ability to invest – especially Santos who requires a US$60 per barrel oil price to sustain its current gearing levels and fund its growth projects.’

Investment plans

The current crisis in the oil market is being described by analysts as historic because there has been both a demand shock and a supply shock.

According to the International Energy Agency (IEA), global oil demand is expected to decline in 2020 as the impact of the new coronavirus (COVID-19) spreads around the world, constricting travel and broader economic activity.

‘Oil companies will be more concerned with the impact of COVID-19 (Corona virus) on forward forecasts,’ says Lennox.

‘If economic growth slows, the demand slows – the demand for oil will be part of that equation.’

Domestic prices

The domestic impact of the oil price drop in PNG should be positive, however, with the prospect of lower prices for petrol, diesel and aviation fuel.

This should provide a domestic economic stimulus, but Lennox observes that it depends on PNG’s currency, the kina, staying at its current levels. In Australia, he notes, the oil price fell but the Australian dollar also dropped, partially negating the effect of a lower oil price.

‘If the kina rises, and the oil price falls, you are in for a double bonanza.’

‘But I suspect that PNG will be fairly similar [to Australia]. If there is a big fall in the oil price, the PNG currency will probably also weaken, so they would cancel each other out.’

Lennox believes the oil majors will probably see the current price drop as only temporary; it is unlikely to affect their long-term investment plans.