The stall in new capital investments into infrastructure born out of a 60 percent drop in oil prices and the Chinese economic slowdown combined will likely continue straining non-OPEC oil and gas producers, as the “ECS industry has not yet fully recovered from the blow” of the financial crisis according to the latest report on engineering, construction, and services (ECS) from the Boston Consulting Group (BCG), but the infrastructure sector as a whole could benefit from the slump.
The firm's third annual report said, “A sustained slump will likely spur increased M&A activity as ECS companies build scale and attempt to diversify their order books beyond oil and gas projects.”
“ECS companies with high exposure to oil and gas and mining will struggle as they adjust to slower growth in these segments,” the report said. “These players will be compelled to pivot away from oil and gas and mining to other sectors such as infrastructure, which is expected to be positively affected by lower oil prices.”
Hit especially hard by the oil price slump, however, are non-classical sources of production, or rather non-OPEC oil producing countries. These nations, which now combined only comprise about 40 percent of the world's oil markets according to the US Energy Information Administration, face what BCG principal Santiago Ferrer called an “endurance challenge” while speaking at the CG/LA Infrastructure North American Leadership Forum in Washington, DC this week, as those nations struggle to withstand the strain of oil prices that are too low to attract new capital investments.
“Oil prices are down around 60 percent and the key that's driving this is the same oil economic lull of supply and demand, and right now there is far too much supply for the demand. Unless that changes anytime soon, and it doesn't seem like it, we'll still see depressed oil prices going forward. And the recent news of China and their slowdown there means we'll expect to see this for a little while.”
“Obviously there is a lot of different factors at play, some of them are economic and some political, but if you look at this three possible movements around a fast-paced rebound, cyclical recovery or sustained pain. At the moment, at least from my humble opinion it looks like a sustained pain,” Ferrer said.
BCG does expect the price of oil to rise again to the $60 to $70 per barrel range, which would turn the tides on oil and gas development, which is currently experiencing a lull in new capital investments, with the majority of investments into the sector currently going to operations and maintenance (O&M) operations.
“Really the growth and a lot of what's being invested in is really O&M expenditure and not capital expenditure,” Ferrer said. “Obviously that's a bad self-fulfilling prophecy, because if you don't invest in capital then you need to invest more on O&M in the long term.”