Instability in Global Financial Markets, Decline in Oil Prices, Credit Crunch and Weak Energy Demand have Impacted Investment Plans of Oil and Gas Companies
Online PR News – 04-December-2009 – – The current financial crisis has put immense pressure on cash flows of companies by lowering commodity prices and making external finance difficult and expensive for these companies to access. The diminishing expected rate of return on projects due to volatility in crude oil price, coupled with lack of funding support for projects due to tightening of credit markets are the major reasons for decline in capital expenditure in the last quarter of 2008 and expenditure plans for 2009. Reduction in expenditure has led to lower exploration and production activities. Under such circumstances, most oil and gas companies will prepare their capital budgets more realistically in line with their internal cash flows.
Since mid-2008, instability in financial markets followed by a global economic slowdown coupled with a sharp decline in oil prices has led to an uncertainty in the oil and gas industry worldwide. Demand for oil reduced by 2.5% in the last quarter of 2008 and an additional 3.6% in the first quarter of 2009. Weak oil demand followed by plunging oil prices has made investments in oil and gas projects less profitable and unattractive. Moreover, the cost of construction and equipment cost has not dropped down to the levels of oil prices, leading to tightening of cash flows of oil and gas companies. Volatility in oil prices and deteriorating market sentiments has held back expansion plans in supply capacities, which has adversely affected capital expenditure in oil and gas projects. This, in turn, has led to extended periods of excess capacity or supply shortages, which has fuelled further volatilities.
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