How Do Low Oil Prices Affect the Engineering, Procurement, and Construction (EPC) Sector?
The Engineering, Procurement, and Construction (EPC) sector serves a vital role in the oil and gas industry, but how do low oil prices impact this sector? In order to understand these impacts, it is important to break down the various parts of the oil and gas industry and the different types of EPC contractors involved.
The Divisions of the Oil and Gas Industry
Downstream: This sector involves refining and selling the crude oil into gasoline and other fuels. Upstream: This includes extracting the crude oil from the earth, whether it be subsea, surface, or shale. Midstream: This part of the industry focuses on the transportation of crude oil to refineries via pipelines or FPSOs (Floating Production, Storage, and Offloading units).All these sectors have their own EPC contractors who work on varying projects. The impact of low oil prices on each of these sectors can be different, making it challenging to provide a blanket answer to how the EPC sector as a whole is affected.
Upstream: The Challenges
The upstream sector is particularly vulnerable to low oil prices. The cost of production for different types of oil, such as subsea, surface, or shale, varies significantly. As a result, low oil prices negatively impact EPC contractors in this sector because their clients receive lower prices for their oil. This can lead to reduced revenue and profitability for EPC companies that are contracted for upstream projects.
Downstream: The Profit Opportunities
Conversely, the downstream sector can benefit from low oil prices. These are the refineries that purchase crude oil on the open market and refine it. During times of low oil prices, they can purchase crude oil at a lower cost and store it. The sale of refined products happens two years later, when oil prices are likely to be higher in the retail market. This creates a pricing advantage for the downstream EPC contractors who can negotiate better deals and provide cost-effective solutions.
The Complexities of Oil Trading
The EPC sector's response to low oil prices is further complicated by the intricacies of oil trading. Oil is traded on stock exchanges like Brent and WTI, and contracts are often based on future oil prices two months ahead. This means that the price of crude oil can be influenced by factors such as supply and demand, geopolitics, and market speculation. As a result, EPC contractors must stay closely aligned with these markets to understand the true impact of oil price fluctuations on their projects and clients.
In conclusion, the impact of low oil prices on the EPC sector varies widely depending on the specific part of the industry and the type of projects involved. While the upstream sector faces challenges, the downstream sector can find opportunities. Understanding these dynamics and staying informed about global oil markets is essential for EPC contractors to navigate the complexities and ensure long-term success.