2017 oil and gas trends: More of the same?
- Written by Vlad-Adrian Iancu
Some people would say that the oil and gas industry is somewhat cyclical. Long periods of prosperity are followed by periods of crisis and vice versa. There’s no secret that for a couple of years now the industry has been lacking in the profit department. Everyone has been struggling to make ends meet however they saw fit. Or at least this is what they have been telling us. So, when looking forward, one dangerous question rears its ugly head: Will 2017 be a rehash of 2016? Will companies be faced with the same hardship or will we finally see the light at the end of the tunnel? Some analysts and people in the know tend to favour the hypothesis that we are now in the ‘recovery’ phase. Meaning we have learned how to take a punch and we’re ready to hit back. Investment and innovation seem to be the main weapons but we must have the courage and consistency to implement them. But we already know this, it is old news. Fact of the matter is that by now the industry has gotten used to being so pressured that it will continue to act so even if opportunities do appear. If 2017 proves to be radically different this will present an even greater challenge.
The catchphrase of choice seems to be ‘risk management’. Even though prices seem to be recovering they are still far from what they used to be. Due to cutbacks, the companies will find new investments a tricky affair. Every step will need to be calculated and recalculated. We still have the model of the cost reduction period that saw the industry lose about 400,000 workers and cancel several unprofitable projects. But these measures, helped by the process of improving efficiency, proved to be exactly what the doctor ordered. Of course, they were useful then, but how about know? According to PWC these measures were essential in navigating the crisis and we are just now seeing the results: “A growing number of projects can break even at oil prices in the high USD20s. One good example is Statoil’s Johan Sverdrup field in the North Sea, where the break-even price of development costs has been reduced to around USD25 per barrel. That would have been unthinkable a few years ago.”
The new price gains are expected to remain in place and eventually balance the supply and demand cycle. A spike in oil prices might even be possible and this of course will attract more traders which will again build up prices. But this constitutes an uneasy alliance and companies need to be wary of that. The good news is that not only the big international oil companies will benefit from this but also the oil-field service providers can finally break even. In what pertains to the upstream sector this might prove to be a balancing act between keeping the development prices down and investing in new digital initiatives to replace the knowhow and man power they lost in the personnel cutbacks of 2014. Seeing as this is more of a transition period than a full recovery, it is high time that the underdogs started biting off a piece of the pie. According to PWC, Latin America could be the next oil hotspot, with new domestic business creating employment opportunities.
In order to navigate this uncertain period, PWC developed six strategies to see you through 2017. They highlight the fact that preparedness will be a deciding factor in this affair as these couple of years have certainly proved that oil companies need a clear strategic profitability plan for all scenarios. The focus, they say, has shifted from values like production growth and reserves to profitability and capital efficiency. For companies that used to focus on production volume targets this may come as a hard reset, especially for their internal organizational structure. The next goal would be diversification of services provided. It will most likely prove difficult for the big companies to compete in all areas and this is where smaller, specialized companies will move in. In terms of capabilities a harsh selection has to be undergone and only essentials will make the cut. Furthermore, this specialization will seriously shift the balance between big oil companies and contractors. New ways of collaborating and managing an oil or gas field have to be thought of in order to ensure that the job goes to the best prepared entity. A good example is BP’s alliance with exploration specialist Kosmos Energy where the bigger company is technically partnering up with its smaller competitor. The era of one company exercising full control over all their assets might be at an end as no business may stretch that far. Another important direction should be the reassessment of portfolios in order to ensure the company is going in the right direction and has the right traction. Nothing would be more harmful than sticking to a project that does not match your capabilities. In anticipation of the low-carbon environment, companies may choose to make the switch now to specific technologies. It will be surprising but also entertaining to see long running oil and gas companies making the jump towards renewable energy. New asset dealing and buying is also back on the table with the barrel price stabilizing around USD50 per barrel as well as new opportunities for successful mergers and acquisitions to keep up with the fluidity of the market. Furthermore, the name of the game is still going digital and companies that want improved efficiency and innovation will have to commit to the trend at one point or another. As explored in a recent interview, robotics is set to become a staple of the industry. Last but not least, the oil and gas industry must finally refocus its attention on the most important resource: talent. Going through the restructuring and downsizing phase, many veterans were deprived of their jobs and new recruits regretted the day they chose this field. Seeing as things are finally looking up it would be a missed opportunity not to start recruiting fresh and up and coming minds to carry the industry forward.
Prices may be going up, what about demand?
A variable that has been popping up in recent years is the energy one and more specific electricity. According to BP: “An extra 100m battery-electric vehicles could lower oil demand by around 1.4 Mb/d in 2035”. Autonomous vehicles, car sharing and ride pooling will have an impact on both energy and oil demand. This is certainly something to consider as the world could be on the verge of a mobility revolution. Two scenarios have been offered in this instance, one dealing with the digital revolution and the other with the electrical one. The first scenario builds on the premise that the technology for autonomous vehicles, car sharing and ride pooling progresses faster than reductions in battery costs and electric vehicles. All this would eventually reduce oil demand but at the same time lower the price of car travel making it more accessible and hence more reliant on oil. In the other scenario, all car travel is implemented with electric vehicles thus eliminating the need for oil altogether.
But let’s not get caught up in theories here and lose the main idea. The IOGP is adamant on this thing: “The world will continue to rely on oil and gas for decades to come – even as we all travel along the path to a lower carbon future.” If we are to give credit to them and the IEA, we may rest assured that global oil demand will grow by 2040 boosted by the population growth and energy requirement. The most likely scenario is that governments will start developing their energy sectors by using current and future policies agreed upon in the COP21. Again, according to the IEA, the consumption for natural gas is likely to increase, accounting for 24% of energy use by 2040, but renewables will still have the biggest development in the primary energy mix. Coal will be left out of the equation, as the least attractive option. OMV is also committed to this switch: “However, we are certainly committed to working on energies of the future, such as hydrogen for example,” explains Wolfgang Ernst, from the strategy department.
As ways of producing this resource they have listed biomass and artificial photosynthesis.
Seeing as 2017 is actually here, the time for strategies may be over and action has to take the forefront. A cumulated 44 trillion USD investment by 2040 is no easy feat, but it may prove to be a necessary one. The track record is not in our favour and if 2017 is going to be another low investment year this may start yet another bad cycle for the industry just as it seemed to be recovering. Considering that limiting CO2 emissions will have to be observed as well we can surely state that this year will pose some issues to all oil companies, be they established majors or up and coming starters. It is up to them, all of them in the industry to give us a definitive answer to the burning question: is 2017 just more of the same?