Oil, Gas Industry Confidence Bounces Back: DNV GL (Update)
(Adds comments from interview with VP Oil & Gas, Graham Bennett)
After three years of spending cuts and freezes, oil and gas industry executives can now see bright prospects for growth. Two thirds (66%) are saying their company will maintain or increase capital spending in 2018, compared with 39% last year. That will feed through into higher capital and operating expenditure as well as research and development spending, according to new research from technical advisors DNV GL published January 25.
‘Confidence and Control: the outlook for the oil and gas industry in 2018’ is DNV GL’s eighth annual report providing a snapshot of industry confidence, priorities and concerns for the year ahead. More than a third (36%) of 813 senior sector players surveyed expect to increase spending on R&D and innovation in 2018: the highest level recorded in four years. Digitalisation (37%) and cyber security (36%) will form the principal areas of R&D investment focus this year, it found.
There are however five key barriers to growth, with each given roughly equal weight: these are lack of investment in innovation (19%); oversupply of oil and gas (19%), operating costs (18%), reduced exploration activity (19%) and competitive pressure (22%).
“Our research indicates that the oil and gas industry is becoming more confident that its successful focus on cutting costs and building new efficiencies into the value chain will last. A new optimism is now emerging, driven from a common understanding that cost levels are under control and operators can make reasonable margins from an oil price that is expected to stay lower for much longer. The winners in our industry this year are those who can continue to make a clear shift from an expansion mindset to a margin mindset, and recognize the importance of implementing new models and technologies to improve operational efficiency,” said DNV GL's head of oil and gas, Liv Hovem.
Half the respondents (50%) are, as last year, keen to increase cost control measures in 2018, suggesting permanent new discipline in the industry. Close to two-thirds (62%) believe that these are permanent changes, mirroring the results from last year’s survey (63%). This may suggest that the industry is going through a sustainable period of change, it said.
Oil prices and the upstream
Stable oil prices with ageing assets and smaller field developments means that more mergers and activities, and most of those in the North Sea, will be funded by private capital, not by the majors using their balance sheets, DNV GL's vice-president for oil and gas, Graham Bennett, told NGW on the eve of the report's publication.
"Peak oil may happen in the mid-2020s, but we still need to replace what we consume every day, as we will have to service the demand; and demand decline won’t set in until the mid 2030s as EVs and FCEV’s make bigger inroads. So we see the continued need for new E&P. Gas is a more international market, which is less constrained than OPEC controlled oil, and there are more outlets for it, so there is less global market control. However FLNG developments are more expensive than an FPSO for oil and there is an increased risk of stranded gas assets.
"The oil price has gone up faster than most forecasters expected and could still go up further. It has been close to $70/barrel (Brent) since the end of last year. The next few years will see companies remaining cost-conscious as they have to pay back loans and stabilise balance sheets. There has been a lot of consolidation both in the operators (Total and Maersk for example) and the supply chain (Wood Group and Amec Foster Wheeler for example). Many of the new buyers on the UKCS are being backed by private capital and they are much more beholden to the banks. They will retain tight cost control to be viable at $50/b Brent, but enjoy the upside of $70/b to repay their debts. Cost inflation is unlikely to be allowed.
"With Opec and Russia being disciplined and cutting back production until the end of this year, oil flows to market have been restricted, but the gas market is not so well globally organised so prices are diverging. There is an excess of LNG acting as a relief valve keeping hub prices down. With LNG, we expect more of the small-scale FLNG projects that are quicker to market, not the giant Preludes, despite the “design one, build many” strategy of Shell," he said.
"We have given approval in principle to several new technologies: Brystad Energy Management and Dreifa are both developing barges for offloading LNG and generating local power. In these cases the LNG is only partly going into the grid: some of it will go into power generation and some into local bunkering operations or for trucking to the customer. This confirms the flexibility of gas, improving the economies of countries that need baseload electricity, not intermittent renewables," he said.