DNV finds improved confidence on rising efficiency and prices
March 29, 2018
A new survey highlights the growing sense of confidence in the oil industry, though services companies remain under pressure, writes Jeremy Bowden
A recent survey of senior oil and gas professionals conducted for assurance specialist, DNV GL, paints a positive picture of the sector and its prospects for this year. But a focus on margins is keeping things tough for some down the supply chain, and new technology is changing the way companies operate.
Those surveyed said they anticipate a sharp improvement in expenditure and research and development levels in 2018, with new research from DNV GL indicating confidence in the industry has doubled.
Among DNV GL’s survey respondents, 63% were confident about the growth prospects for the oil and gas sector in 2018, up from 32% reported in the previous year. But the figure still lags well behind the 88% level recorded in DNV GL’s research ahead of 2014, when prices were above US$100 per barrel.
Part of the rediscovered confidence is down to recovering prices, which respondents felt would be US$63 per barrel at the end of December 2018, which is higher than most forecasters are predicting.
The other key factor upon which the confidence is based is falling costs, which many respondents felt would enable commercial development of upstream prospects at far lower prices than in the past. “After three years of significant cutbacks in investment, the industry has accumulated many potential projects, most of which have lower break-even points than before,” it said.
Standardisation is one key area of cost cutting, with 87% of survey respondents saying they would increase or maintain spending on operations in this field in 2018. It said there were already examples of projects in the US Gulf that are “carbon copies” of similar projects. The report also noted that offshore investment cycles had been successfully reduced from about 10 years to five or fewer, partly to compete for funds with shale oil’s nine-month cycle.
However, the cost cutting has inevitably put pressure on some, especially in the service sector, with operators “on a seemingly relentless drive to improve their margins.”
This, combined with the smaller number of available projects, has squeezed the margins and revenue of those further down the supply chain.
Recent figures from McKinseys back this up, indicating an overall quarterly decline in oilfield service and equipment (OFSE) company margins in the fourth quarter of 2017, despite a continuing slow recovery in revenue. While 51% of respondents to the DNV GL survey said that overall prospects improved for their organisation in 2017, 24% had the opposite view and 24% were neutral.
Bigger is better
Size appears to be an advantage in the current environment, with 63% of respondents in large companies saying prospects had improved in 2017, against 47% in smaller operators.
Many of the least confident respondents were from smaller businesses, which suggests a divide between the biggest companies and the rest of the industry.
The report links this with analysis from Goldman Sachs, which predicts that the super-majors will “develop a 1990s-like domination” again in 2018, because cost-cutting and relatively low prices are keeping smaller players out of the biggest projects. “Over the past three years, the seven largest oil and gas companies have initiated 90% of mega-projects, compared with 50 companies that shared the largest projects over the 10 years before that,” said the report.
Respondents from large companies had significantly stronger confidence in both industry growth and the prospects for their organisations, compared with those from small and medium-sized enterprises (SMEs). For instance, 70% of those from large companies anticipate reaching their profit targets this year, compared to just 47% among smaller companies.
The report also found that respondents from downstream-focused organisations were more confident than those from other parts of the industry.
The oil-refining and gas-processing sector were most optimistic, with 82% confident about the industry’s growth prospects in 2018. Upstream companies were less confident about achieving profit targets for 2018 (49%) than those with operations throughout the chain (61%), or in the downstream (65%).
On a geographical basis, the industry’s growth prospects were said to be lowest in North America (57%) and Asia Pacific (57%), and highest in Latin America (77%), although confidence improved in all regions in 2017.
The survey also showed that a large proportion of the industry intends to increase investment – not only in its core business, but also in diversification opportunities, R&D and digitalisation.
Two-thirds aim to maintain or increase capex in 2018 – the first increase in three years and a considerable jump from 39% last year. Greater spending was most likely to be seen in oil refining and gas processing, with investmnent being driven by integrated companies and E&P firms. The biggest expenditure areas for R&D are anticipated to be digitalisation, cyber security and subsea.
Other trends emerging suggest the industry is coming to terms with the move to decarbonise the energy system and has embarked on a long-term energy transition, towards what the report called “a diverse mix of ever-lower carbon solutions.”
Gas is seen as critical to this transition, and the majority of respondents (86%) expected it to become an increasingly important part of the global energy mix over the next 10 years – up from 77% a year ago. The report also pointed to a growing independence for gas pricing. “More respondents than last year (55% to 45%) now expect oil and gas prices to decouple, which highlights a growing expectation of divergence in the supply and demand patterns of the two fuels,” it said.
While investment in oil and gas projects will go on attracting the most industry capital, the survey results also highlight “an ever-growing share for renewable energy sources within the portfolios of oil and gas companies.” This trend is highest in integrated and downstream companies where 65% are likely to invest in opportunities outside of fossil fuels, but still within the energy sphere.
Such opportunities include renewable energy generation, electric vehicle charging networks and biofuel synthesis. The report cites the example of French utility Engie, which sold its upstream LNG assets to Total in November 2017, following the sale of its E&P business to Neptune Oil & Gas earlier in the year. Similarly, Denmark’s DONG Energy, made a dramatic shift out of oil and gas in 2017 to focus almost entirely on renewables.
Blurring the boundaries
Beyond renewables, the boundaries of the sector are becoming increasingly blurred, with almost 60% of respondents from both integrated and downstream organisations saying they may invest in opportunities that are totally outside of the energy industry.
“This could include anything from waste-water management to industrial biotechnology. Royal Dutch Shell, for instance, has one of the world’s biggest retail networks through its fuel stations, with more sites than either Starbucks or McDonald’s,” said the report.
Overall the report is upbeat and should be encouraging to those investing and working in the sector, as well as those that rely on competitively priced energy.