U.S. a ‘swing producer’ in balancing O&G market

The oil and gas industry is looking to the U.S. to reduce production to help stabilize oil prices as the industry looks to find its footing after a volatile 2015.

By Oil & Gas Engineering April 5, 2016

After a volatile year in the oil and gas market, there are signs the industry is stabilizing, albeit at levels below where the market was in 2015. Oscar Abbink, senior principal researcher in the energy division at IHS Research, talked with Oil & Gas Engineering about the market’s current state, and its future prospects:

Oil & Gas Engineering: Assess our current global situation with oil and gas exploration and production (E&P). After a year of declining oil prices, do you see an improvement for the oil and gas sector on the horizon?

Abbink: With 2016 a rebalancing year, oil prices will remain depressed. Even with the slow recovery from the sub-$30 nadir, prices are hovering around $40 a barrel as of mid-March 2016. These price levels continue to constrict oil companies’ investments, and have resulted in a 27% reduction in exploration and production (E&P) spending between 2014 and 2015.

There is little indication of an uptick in E&P investment in the short-term, with producers focusing efforts on minimizing costs and maximizing production from existing wells. Combined with rig stacking, which is a result of excess capacity, the near term prospects remain negative-with many projects being either postponed or cancelled entirely.

We do expect an upturn towards 2020 in line with improving oil prices. Delayed projects should start to come back to the drawing board in 2017-2018, with spending rebounding in 2018-2020. However, recovery will be protracted, with E&P capital expenditure (CapEx) not expected to return to its 2014 levels until 2019.

OGE: Many factors appear to drive the oil price such as economics (supply and demand), politics, and speculation. Given that we think we can manage economics a bit better than the others, what does that mean for the near-term?

Abbink: When OPEC announced that it would freeze its current rates of production and with Iran introducing about 400,000 barrels per day to the market by mid-2016, the market will be well-supplied in 2016.

To balance the market, supply will need to come down and with no intervention from OPEC; it’s basically up to U.S. production as a swing producer to reduce production. In fact, we estimate that at present levels of demand growth, which is forecast to weaken in 2016, (demand growth) need to nearly double to bring markets into balance.

An area of additional concern in early 2016 is the greater fear of a global economic slowdown compared with a year ago. There are no signs of a global manufacturing upturn. Instead, many of the major economies, including China, Japan, much of Europe, and the U.S. are facing varied challenges.

OGE: All that being true, what’s the long-term view?

Abbink: The energy mix will not change quickly, but lower costs for renewable energy combined with environmental concerns increase the likelihood of lowering the share of fossil fuels over time. Increasing deployment of cost-competitive non-fossil fuel energy supply and targeted government policies will be required if fossil fuels’ share in the global energy mix is to fall. Fossil fuels have maintained a remarkably stable share at around 80% of the mix for several decades. The vast size of fossil fuel infrastructure in use today means the world will still consume fossil fuels in large quantities in 2040.

OGE: What are the specific pressures on the offshore market? How are those pressures different than onshore drilling?

Abbink: Both our offshore and onshore cost indices are down, 14% and 12% respectively. The pressure on offshore drilling is significant. Offshore drilling is more expensive than onshore drilling, and offshore developments, particularly in the deepwater, require large capital investments.

Onshore, the significant drop in activities in the North American unconventionals has led to a strong fall in demand for onshore drilling. Outside the U.S., the effect has been less dramatic.

In general, the industry is in a process of re-adjusting from growth to capital discipline. While oil prices were high the industries emphasis was on expansions into new plays (such as arctic, deepwater etc.), large expansions of workforces, and easy access to borrowing. Also when prices, and as a result profits, were higher the monitoring of minor incremental project spending was negligible.

However, new oil prices introduce new priorities, with oil companies targeting efforts around workforce and project portfolio rationalization and reducing and more closely scrutinizing budgets, as companies operate in survival mode.

With the current market conditions, producers are looking for a clear and immediate return on investment to justify spending, with CapEx and operational expenditures (OpEx) dictating the order of the day.

OGE: What’s one thing you think people overlook when they look at the oil and gas market? What’s the one bit of advice you’d offer for these days?

Abbink: During times of high oil prices the focus has been on exploration and expansion of production. In a financially restricted environment, companies are focusing on efficiency and cost reduction.

One solution may be the introduction of digital technologies-upgrading facilities to include elements of the digital oil field. This is a way of both significantly reducing costs quickly, and also setting up a company for success as oil prices recover.

The introduction of solutions such as greater connectivity and advanced analytics, along with other technologies such as the introduction of drones (e.g. for flare stack maintenance) can help reduce OpEx overheads dramatically within a year or less, reduce energy wastage (and costs), and improve visibility and maintenance of asset performance. Designing with high levels of de-manning of facilities can bring down CapEx costs significantly. A focus on technology now promises benefits for future growth and profitability as well short-term survival. IHS has documented only sporadic cases in the past.

Original content can be found at Oil and Gas Engineering.