Leave the worrying about the highs and lows of oil prices to obsessed analysts and headline writers. That volatile aspect of the energy business is largely out of the control of industry leaders. Instead, oil and gas companies (producers or refiners) whose strategic future is still a puzzle should be asking a couple of simple questions, mostly divorced from the cost of oil:
- Where do we go to lock in demand?
- Are we prepared to thrive in a business environment that is oversupplied?
If both questions are adequately — and, in some cases, fearlessly — addressed, oil and gas companies should be able to forge a pathway for success, no matter how uncertain the prices for their products.
The ground in the oil patch has shifted dramatically. The forecast for the industry is extremely different today compared with how it looked just a couple of years ago, when the fundamentals of the oil industry were controlled by cartels. That traditional structural discipline has been replaced by a systemic imbalance marked by vastly increased supply and receding demand growth. Global economic weakness (in particular, slower growth in China and continuing financial woes in Europe); tougher fuel economy regulations; more viable forms of alternative energy; and the development of extraordinarily efficient engines on equipment as varied as cars, earthmovers, and power plants have all combined to dramatically curtail the need for oil. Meanwhile, robust new reserves, especially of shale oil, in numerous regions around the world are glutting the market.
Little surprise, then, that the U.S. Energy Information Administration estimates that in 2014 the increase in the global supply of petroleum and other liquid fuels was almost twice the increase in consumption. That was a recipe for lower prices and shrinking profits. And it presents a troubling outlook for oil giants such as ExxonMobil, BP, Total, Chevron, and Shell that invested tens of billions of dollars in oil exploration when prices were high but did not enjoy a concomitant boost in production or profit margins. Though they’ve slimmed down by shedding unprofitable units and cutting back on investment more recently, these companies still face increased competition from an array of state-owned oil companies and independents.
Fortunately, the picture is a little bit brighter in the gas sector: Global demand for natural gas is expected to have risen by 2.2 percent per year by the end of 2019, according to the International Energy Agency. Yet although natural gas will likely continue to represent an increased share of the global energy mix, a share growing by 2.4 percent annually until 2018, analysts expect production to exceed demand in the short term.
Adjusting to the new reality
As oil and gas producers examine questions about locking in demand and thriving during a period of oversupply, they will inevitably also ask themselves: Do we need to improve the efficiency of our operation or adjust our portfolio? Some companies that we have worked with have chosen to evaluate whether they are “fit for 50” (as in US$50/barrel), which is like being healthy enough to run an ultramarathon even if you may not need to run one. But even if being fit for 50 seems too draconian, oil and gas companies, emerging from a period of high growth and rapid expansion into an era of oversupply, must now redirect their efforts. Their primary focus now should be on driving capital and operating efficiency to preserve their margins and maintain the reinvestment rates necessary to grow production.
Though it may be surprising, the industry has demonstrated the ability to be innovative and to lower costs when necessary. Producers and refiners have harnessed new technological advances, such as digitisation, robotics, and analytics, to squeeze out higher volumes with less investment. But these digital breakthroughs have not often extended to “above the ground” parts of the operation; for example, the logistics of water and waste management in shale oil fields are far from best in class, and lean manufacturing techniques are seldom used by upstream operators. It’s necessary now to tackle these shortcomings and other similar ones. In doing so, oil and gas companies can confront oversupply with increased efficiency and reduced costs.
Additionally, oil and gas producers need to carefully evaluate their portfolios, field by field, to ensure that each operation is a good fit for the company’s core strengths, customer demographics, and preferences and skill sets. Only a few companies will successfully shore up demand and improve margins by consolidating their strongest assets, yet in our view it is an essential element of survival in the energy industry today.
For downstream players, guaranteeing a buyer for their product is everything; the need to confront demand challenges head-on cannot be underestimated. North American and European markets are shrinking to the point where they can no longer absorb all of the oil and gas refined in the region (the U.S. now exports more than 1 million barrels per day of energy products). Increasingly, refiners must look beyond their borders for customers. But what they inevitably find in global markets is fierce competition from the Middle East and other longtime exporters that have built large modern refineries hoping to serve Asian demand. To compete effectively in this environment, downstream companies must either secure more robust and long-term relationships with established and new customers or seek out smaller niche markets to avoid head-to-head rivalries that have the potential to destroy their profit margins.
The biggest mistake that oil and gas companies can make in this difficult business landscape is to focus solely on reducing costs (either operating or general and administrative) and spending; this strategy is effective only in a very narrow range of market conditions and rarely effective enough to make businesses successful over the long term. Rather, companies should carefully consider the supply of assets, analyse the logistics of accessing available markets, and ensure a long-term presence in these markets without getting into a bidding war. Oversupply and lower prices represent a real challenge to the industry, but that doesn’t mean the future is all gloom. It just means that producers and refiners need to be prepared and adopt strategies that take advantage of the new reality.
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/15012015/2015-oil-gas-trends-065/