The significant growth in upstream capex spend during the period from 2000 to 2013 did not generate a commensurate increase in production and reserves, and the oil price fall of 2014 acted to intensify the challenges already faced by the industry in a high oil price environment. In this challenging environment, the response to the current downturn is different, for three reasons:
1. Operators’ behavior and competitive landscape are changing
The response to the downturn as varied according to various types of operators.
- International oil companies (IOCs)
The large cap IOCs continue to focus on increasing their cash flows to reduce their leverage and sustain their ability to meet their dividend payment commitments. A combination of divestments, downstream strength and working capital releases has helped support balance sheets, while significant efforts have been made to reduce an unsustainable cost base. IOCs have managed this by focusing on standardization and simplification measures and reducing project inefficiencies, while maintaining their focus on safe operations.
The independents have undergone significant ownership changes during the past few years, with many transitioning from publicly listed to private companies owned by private equity. These new market participants are heavily focused on returns and more willing to share the risks and rewards with the oilfield services companies.
It is likely that risk-sharing agreements will increase as private equity owners further increase pressure on contractors to deliver better outcomes at lower costs. Such arrangements could provide contractors with an alternative approach for achieving market success and premium prices when other more traditional routes prove unsuccessful, or with the ability to move into new markets ahead of competitors or to build partnerships with key customers.
Critical to the success of these arrangements will be to deeply understand how the products and services provided by contractors deliver value to the customer.
- National oil companies (NOCs)
In general, NOCs have also responded to lower oil prices by driving down costs and improving efficiencies in their oil and gas production activities. Over the past few years, NOCs have also continued a long-term trend of looking to take greater control of their resources and seeking to displace the IOCs by using service providers in a more integrated manner.
Many NOCs are also focused on creating more value within the hydrocarbon value chain and are increasing their vertical integration by creating a cohesive business that efficiently operates across the value chain.
2. Onshore unconventionals have become a new core resource
The dramatic decline in oil price caused a heavy blow to many shale operators, forcing them to focus on survival, putting growth or acquisition strategies on the backburner. Although not heavily invested in by Europeans, US unconventionals offer an interesting and strategically useful asset, driven by shorter cycles and flexible portfolio options, especially within the Permian basin, which now holds nearly as many active oil rigs as the rest of the US combined. The North American shale revolution has led to structural changes in global oil supply dynamics and dramatically lowered the fundamental economic equilibrium price point. Most participants in oil and gas markets now realize shale in particular changes the game.
Because of its abundance, the number of economically rational operators involved, its short development cycle, low risk profile and ability to deliver returns quickly, US shale will likely represent the marginal barrel of production, at least in the medium term and potentially for much longer. As a result, the oil market clearing price is expected to be set with reference to North American shale. Shale producers are able to quickly respond to price signals.
3. Digital is transforming the route to reserves and their monetization
The oil and gas industry is one of the world’s most advanced user of technology. However, to date, these technologies have been primarily focused on improving time to first oil and improving the effectiveness of hydrocarbon extraction, rather than above ground operational performance and end-to-end integration.
Digital has the potential to disrupt the oil and gas industry on a scale equivalent to the US shale phenomenon by:
- Connecting critical assets and reducing system failure which can easily result in costly and often life-threatening emergency situations
- Monetizing and collecting data in real time without previously necessary human intervention
- Managing, storing and analyzing massive amounts of business data to drive better and faster decisions
- Further increasing reservoir management and drainage efficiencies
- Deploying digitally enabled technologies like artificial intelligence and robotics, reducing the need for human responses and changing the skill sets needed