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'The oil price will rise again', says IOGP chief

Executive director of the IOGP, Michael Engell-Jensen, talks about what's next for the energy industry

The executive director of the International Association of Oil & Gas Producers struck a relatively upbeat note about the oil price – given the circumstances – at the Offshore Europe conference in Aberdeen in early September. “These downturns are always very painful,” Michael Engell-Jensen told Petroleum Economist. But the International Energy Agency (IEA) forecasts that in 2040 oil and gas will still account for half of the total primary energy demand, so “there is a fundamental need for our production, this is just a temporary feature.”

In the meantime companies have to lay off a lot of good people and projects get cancelled, so “it is a mess.” But it is difficult to see how it could be different, he points out. Producers are not in control of the oil price: it is a matter of supply and demand. Saudi Arabia has taken the decision to produce a lot of oil. This is not sustainable for Saudi Arabia in the long term -- it is eating into its currency reserves - “but what is the long term? The oil price will rise again, and expansion will be on the way.”

Another way of saving money is through standardising equipment. Rather than risk a gratuitous failure, every company will prefer to use its own Christmas tree or ball-valve, or replace the ball-valve that it used before. This pushes up manufacturing costs. “But there is no intellectual property in a ball-valve,” he points out. “It is low-tech equipment.”

However, deciding which specification to use from the hundreds out there will be challenging. The World Economic Forum is pushing for the adoption of common industry specifications, perhaps at the Davos conference in January. The Norwegian company Statoil has been pioneering a new approach to keep down offshore costs in Norway – among the world’s highest – in order to fast-track projects. Using off-the-shelf equipment for all but the most complicated parts and cutting down on design time and money and brings gas and oil to market more quickly. But it has the advantage over the UK of being a state-owned company involved in most field developments.

Another aspect of the problem facing mature provinces such as the UK is the conflict between markets and governments. An asymmetrical situation, where the government is able to exert pressure on companies to act against their commercial interests will deter investors, meaning either granting them more concessions to stay, or risking their departure and so losing more production earlier than under the hands-off approach the UK government took in the first 40 years. This might smack of central planning, but for Engell-Jensen, the government is doing the right thing with its creation of the Oil & Gas Authority and the separation of licensing from environmental issues.

“The choice is between no business and a profitable business for all,” he said. “The challenge is how to reconfigure the elements, to split the pie differently. And this applies to most mature provinces.”

On shale gas production in Europe, IOGP is clear that the potential is there. “There seem to be good formations in the UK and France,” he said. But what is lacking is honest debate. “There is a refusal to have the discussion,” he said. “The onus has to be on us to get into the room, and to say that we are here to help society. Can we please talk about the facts?”

A key aim of the industry – and the theme of the conference – is inspiring the next generation, including those just out of university. To complement rather costly graduate programmes, the industry should be looking at say one-year internships and placements. A year with a good supervisor on a good project would equip the intern with the experience and references to set him/her up on a career, he said. Otherwise there will be a gap in managers when it is all hands on deck once more. Anecdotally, many engineering graduates are taking up careers in banking instead.

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