Industry optimism is on the rise, but so are costs
The oil and gas sector feels better able to survive oil price volatility, DNV GL’s boss tells Petroleum Economist, as long as spending is kept under control
The boom days may be over, but the oil and gas industry has emerged from the oil-price slump leaner, fitter and in a better position to cope with future volatility in the sector, says Liv Hovem, chief executive of DNV GL's oil and gas business.
As a provider of testing, certification and advisory services, the Oslo-headquartered company is well placed to take the pulse of the industry. The regular surveys it carries out across the sector, along with analysis of demand patterns for its own services, give a good idea of current trends.
DNV GL's latest report, an annual outlook for the oil and gas industry, suggests optimism is returning for both operators and suppliers. A survey of 791 senior oil and gas professionals around the world-conducted in late 2018-found 76pc of respondents confident about the industry's growth prospects for 2019, more than double levels recorded in 2016 and 2017. Those in Brazil (95pc), China (89pc) and the US (85pc) were the most optimistic.
A higher and relatively stable oil price, leading to fuller corporate coffers, has clearly played a role. But Hovem tells Petroleum Economist, in a telephone interview, that companies are also more confident that the streamlining of their activities and a more cost-conscious approach adopted over the past five years will make them better able to withstand future dips in their fortunes.
"The efficiency measures and lower costs achieved by the industry have enabled companies to be more confident that they can make money, even at a lower oil price and in an industry that will remain cyclical," she says.
Who is afraid of peak oil?
Hovem adds that the sector is confident that there will be sufficient demand to sustain it for the foreseeable future.
DNV GL has predicted that factors such as rapid uptake for electric vehicles will result in peak global oil demand as early as 2023. But the industry does not appear unduly phased by this, possibly because many leading forecasters, including DNV GL, are predicting a gradual levelling off of oil demand to a plateau over several years, rather than a rapid decline.
However, Hovem detects some shift in emphasis towards oil projects that can be developed more rapidly. "We are seeing fewer oil mega-projects that have 10-year perspectives, with companies looking for quicker returns on their investment," she says.
A cautious oil-price outlook should help ensure that capital expenditure plans drawn up in recent months do not fall by the wayside. DNV GL notes that major operators are planning their spending strategies based on a long-term oil price of $50-60/bl, well below the peaks of late 2018. Brent crude was trading above $60/bl in late January.
Operators and suppliers are also confident enough to start bolstering their workforces, following deep cuts since 2014. The survey indicated 34pc of companies expected to expand their workforces in 2019, compared to 20pc the previous year.
DNV GL itself is also experiencing enough of a pick-up in activity to start recruiting in earnest again. The company suffered along with its customers during the downturn.
"We have been through a tough time in the oil and gas business area-we are around 60pc of the size we were in 2014 in terms of revenues. We have had to reduce our operations globally," Hovem said. "But 2019 will be a year which will see more recruitment on our side."
Costs on the rise
Industry optimism is still tempered by a degree of caution, not least because costs, which plummeted when activity collapsed, are starting to tick upwards again. The survey reported that 41pc of respondents had experienced cost inflation in 2018 after several years of frozen supply-chain rates.
The survey also found that suppliers seem less happy with their financial position than those buying their products. Only 66pc of suppliers were confident of achieving revenue targets in 2019, while 57pc were confident of hitting profit goals. The figures for buyers were 82pc and 80pc, respectively. That could indicate suppliers will try to nudge up prices over coming months in an effort to balance the books.
Meanwhile, the operators that are now more focused on launching a new clutch of large upstream projects may pay less attention to the tight cost control that has dominated their thinking over recent years. "Now that there are more investments coming in, people will be busier, so delivering projects on time could be higher on the agenda than cost cutting," Hovem says.
In 2018, 62pc of senior oil and gas professionals believed the cost-efficiency measures put in place during the downturn would be permanent. In 2019, the share is down to 54pc. Meanwhile, only 21pc said cost efficiency would be a top priority in 2019, compared to 41pc back in 2016.
So, does that mean the oil and gas firms are about to forget the lessons learned from efficiency drives and efforts to collaborate more closely to cut costs? "Costs will remain an issue even if they are a bit lower down on the list, but the industry definitely needs to remind itself of the risks," she says.
A focus on digitalisation in research programmes revealed in the report suggests the hunt for greater efficiency goes on, given the savings in terms of staffing and time being sought through the development of unmanned wells and other digital technology-related advances.
Gas to the fore
With peak oil seemingly not too far off, it is not surprising that gas developments are becoming increasingly prominent in corporate strategies. As part of that push, efforts to make gas a more appealing clean energy option, such as promoting its use as a feedstock for hydrogen production, are on the rise.
"A larger number of the projects that we are involved with now are related to gas. As a company, we are involved in qualification for innovations, testing new ideas and technologies, and more of that work is related to blending gases in different mixes and also to the use of hydrogen," Hovem says.
The survey also reflected this change. More than a quarter of respondents thought there would be a significant increase in the use of hydrogen to help decarbonise the gas mix in 2019.
Around half of the professionals polled said they would actively seek to adapt to a less carbon-intensive energy mix in 2019. But that shift has been prompted less by altruism and more by increasingly strict environmental regulations governing sections of the industry, along with improved-and cheaper-technology.
Oil and gas companies said regulation was the leading factor behind any drive to decarbonise their operations. Planning for the energy transition and 'doing the right thing for society' were down in ninth and 10 th place, respectively.
"The survey," Hovem says, "shows that companies are not doing this for the greater good, they are doing it so that they can benefit business-wise. If stronger measures are needed, then tighter regulation will be required."
Betting on renewables
Investment by oil and gas companies in renewable energy projects is continuing-a third said their companies planned to invest more. This is an area where the supply chain is already playing a major role, notably in the offshore wind industry, where similar services and skills to those deployed in offshore hydrocarbons developments are required.
Oil companies have long invested in renewables projects, if only to boost their green credentials. Now, these projects are more attractive because of their improving profitability and because involvement in them ensures that hydrocarbons producers retain influence in global power markets in future decades, as renewables displace fossil fuels.
"They are preparing for the future-hedging in a way. But, a lot of the competencies of the big oil companies are relevant to the renewables sector, such as their experience in driving large, complex infrastructure projects," Hovem says.