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Oil firms chase efficiency gains

The spectre of ‘peak demand’ puts an onus on producers to tighten up their games

Energy efficiency in the upstream clearly means different things to different people. But what is evident is that virtually every firm is looking at where to make marginal gains, as a subdued price environment and fears over the future of oil demand growth significantly reduce the ability to run flabby operations.

The oil majors are taking divergent paths in some aspects, but one trend is easily identifiable, namely portfolio efficiency. The firms are concentrating their financial and technical muscle on fewer, high-potential prospects in key upstream areas and excluding marginal production provinces—in turn, leaving independent producers to bring their own specific focus into areas from which the majors are retreating.

ExxonMobil is concentrating on its major new plays offshore Guyana, Brazil, and Mozambique, while BP has strengthened its US shale deal by acquiring assets from Anglo-Australian producer BHP and is opening up a new gas province offshore Senegal and Mauritania. Total has marshalled a concentration of assets in the North Sea through exploration and acquisition, while also acquiring material Mozambique gas assets in the reshuffle of assets following the marriage of US independents Occidental and Anadarko and staking out its major gas position in Russia.

Shell has consolidated its core positions by selling over $30bn in assets since agreeing to acquire UK firm BG in 2015. All the majors, including Chevron, continue to pursue aggressive divestment targets to rid them of the least efficient assets at the tails of their portfolio. Interestingly, though, there has remained a healthy appetite for these assets, with specialist buyers seeing efficiencies that they can wring out of these unwanted fields.   

Power or not

While it slightly risks over-simplifying the group, the three European headquartered majors have travelled further down the road of concentrating more on gas than oil and diversifying into electricity. ExxonMobil and Chevron have appeared more focused on process efficiencies, although the two companies, alongside the newly expanded Occidental Petroleum, did recently join the efficiency-promoting Oil and Gas Climate Initiative.

Despite the drive for technological gains, significant efficiency drives have continued to trail production increases in the US shale patch

Analysts say that this split is partly due to regulatory differences: diversification into downstream electricity, particularly for electric vehicles, is, ironically, simpler to implement in the unified regulatory environment created by the 28 countries of the EU, than in the patchwork of utility regulation of the US, a single country but with divergence at state level. It does, though, partly reflect genuine strategic differences—BP and Shell are actively marketing electricity in the US while the US majors have largely steered clear of power, except in their upstream operations.

On an operational level, the majors have looked to apply significant new technologies to recover hydrocarbons more efficiently, especially, but not limited to, US tight oil plays. Total, for example, has reportedly deployed extended-reach drilling and improved collaboration in supply chains in its North Sea operations. According to the Oxford Institute for Energy Studies, some majors are applying their expertise in reducing CO2 content in natural gas for LNG production to further carbon capture, utilisation and storage (CCUS) technology. 

Shale challenges

Despite the drive for technological gains, significant efficiency drives have continued to trail production increases in the US shale patch. A lack of midstream infrastructure has, according to NGOs such as the Environmental Defense Fund, led to significant associated gas flaring and venting in key producing states such as Texas and North Dakota. The US Energy Information Administration (EIA), which regularly reports flaring and venting, has not reported such volumes since early 2018. But gas prices at the Texas Permian Basin’s Waha hub have recently dropped to as low as $1.70/mn Btu below benchmark Henry Hub values, a testimony to the difficulty market participants have in evacuating associated Permian gas.

Trends towards more efficient automobile engines may dampen demand growth

ExxonMobil, Chevron, and Occidental have staked out major acreage positions in the Permian Basin and are already reporting progress in their plans to significantly increase output there. But the speed of US light tight oil output from production hotspots such as the Permian and the Bakken Basin in North Dakota, is outstripping the ability to match the increased molecules to expanded export infrastructure. The lag in permitting and building pipelines, for example has led to increased transport of crude by relatively inefficient rail and truck.

Industry officials expect that, as pipelines and commensurate ocean export infrastructure are completed, US crude oil and LNG exports will increase, limiting the need for flaring and giving efficiency gains. Domestically, gas marketers are encountering difficulty finding new clients among key gas consumers, such as power generators, as downstream electricity efficiency and renewable power generation dampen demand.

Analysts are also beginning to forecast that US oil and associated gas output growth will start to slow, which could combine with increasing exports to ease downward pressure on domestic crude and gas prices. The EIA forecasts that US oil production will rise by 1.9mn bl/d in 2019, to 12.3mn bl/d, before slowing markedly to an additional 900,000bl/d gain in 2020, to 13.2 million b/d.

12.3mn bl/d - EIA forecast of US oil production in 2019

But the prospect of a recovery in prices is unlikely to halt the focus on making operations cheaper and more efficient. Wall Street is becoming increasingly unwilling to extend finance to US producers, not just for speculative exploration but even for opex-heavy production. It is hugely unlikely to welcome a relaxation on upstream efficiency and fiscal discipline on a modest price rebound. Indeed, some analysts suspect the finance crunch may lead to 2020 output being materially less than the EIA’s forecasts.

US downstream oil and gas efficiencies may also, over the long-term, have a significant effect on US production. Nearly half of US consumption is motor gasoline, and trends towards more efficient automobile engines may dampen demand growth as the motor pool is slowly renewed. Meanwhile, the gas sector has largely saturated power generation demand beyond an ever-dwindling stock of coal plant retirements. The first eight months of 2019 saw US grid electricity sales essentially flat to the same periods of the past two years at 2.6PWh, according to the EIA.

And, in the chemicals sector, industry and legislative trends towards recycling of single-use plastics may lead to the rise of a recycled feedstock which some chemicals industry officials believe could be competitive with “virgin” chemicals ethylene-based products. Again, upstream oil and gas demand would come under threat, encouraging an efficiency drive.  

NOCs no longer insulated 

The upstream efficiency drive is also beginning to impact on the national oil company (NOC) sector, not least where these producers are looking to increase oil export volumes by substituting gas, nuclear and renewables for oil in often-wasteful domestic power generation sectors.   

>$30bn – Shell divestments since 2015

Saudi Arabia has announced that it intends to move to a power generation system based 30pc on renewable energy and 70pc on natural gas, partly in a bid to free up additional oil for export, while Abu Dhabi has announced that it aims to implement a 22pc reduction in energy consumption by 2030 and is diversifying its power system to accommodate nuclear and renewable energy. State-owned oil firm Adnoc will be intimately involved in implementing this latter efficiency drive and is collaborating with Italy’s Eni and Austria’s OMV and Borealis in increasing efficiencies at its refinery and chemicals operations.

Many other NOCs have yet to join the efficiency drive, either because of political upheavals such as Venezuela, or because of slow reforms as in Algeria, where a new hydrocarbons law that improves returns for investors has only just been ratified and low domestic gas prices have made it difficult to control demand. Russia, on the other hand, has in recent years improved its refinery yields and efficiencies by installing new hydrocracking capacity, and boosted its gas industry by joining the ranks of major LNG exporters. 

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