December 2017

The Oil & Gas Council hosted our flagship event, World Oil & Gas Week in London on December 4-5 2017. With over 700 of our members from across the upstream oil and gas industry, financiers and investors, the conversation was flowing at a wide range of networking opportunities culminating in the annual Awards Dinner. With over 80 speakers taking part in discussions over two streams, the Assembly provided interesting insights into what the future holds for stakeholders across the industry. A number of recurring themes emerged over the two days, with the outlook on the whole generally positive and some interesting times ahead as we approach what could be a new era for the oil and gas industry:

The Rise of Renewables

National policies pushing for a lower carbon future have driven the increased uptake of renewable energy solutions globally. Technology improvements have led to increased efficiency and in some places as competitive a kWh as provided by traditional fossil fuels. Recent years have seen increased interest in the sector by oil and gas companies; however this is, and will likely remain, only the realm of the oil majors with limited interest to small- and mid-cap players. While renewables, nuclear and hydroelectric power look to account for 50% of the growth in energy supplies (and significant investment) over the next 20 years, there continues to be a need for investment in oil and gas projects to power the world, with gas’s position in the global energy mix set to rise.

A Digital Future

The downturn has offered the opportunity to address the cost base with a strong focus on taking out costs and improving efficiency.  Across the board, waste within the value chain has been addressed in an effort to reduce breakeven prices, with some managing to reduce well costs by as much as 50% or more.  However, there is only so much slash and burn that can be done before looking at operational costs and here digitalisation is beginning to, and will increasingly, play an important role. Digital technology will change the industry and the effective adoption of these new technologies will determine the success of oil and gas players across it. It is vital that service providers are not squeezed to the point that continued innovation is no longer possible.

Accessing Capital – A Mixed Outlook

With the industry showing signs of recovery, combined with a greater alignment between buyers and sellers, 2017 (particularly early 2017), saw a flurry of M&A activity, funded largely by Private Equity. This alignment is expected to continue and deals will flow for the next few years, aided by a willingness of some sellers to accept future liability on ageing assets. As the importance of social, governance and environmental issues grow and with some investors remaining sceptical about further upside available within the industry, capital will continue to be selective and cautious, while some will withdraw investment altogether. PE can fulfil some equity requirements, as buyers or partners, to the right companies. Liquidity in the market has increased, however tougher regulations in the banking industry could put further constraints on traditional sources of funding (commercial loans/bonds) for small players. Renewables is detracting some financing and investment thanks to increasingly attractive returns and playing to the greener mandates of some, at a cost to the oil and gas industry. 

Exploration is Critical

Exploration will make a return, particularly as technology, partnerships (with suppliers) and standardisation continue to drive costs down. For the majors focussing on reserve replacement, exploration remains the most cost-effective route for growth. The question of who will uncover new basins and drive future production remains, with most agreeing that the IOC (and NOC) model will remain dominant. It was also agreed, however, that the rise of the ‘specialists’ (both geographic and in terms of technical skills (breaking new frontiers, late life asset management, etc.)) will continue. Government/regulators have a significant role to play in removing barriers to allow more straight forward regulatory approaches to development, critical in a lower priced environment. The geopolitical position and the (unpredictable) rise of renewables mean that the market will be prone to shocks and changes of sentiment that don’t make for a stable investment base.