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Forecast for the oil and gas industry

Price movements and the growth of tight oil

The oil industry is one of the most prominent examples of the interplay among supply, demand and prices, but it also demonstrates how price movements can encourage changes in behavior – in areas such as investment, technology adoption and new ways of operating.

While it is common knowledge that oil prices have collapsed from their lofty heights in 2014, it is not as obvious that they have crept up since then. By the first quarter of 2017, Brent crude was in the mid US$50/barrel range, up 100 percent from January 2016 lows. Yet, that’s still half what they were just before the crash in late 2014.

These large shifts in the oil price are driven by an imbalance in supply and demand. The sharp drop in prices in late 2014 was preceded by a strong and steady increase in supply, even as demand softened. Currently, prices are relatively steady, in part because the supply and the demand are mostly in balance. To understand what lies ahead for prices, it is a matter of seeing how supply- and demand-side factors line up.

Paul Markwell, Vice President of Global Upstream Oil & Gas Research & Consulting at IHS Markit sees plenty of room for growth from tight oil plays.

Plenty of room for growth

On the supply side of the equation, the main factors – according to Paul Markwell, Vice President of Global Upstream Oil & Gas Research & Consulting with UK-based IHS Markit – include: how much more growth in supply is possible from unconventional North American tight oil plays, from Russia and from low-cost areas such as the Middle East. Given current indications, there’s plenty of room for growth, he says.

Other factors include how effective existing conventional field operators will be in continuing to arrest declines in production, and how many proposed conventional field development plans, particularly offshore projects, will go ahead.

Overestimating competitor costs

Another factor is the level of discipline practiced by exporters participating in the OPEC and non-OPEC supply cut that was announced in November 2016. After declining to step in with supply cuts to bolster the collapsing oil price in late 2014, OPEC joined several non-OPEC producers to cut more than 1 million barrels a day of supply. Set to expire in late spring, there is talk that the agreement could be extended for an additional six months.

The question for OPEC and other participants in the production cuts is what is the right price to deliver sufficient revenue without drawing too much new supply into the market. This is particularly challenging, observes Robin Mills, CEO of Dubai-based Qamar Energy, because “OPEC has consistently overestimated the cost of competitors, who have then been able to improve their costs.” North American shale is one example, he says, which has cut production costs by nearly 50 percent.

Qamar Energy CEO Robin Mills says the challenge for OPEC is to find the right price to deliver sufficient revenue without drawing too much new supply into the market.

Markwell says demand is driven by several factors, such as the extent of growth in China and India, the effect that an uptick in prices will have as economic stimulus for oil producing countries, and the increasing demand for natural gas liquids, particularly from the petrochemical industry.

An uptick, no rebound

This year and next, according to Markwell, supply and demand are roughly in balance, so IHS forecasts Brent crude will average in the range of US$57-US$58 in 2017 and US$57 in 2018. In part, this is because current OPEC actions – production cuts – trigger reactions, including increased drilling from North American tight oil producers, a move that will limit upward price pressure in the near term. Looking further out, into the early 2020s, the IHS baseline forecast sees prices reaching US$70 “and upwards”. However, “we do not see a rebound to the US$100-plus level for the foreseeable future,” Markwell says.

At the time of the oil price collapse, exploration and production players were being challenged by record high costs. Since then, costs in some oil fields – particularly offshore and North American shale – have been cut in half.

Source: nasdaq.com


The cost reductions between 2014 and today are a result of both cyclical and structural factors, Markwell says. Cyclical factors, such as stripping out excess costs in the supply chain and finding more efficient ways to deliver goods and services, are important across all projects. But structural factors, such as technology adoption and more efficient operations, can contribute more than half the cost reduction in certain cases. Examples of the latter include standardization, reduced inventories, and changing capital project development plans and project execution, according to Markwell.

In many cases, there’s a direct line of sight between the application of digital technologies and some operational or performance improvement.
Paul Markwell, IHS Markit

 

While industry-wide standardization of equipment and technologies is still in the early stages, IHS has seen individual companies pursue standardization through the reuse of existing designs, shifting to the use of common approaches to building modules on offshore platforms or subsea tiebacks, and repeating the same design and drilling programs for wells in a given field.

 “In many cases, they can see a direct line of sight between the application of these digital technologies and some operational or performance improvement around efficiency, or capital-project execution efficiency. This is attractive to see a payback in higher efficiency over a relatively short term,” Markwell says.

New technologies and digitalisation can help to reduce unplanned downtime.

Digital delivers real-world returns

Among the five technology areas that IHS monitors, digitalization is attracting the most focus from the industry, Markwell says. By digitalization, he means everything from data analytics, sensors on equipment and data platforms to automation, robotics and drones.

 “In many cases, they can see a direct line of sight between the application of these digital technologies and some operational or performance improvement around efficiency, or capital-project execution efficiency. This is attractive to see a payback in higher efficiency over a relatively short term,” Markwell says.

Reducing unplanned downtime

These technologies can reduce unplanned downtime by warning operators when a part or piece of equipment is going to fail. Sensors across an entire field allow for real-time remote monitoring of performance variables such as pressure, temperatures, flow rates, and flow composition and other variables, even in remote areas, explains Mills. By optimizing operations and maintenance through the use of sophisticated algorithms, and reducing wear and tear, and optimizing maintenance, operators can increase output and reduce costs, he says.

While oil prices will continue to rise and fall, driven by supply and demand, it’s clear that the appetite for digitization, automation and other structural improvements to operations that the recent price collapse has spurred is certain to move in only one direction – up.

Ward Pincus is an energy writer based in Dubai, UAE.
Picture credits: Image 1, 4: Siemens AG; Image 2: HS Markit (Paul Markwell); Image 3: Qamar Energy (Robin Mills)