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Resilience in a time of volatility: the future of Oil & Gas

18 Nov 2015

What will happen to oil prices in 2015 and beyond? It’s a question that has industry experts — and industry watchers — searching for answers. Supply is up, demand is down, and it appears that some of the conditions that created crude’s rapid price slump in late 2014 could remain in place for some time.

Of course, the oil and gas business is no stranger to the market’s ups and downs. The boom and bust cycle is one that industry veterans know all too well.

But despite adverse implications for the industry, the collapse in the price of oil will spell good news for the global economy. A $50 reduction in the price of crude oil translates into a $4.6 billion per day stimulus to the global economy, or more than $1.7 trillion per year. In just the US, the stimulus would amount to almost $950 million per day, or almost $350 billion per year.

The industry’s recent success in applying advanced technologies and pioneering processes to find and produce oil — both conventional and unconventional — has produced substantial supplies, even in challenging geopolitical conditions.

The International Energy Agency (IEA) has made public its analysis of the short to medium term future of the oil industry.

In what is not good news for the North Sea, the IEA predicts that oil supply outside OPEC will stop growing and start stagnating by 2020, as investment cuts begun in 2015 make their presence felt on the global industry.

Meanwhile, gas is becoming more important as a global energy source, with an annual growth rate of 1.7%.

Between now and 2020, the partial switch from nuclear to gas in Europe’s power sector is expected to lead to an increase in annual gas consumption from 20 to 40 bcm. Germany shut down several nuclear power plants because of the Fukushima disaster and plans to exit nuclear power generation in the next 10 years.

Additionally, the gas import infrastructure is undergoing massive expansion in both pipeline gas and LNG. A conservative assessment of import infrastructure projects either under construction or in the planning stages reveals a 65% increase in pipeline capacity and more than double the LNG import capacity by 2020. Overcapacity will reach 77 bcm by 2020, even in a conservative scenario. If the gas consumption growth trend of 2% or more continues, capacity usage could reach historic levels.

Unconventional gas now accounts for around 40 percent of U.S. gas production and could turn the United States into an LNG exporter within the decade. Projects are already underway, including the Sabine Pass LNG terminal, which is designed to build up liquefaction capacity. Although the technology to release shale gas has been around for decades, introduced in principle in the late 1940s, major legislation and economic changes have recently propelled a U.S. shale gas revolution.

In Europe, the picture looks completely different. Although there are significant reserves of unconventional gas up for grabs, only a handful of countries are capitalizing on them. Poland, for example, wants to gain more independence from Russian gas deliveries, so the country has awarded more than 40 drilling licenses to major U.S. oil and gas companies. Germany has single drilling activities underway, mainly focused on the Lower Saxon basin, while France's lower house of parliament approved a bill that bans shale gas drilling because of environmental concerns in a difficult political environment.

Asia Pacific is projected to increase production of unconventional gas more than eightfold through 2020, driven primarily by China's drive for energy independence. China's goal is to derive 30 percent of its gas production from unconventional sources by 2020.

India is also pushing for shale gas as deposits countrywide are projected to be 300 times higher than India's current largest gas field, the Krishna Godavari (D6) basin.

Chinese national oil companies are preparing for an unconventional gas revolution in China and are acquiring the necessary expertise and technologies in countries with advanced experience in shale gas.

That said, one of the biggest issues facing both industries is the impact lower prices will have on retaining talent. A repeat of the 1980s and 90s, when the core workforce was hollowed out across the industry, would be devastating today — at a time when many oil and gas companies have finally restocked their technical and managerial benches.

In the months to come, we are likely to see a number of acquisitions and asset sales across the industry as distressed companies seek relief and strong companies seek bargains. Smart companies will find a way to hold on to their key people by keeping crews active and moving them to core assets.

No one really knows how long the conditions we see today will be “the new normal” in an industry known for its volatility and cyclicality. Taking the necessary steps today – in concert with an experienced advisory firm knowledgeable in corporate finance, capital and debt, working capital, transactions, tax, and valuations and business modelling— can protect your competitive edge and position your business to thrive.