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
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.