Economy – Oil + Gas Monitor http://www.oilgasmonitor.com Your Monitor for the Oil & Gas Industry Mon, 15 Aug 2016 06:57:26 +0000 en-US hourly 1 https://wordpress.org/?v=4.6.9 Thriving and Surviving in Oil & Gas http://www.oilgasmonitor.com/thriving-surviving-oil-gas/ Wed, 27 Apr 2016 06:37:32 +0000 http://www.oilgasmonitor.com/?p=11308 Dan Turner | Kepware Technologies It’s been happening all our lives. Oil & Gas prices fluctuate, and with the ups and downs, the industry adapts and looks to thrive—and more recently, to survive. In 2015, when oil fell to its lowest price in seven years, more than 100,000 jobs were shed and organizations looked to […]

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April 27, 2016
Dan Turner | Kepware Technologies
It’s been happening all our lives. Oil & Gas prices fluctuate, and with the ups and downs, the industry adapts and looks to thrive—and more recently, to survive. In 2015, when oil fell to its lowest price in seven years, more than 100,000 jobs were shed and organizations looked to slash billions in spending.  It’s a cycle. It always has been, and always will be. Despite this fact, there is technology on the horizon that can help organizations make right-size investments during the survival phase.

A novel approach to survival in a volatile market with thinning margins is to do more with less. Automation, monitoring, and control are not new concepts, nor are predictive maintenance and resolving high-frequency maintenance issues. While many objectives remain constant, one major change introduced in the past few years is the ability to flexibly store and mine increasing large volumes of field data. Data is expanding at an exponential rate due to the advancing horde of intelligent, Internet-connected devices that are ready to serve up their data for analysis.

This trend will only continue as the Internet of Things (IoT) grows from concept to implementation. For background, the IoT is essentially the network of Internet-enabled devices and the communication that occurs between these objects and other devices and systems. At Kepware, we are already seeing the IoT become a reality right before our eyes—particularly for customers in the Manufacturing, Building Automation, and Energy Management verticals. According to Cisco, the number of Internet-connected things will reach 50 billion by 2020, with $19 trillion in profits and cost savings recognized from the IoT over the next decade.

More and more organizations are realizing the value of the IoT through monitoring, control, optimization, and analysis. New vendors and technology entering the industrial market are driving down the cost of automation, data flow, and handling, which in turn provides savings to end users and enables system improvements. This is where doing more with less becomes important and we are able to become more efficient—squeezing every bit out of every asset at our disposal.

While the up-front cost of an IoT solution is something to consider, the investment is small compared to the process improvements made possible by the ability to make good, data-driven decisions. Furthermore, in an industry where buying and selling assets is as common place as drilling, fracking, or filling your car at the pump, maintaining servers and licenses throughout the lifetime cost of a solution becomes a moot point.

While the data systems may not be the largest investment an organization will face, it is an optimizable one that can be maximized with highly flexible and expandable Cloud platforms. For example, it’s not uncommon to double the size of your assets during a growth period. If you have a fully functioning system, it rarely—if ever—is sold in the sale alongside the field assets. After the sale, you have less assets, but still hold a full-size automation and monitoring solution with licenses that need to be updated, annual service contracts that must be paid, and out-of-date server hardware that will eventually need to be replaced. Now imagine instead that the cost of data and information flow could be adjusted based on the size required by the current asset owner. That’s the value the Cloud brings to O&G.

As we continue to navigate the natural ebbs and flows of O&G, the organizations that can master and harmonize the cacophony of the most data, will win in all aspects of the industry. Companies that find ways to do more and produce more with less will do well no matter what phase of the cycle we are in. Less cost handling and more automation mean more production—and ultimately more product flow to the customer.

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Oil and Gas Cost Savings: Time is the Most Valuable Commodity http://www.oilgasmonitor.com/oil-gas-cost-savings-time-valuable-commodity/ Mon, 18 Apr 2016 06:02:48 +0000 http://www.oilgasmonitor.com/?p=11258 Michael G. DeCata | Lawson Products Focus on what you can control.   The historic decline in the price of oil, which has dropped 70 percent since the summer of 2014, brought with it operational challenges for oil and gas enterprises, including unprecedented headcount and CAPEX reductions. New performance strategies ensuring production uptime, particularly in […]

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April 18, 2016
Michael G. DeCata | Lawson Products
Focus on what you can control.
 
The historic decline in the price of oil, which has dropped 70 percent since the summer of 2014, brought with it operational challenges for oil and gas enterprises, including unprecedented headcount and CAPEX reductions. New performance strategies ensuring production uptime, particularly in aging assets both upstream and downstream, and establishing efficient workflow processes are vital to improved and profitable business operations, returning some control in a struggling climate.

Maximizing productivity is critical to reducing the market’s impact on financial performance. And there is one metric that is preeminent over all others: time. Whether you consider machine time or labor, accomplishing more per unit of time is the difference between succumbing and surviving. And when the market regains its footing, accomplishing more per unit of time will mark the difference between average profits and superior profits; between competing and winning.

In a downturn, firms often focus on price rather than cost. Equipment maintenance is a prime example.  The value of machine uptime and labor productivity often dwarfs the price of consumable maintenance components. A $300,000 excavator that an operating company uses can be disabled by a $5.00 hydraulic hose fitting. Without the replacement part on hand, one or two days of service may be lost, pushing back production. Think about the decision to cannibalize a part from a sidelined rig, only to have it fail, potentially with a devastating safety or environmental effect. How much could a work interruption cost you?

High service, vendor managed inventory (VMI) is an approach to insuring part availability at the instant the part is needed, without the loss of production incumbent with next day service. High service VMI minimizes inventory costs associated with just in case inventory by monitoring consumption on a weekly or bi-weekly basis, improving both asset time utilization and the productivity of skilled mechanics.

Operating company extracts dramatic savings

One of Lawson Products’ largest customers is a major international oilfield services company. This operating company provides production management, the crews, infrastructure, rigs, hydraulics, casings, trucks, and more – everything required to respond to exploration and production (E&P) customer needs.

The service provider significantly improved equipment utilization and reduced turnaround times in its pressure pumping division by reducing inventory and maximizing the productivity of its mechanics.

Over the past year, Lawson has provided this customer 12,220 unique items, totaling several million pieces, at an average piece price of less than $1.00. The real-time availability and labor productivity associated with these expense items is extraordinary.

Time is money

Because of the nature of maintenance repair and operating supplies, consumable MRO in this case, it touches everything. Whether for exploration and production or operating companies, it’s all of those consumable maintenance items – drill bits, specialty adhesives and chemicals, or a broad range of fasteners – that mechanics or engineers expect to be there when they reach for them. This affects both productivity and profitability. An empty drawer or shelf could keep a critical piece of equipment offline. VMI programs done to the fullest extent directly impact an organization’s earnings.

Due to headcount reductions, we’ve seen more clients using multi-skilled crews to address resource management. Set expectations with your VMI provider to handle all of the ordering, inventory management and stocking of your bins, freeing up staff to focus on more strategic work. We have an E&P client that helicopters our sales representative out to the rig to do workspace audits, restocking and consultations on the right way to use products and demonstrate additional uses for them. Especially in distressed periods, you’ll put time back on your side by leveraging high service from your VMI provider.

Lastly, it’s well documented that a significant percentage of downtime that companies experience relate to product reliability. That’s a final area of cost savings. Selecting quality, highly engineered and more durable products gets to a lower cost overall, due to greater uptime.

There’s that word again, time.

During this challenging period in the oil and gas industry, every minute of productivity counts.

High-service VMI is the best way to squeeze every minute of productivity from your machines and make every minute of your mechanics’ time available for value-added work.

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Blood & Oil The New Emerging Petro-Landscape http://www.oilgasmonitor.com/blood-oil-new-emerging-petro-landscape/ Wed, 16 Mar 2016 13:33:13 +0000 http://www.oilgasmonitor.com/?p=11110 Albert Goldson | Indo-Brazilian Associates LLC Collectively the major oil producing countries that are highly dependent on oil export revenue are experiencing an unprecedented level of tumultuous upheaval. A seismic shift is taking place in world oil production with the addition of US shale-oil production and recent exports during a period of flat demand not […]

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March 16, 2016
Albert Goldson | Indo-Brazilian Associates LLC
Collectively the major oil producing countries that are highly dependent on oil export revenue are experiencing an unprecedented level of tumultuous upheaval. A seismic shift is taking place in world oil production with the addition of US shale-oil production and recent exports during a period of flat demand not to mention a strong US dollar – so much oil and nowhere to go. And because of the strong US dollar, even countries that are not under economic strain have shrewdly decided to limit their purchases of oil.

Each oil dependent country has unique economic handicaps and each with their own particular budgetary breakeven oil price requirement that makes it imperative for them to produce at an unsustainable, flat-out pace.

However the oil market share is directly linked to another type of market share: defending sovereign territory with the creation of buffer zones by arming proxy groups. Additionally they have a dearth of military experience in supporting or battling militants beyond their borders, made more challenging because these militants are battle-hardened, highly experienced and possess firepower that rivals those of sovereign states.

A factor rarely mentioned is that many of these oil producing countries’ economic difficulties are exacerbated by the high cost of these direct and/or indirect military entanglements. The security and armed forces of autocratic governments are established to defend against internal threats, rarely external ones. These counties are now battling a two-front war, internal and external, and as a result are stretched painfully thin.

In the past their purchases of advanced fighter jets and other ‘trophy’ weapons designed for external battles, were rarely used in combat and their costs were limited to the initial purchase price, crew training and general maintenance. Nowadays these trophy weapons are significantly more expensive to maintain when utilized on a daily basis which accelerates the ‘burn rate’ of their precious foreign reserves. Consequently these war-time military expenditures increase considerably the actual breakeven budgetary oil price point than the officially accepted published figures.

Even a rise in oil prices above their adjusted economic break-even point will only enable them to more comfortably finance their armed forces to defend territorial market share. Depressingly because of the continued existent of powerful non-states operating almost at will within failed states, military expenditures will remain unchanged. And at some future point when the region establishes a modicum of stability, these countries will maintain their elevated military expenditures because they reside in a region whose stability is always short-lived and tenuous at best.

In this region, market share in the oil is meaningless without military dominance because “checkbook diplomacy”, practiced to perfection by the Saudis, has been rendered outdated and ineffective. Economically countries can adjust accordingly to harsher circumstances but cannot recover easily militarily from the loss of sovereign or buffer territory, especially the loss of influence within their own territory to anti-government indigenous citizens.

Outside of the Middle East cauldron is Nigeria and Venezuela, major oil producing countries that have exclusively internal yet still potent challenges. Nigeria still struggles to pacify the militant group Boko Haram while Venezuela, at the cusp of economic default, a humanitarian crisis and civil unrest, has a political gridlock between President Maduro and the opposition’s legislative majority, an acidic confrontation that can spillover onto the streets and ignite this tinderbox.

The OPEC community continues to have divergent and competing interests which have created unusual and sometimes contradictory geopolitical cross-relationships. In one of a multitude of examples, Iran and Russia collaborate militarily in Syria because of decades-long mutual interests yet compete on energy matters including gas exports with sanctions lifted on Iran yet still in place for Russia.

Because of these conflicting interests it’s almost impossible for OPEC to agree upon a strong coordinated effort to reduce production to raise oil prices. Those countries best positioned to not only survive but thrive after the denouement of economic and military battles, are the ones who best utilize their resources. Based solely on economics the ones with the deepest pockets and access to credit are Iran and Saudi Arabia; those most vulnerable are Iraq, Russia, Venezuela, Nigeria, and Iraq.

Not surprisingly the recent non-binding production “freeze” agreement among OPEC and non-OPEC producers has no real impact on raising oil prices. The real objective of the agreement was that it provides an important political precedent: that OPEC and non-OPEC countries can agree collectively in establishing some kind of an agreement. The perception created is that OPEC and non-OPEC countries indeed continue to disagree, but now the lines of communication are established so that differences can be narrowed, perhaps even overcome, in future meetings. Weak agreements are better than no agreements.

The eventual denouement of these economic and military battles will shape the region for decades to come. These governments are well aware that these are extraordinary historic times which, whenever the sand settles, will determine a newly formed power dynamic in the Middle East whose future landscape may be unrecognizable from today. Their frenzied efforts economically and militarily for not only survival but dominance is justified because second best is not an option in this unforgiving region.

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Problem in the Oil Patch – Oil, Oil Everywhere http://www.oilgasmonitor.com/problem-in-the-oil-patch-oil-oil-everywhere/ Fri, 19 Feb 2016 07:58:44 +0000 http://www.oilgasmonitor.com/?p=11018 Joel Berman| Credit Insurance International Risk Management, Inc. (CII) With the world awash in oil, the problems that it brings become ever more evident.  With prices dropping precipitously, profitability goes down with it.  With more product chasing smaller demand, it produces an ever increasing price spiral downward.  As companies and Countries continue to produce, as […]

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February 19, 2016
Joel Berman| Credit Insurance International Risk Management, Inc. (CII)
With the world awash in oil, the problems that it brings become ever more evident.  With prices dropping precipitously, profitability goes down with it.  With more product chasing smaller demand, it produces an ever increasing price spiral downward.  As companies and Countries continue to produce, as produce they must, they are caught in this trap.

Aside from brick and mortar or in this case, land and drilling equipment, the next largest asset on a company’s books are usually its’ accounts receivable (A/R).  As company’s results continue to deteriorate, the risk of the A/R itself correspondingly are drawn down into this abyss.

There is a cure.  Not a cure all, but an option that remains available to the wide spectrum of players in this universe.  Whether you are a seller or importer of crude or refined products or a service provider selling pipe or other services, the market segment that you service can be addressed by utilizing a product called credit insurance.

Credit Insurance is an insurance product that is grossly underutilized, but has been around in this country since 1897.  It insures A/R against losses due to insolvency and or delinquency:  Domestic and or Foreign A/Rs are eligible for insurance coverage.  Risk is measured and a rate determined.  It is not designed for a single debtor but that is possible if the debtor qualifies for special packaging. The policies CANNOT be used for financial guaranty s; there must be an element of trade in the underlying transaction.  Policies are traditionally written on an annual basis on a multi-debtor platform.

Credit insurance functions at two levels.  The first is the black print of the policy as stated above: provides risk Amelioration. The second level of the policy, the white print, functions as a collateral enhancement vehicle.  To the extent that a policy is put into place, the policy can be used with a company’s lender in order to get a more user friendly borrowing package. Examples:  Higher advance rate on discounted A/Rs, eligibility of Foreign A/R inclusive of sovereign risk and perhaps even a lowering of the cost of borrowed funds. That of course is a function of the company’s balance sheet and the strength of the CFO in making the case.

The cost of credit insurance is remarkably low as it is measured in basis points (B.P’s).  The cost is volume sensitive.  As volume goes up, rate comes down. There is also a qualitative component to the pricing.  Prior to the current oil crisis, the quality of the debtors was significantly stronger and the appetite of the underwriters was correspondingly greater.  Today, amid all the losses, and the continuing failures, the underwriters are more difficult to please; but not impossible.  The debtor mix and client experience will determine the appetite of the underwriter for the particular package.

One of the most important components of this is that the cost is completely tax deductible, so to the extent that the policyholder is a tax paying entity, the government shares a significant portion of the cost.

In addition to providing both the black and white features of the policy, the policy will also offer guidance to the policy holder in that the underwriter will by his approvals and or denials offer insight into the viability of the debtors submitted.  The policy will also offer growth in that the policy can allow the policyholder to ship more than they might have been willing to ship on their own.

At the end of the day, credit insurance is a financial services tool, that if used aggressively can both help a company grow safely while enhancing its’ relationship with its’ lenders.

I am not an economist but I have been offering credit insurance to my clients for 44 years across many commercial areas.  The information is applicable to most industries.  The packaging will vary with the industry and the carrier.

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Oiling the Squeaky Wheels of Lower Prices http://www.oilgasmonitor.com/oiling-the-squeaky-wheels-of-lower-prices/ Fri, 22 Jan 2016 07:21:20 +0000 http://www.oilgasmonitor.com/?p=10779 Bart Schouw | Software AG 2016 will be the year oil companies have to figure out how to live with lower prices—or go bust. I predict that oil companies will hunker down and find innovative ways to weather the low price storm, which appears to be far from over.   The United States’ oil production […]

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January 22, 2016
Bart Schouw | Software AG
2016 will be the year oil companies have to figure out how to live with lower prices—or go bust. I predict that oil companies will hunker down and find innovative ways to weather the low price storm, which appears to be far from over.
 
The United States’ oil production boom was accompanied by a painful oil price bust in 2015, and the near future looks less than bright for oil exploration and production companies.

America’s journey to oil independence picked up steam as production topped 9.5 million barrels per day in 2015. Yet, concurrently, global economics including lower demand from China and an unchecked faucet from the Organization of the Petroleum Exporting Countries (OPEC) oil have combined to squeeze prices down.

“The oil market is an unpredictable beast. Could anyone have foreseen two years ago in 2013…that we were going to see a battle for market share that would slash the price of crude by 60 percent?”  asked Margaret McQuaile, OPEC expert and senior correspondent for Platts, in an article for Insight Magazine.

Innovation—drilling, deep water exploration and, more recently, fracking— led to the peaks in oil production over the years. Now innovation will have to help companies to survive the oil price crash resulting from the latest one.

Low oil prices mean many things to many people. Consumers are generally happier because gasoline and heating oil are cheaper. Producers are typically unhappy because their cash flow is throttled and they could see their financing—from wary hedge funds or banks—cut off.  Some have to shut in wells, break leases on rigs, or sell their land leases to cash-richer competitors.

For a while, U.S. shale oil producers squeezed their costs down and improved operating efficiencies, making even $50 per barrel seem viable profitability-wise. Outside the U.S., producers took advantage of the strong dollar—making low prices more palatable when exchanged for weaker local currencies. Unfortunately for all of these producers, $50 did not last. In December, WTI prices were hovering between $35-40 per barrel. Some analysts are predicting that $20 per barrel is possible in 2016.

So what can organizations do to survive until prices rise again?  Oil companies are already taking drastic measures— Shell abandoned exploration in Alaska and in Canada’s oil sands, Chevron cut its workforce by 10 percent, Exxon cut Q3 2015 spending by 22 percent—and there will be a continuous pressure to reduce costs further.

Governments, once flush with the tax proceeds from $100 plus oil, have to cut budgets. The state of Alaska is considering reinstating income tax for the first time in 35 years.

Saudi Arabia is dipping into its sovereign wealth funds to continue social benefits payments and reducing subsidies on energy. The kingdom is particularly vulnerable to low oil prices because, after the Arab Spring uprisings in 2011, it boosted spending on social projects, subsidies and entitlements to placate the population.

But there are other steps I believe producers will to help alleviate the pain.

Here are my predictions:

  1. Mergers, acquisitions and bankruptcies will reshape the industry, leaving only the strongest players.

Only by maximizing operational efficiencies will the remaining players be able to survive.  Integrated planning and operations departments will become a top business priority for upstream oil companies.

In history a shakedown in oil prices has often led to some big mergers, such as in the late 1800’s when John D. Rockefeller created the behemoth Standard Oil. Perhaps a new mega-major oil company will arise in 2016.

  1. Low oil prices will force disintermediation in the oil field.

Robots or automated operating systems will increasingly replace people, causing ethical debates. The disintermediation trend will benefit E&P firms thanks to lower costs and higher safety levels in hazardous environments, but machines will not be allowed to make mistakes.

  1. The Internet of Things (IoT) and rich sensor data will allow oil companies to “twin mimic” the physical world in a digital environment.

This will give them the ability to make exploration and refining environments smarter. With added analysis and data enrichment, firms can mimic using new, cost-efficient methods without risk before implementing them in the field.

  1. Oil companies will move more IT infrastructure into the cloud to save costs.

But most highly sensitive IT will need to stay on premise, so there will be continuous need for integration between the two infrastructures.

  1. The industry will finally begin to address an outdated, siloed, inefficient supply chain, which is not only slow but also prone to error.

Siloed business processes and disparate IT systems will be rationalized across corporate boundaries to reduce latency in information flows and, effectively, supply chains.

Conclusion

According to the International Energy Agency there is a glut of over 3 billion barrels of oil currently loitering in storage tanks around the world. This equates to a surplus of 1 million b/d and, especially if production from Libya and Iran increases as expected, prices are probably going to continue falling in 2016.

The above are just some of the solutions available to the oil industry which can oil the wheels of low prices. Only those companies that innovate to prepare for this low price environment will survive.

 

 

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Bankruptcy in the US Oil and Gas Industry http://www.oilgasmonitor.com/bankruptcy-in-the-us-oil-and-gas-industry/ Thu, 19 Nov 2015 12:00:51 +0000 http://www.oilgasmonitor.com/?p=10465 Jeff Huddleston | Conway MacKenzie The ongoing oil and gas industry crisis is bringing companies to their knees as a result of stubbornly low prices. As recovery is elusive and unpredictable, strategies to aid distressed companies and prevent bankruptcy have to be realistic, proactive, and address the obvious capital structure problems while preserving the underlying […]

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November 19, 2015
Jeff Huddleston | Conway MacKenzie
The ongoing oil and gas industry crisis is bringing companies to their knees as a result of stubbornly low prices. As recovery is elusive and unpredictable, strategies to aid distressed companies and prevent bankruptcy have to be realistic, proactive, and address the obvious capital structure problems while preserving the underlying business.
 
One persistent problem in the oil and gas world right now is the pricing crystal ball is partly cloudy and partly sunny – that is to say there is a high degree of uncertainty around which direction prices are headed and when. Options for dealing with financial crisis are made much more complicated when opinions on the future direction of oil prices are as diverse and plentiful as subaquatic plant life.

Further, the upstream oil and gas industry is obviously a capital-intensive industry where massive reinvestment is the name of the game. Without sufficient cash flow to replace production taken out of the ground, much less add to the proved reserve base, growth is stilted. With oil prices currently hovering at levels where many companies break-even, there is little, if any, cash left over to even pay a return on current invested capital.

A painful irony is that the current crisis is in many ways a product of the industry’s success. Commercializing the production from shale was an amazing technological breakthrough and unlocked massive new supplies of hydrocarbons. As it evolved in both its efficiency and productivity, shale drilling was a seed for the oil price downturn and whether the industry saw it coming or not, the classic prisoner’s dilemma likely would have kept everyone drilling and set on the course for where we are today.

Shale drilling, the disruptive technological innovation that it was, seemed to attract ever more offers of capital, which the industry was happy to accept, further accelerating the buildup of both massive fortunes for investors and an oil supply glut.

Fast forward to today, what started last year as a supply issue both in the U.S. and globally with strong OPEC production, we are now in a world where slowing growth in emerging markets, namely China, has raised the potential for a demand pullback. Further muddying the outlook is what the impact may be from a new global war on terrorism begins to take shape in Europe and the Middle East.

And if that wasn’t enough to wreak havoc on an oil price forecast, there are a number of concerns that industry, political, and economic leaders have had for decades regarding the quality and accuracy of information in emerging markets. This impacts everything from quantifying and tracking the quantities of oil & gas reserves and production in OPEC countries to determining whether China is entering, or is already in, a recession. These all have significant impact on the duration of an oil price cycle and ultimately how you restructure a balance sheet for potentially a “new normal” oil price that is 50% of what it was last year.

In terms of the restructuring industry, there have obviously been a number of situations that have already hit crisis mode. Many of these were not news or surprises to the energy restructuring community. These companies already had unsustainable amounts of debt or the wrong kind of capital for the type of assets and were in need of restructuring regardless of what happened to prices.

Also in the first half of the year, there were a number of situations that were able to tap the capital markets and potentially fix the problems, or at least get a lifeline to fight another day. Investors were “doubling down” on shale and likely placing bets on a short trough and quick recovery of commodity prices. As we now know today, oil prices have stayed stubbornly low and many of these investments made in the first and second quarter got run over by the pain train – again.

Now in the second half of 2015, troubled companies are running out of time. The few deals that were made didn’t perform, bank extensions are slowing and hedges are burning off. There may not be that many out-of-court options or lifelines thrown to these companies to keep them out of Chapter 11 proceedings. The parts of the formula that kept some of these companies afloat – the hedges, banks’ cautious approaches, and capital investment – appear to have changed somewhat dramatically in these last months.

That being said, the timing is ripe for many struggling companies to address the crisis before running out of the necessary runway to do so. Solutions take time and in these situations, that is almost always defined by how much cash the business has. We try to stress to troubled companies that the time to address liquidity problems or take on a comprehensive balance sheet restructuring is not when you have spent your last dollar.

What options these companies have today is various and, in my view, encouraging for the right situations but players have to be realistic as well. There are still some strategic partners and capital providers of every sort out there, albeit savvier and more opportunistic now. But whether it is taking on new capital or a new buyer or any other restructuring program, these all take time. The more time you have, the more options and the better the company will be. In the restructuring world, cash is king. If you run low on cash, you run low on time and options rapidly diminish.

As far as industry-wide recovery, it is anybody’s guess what will happen and anything is possible. Some are bullish and think we are poised for recovery. Some think we are stuck in a U-shaped recovery or potentially a W-shaped recovery where we will see volatility before stability.

As far as solutions, the industry has been advocating this for more than a year now a lift on the decade-long ban on exporting oil. As we have an oil glut in the nation, another outlet would alleviate the oversupply.

Other than the lift on that ban, there is little government can do. Strangely, it was recently announced that the federal government was planning to sell production out of the Strategic Petroleum Reserve in order to raise additional funds for general purposes. Although the incremental supply in the market is unlikely to have any pricing impact, it’s quite the opposite strategy one would expect if you have the capacity to store oil to decide to sell at prices that are near six year lows. I am still trying to figure that one out.

Distressed companies should not wait for recovery, but seek options now before situations became too critical to stay out bankruptcy. Unfortunately, I think we will see many more industry bankruptcies before prices turn a corner.

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Prediction? Pain http://www.oilgasmonitor.com/prediction-pain/ Tue, 01 Sep 2015 06:28:36 +0000 http://www.oilgasmonitor.com/?p=9970 Scott Cockerham | Conway MacKenzie Capital Advisors History may have been kinder to Mr. T had Dolph Lundgren not so badly overshadowed him.  Aside from a turn as the cuddly, milk-loving B.A. Baracus on the “A-Team,” Mr. T had a role as one of the best 80’s movie villains  as Clubber Lang in “Rocky III.”  […]

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September 1, 2015
Scott Cockerham | Conway MacKenzie Capital Advisors
History may have been kinder to Mr. T had Dolph Lundgren not so badly overshadowed him.  Aside from a turn as the cuddly, milk-loving B.A. Baracus on the “A-Team,” Mr. T had a role as one of the best 80’s movie villains  as Clubber Lang in “Rocky III.”  When asked for a prediction from a reporter for the impending bout with Sylvester Stallone’s Rocky Balboa, Lang glares into the camera and growls, “Prediction?  Pain.”

Mr. T should have gone on to play a half dozen bad guys in that decade, but his performance was eclipsed by Lundgren as Ivan Drago, in “Rocky IV” just three years later.  Now it was Mr. T who was feeling the pain.

How do two boxing movies compare to the state of oil and gas over the next year?  First, the prediction for the industry is certainly pain.  Second, we may see conditions that make the suffering the industry has endured thus far pale in comparison.  There is no panacea for this market. Though priorities and trends will shift accordingly, it is a struggle to be endured.

Stock isn’t just for the Stockyards

While the price of oil has settled into a range orbiting $60 per barrel as of this writing, the bulk of asset and corporate transactions have centered on truly distressed targets.  Operators like Samson Resources and BPZ Resources may have had difficulty performing at $80 oil, but prices have exacerbated their peril and those assets are hitting the market.  Other sellers are justifiably waiting until they are compelled to offer assets for sale given the severe pricing discounts this market commands.  The priority for companies with available capital is to acquire as much upside as possible, yet protect against potential future price declines.

All-stock deals accomplish that.  Noble Energy’s $2.1 billion, all-stock acquisition of Rosetta Resources in May 2015 wrote the blueprint for the type of deal that protects the liquidity of acquirers, provides drilling capital and upside to sellers, and incentivizes all parties to effect transactions quickly.

Hedge Cliff Approaching

The stabilization of oil prices has provided an opportunity to hedge 2016 production for many operators.  However, those looking to buy protection have seen their available capital drop precipitously over the last nine months, either from reduced cash on hand, net income, or reserve based lending structures.  Thankfully, many hedge portfolios for 2015 can provide some ability to hedge further, if their proceeds aren’t being used to keep struggling companies solvent.

If prices are to see a drop in the next half year, the opportunity to purchase protection will erode, portfolio proceeds will certainly be directed at sustaining operating companies, and existence through 2016 will be an open question for those currently vulnerable.  In the broad scheme of things, putting assets in the hands of those capitalized to drill is in the industry’s best interests, but such a shift announces a larger devaluation of those illiquid assets to the market en masse.

Rusting Iron

Oil prices may have entered a state of reduced volatility, but the utilization of hydraulic fracturing fleets and drilling rigs has not.  Services companies that saw 35% margins in a high oil climate have had to give most of those premiums back to their customers in the downturn.  Now substantial portions of their equipment, both on and offshore in the U.S., are sitting idle.  Continued price stability can lead to an increase in services utilization; unfortunately, many smaller frac and drilling companies may not be around to see the recovery.  Worse still, a substantial uptick in U.S. production may portend an extension of the current downturn as oil saturates the market.

Double Dip

A surfeit of available inventory from many potential sources stands poised to flood the market, so much so that it’s difficult to keep track of who could scuttle a recovery.  OPEC seems committed to maintaining a breakneck pace of production in order to retain its market share, far exceeding the demand projections of the EIA and IEA, which both see consumption rising above their first quarter forecasts.  External forces such as alleviation of Iran and Russia’s sanctions, countries attempting to stabilize their production from geopolitical threats, and the production growth of independent U.S. operators, could all drive supply such that the downturn is deepened and sustained for a longer period of time.  Crude inventories must see consistent draws in order to fend off a large price decline, which is likely to occur in the next year.

Creative companies that can purchase assets and inventory stand to reap the most benefit in the coming year because the next twelve months will likely see an appreciable decline in oil prices.  Stock transactions by acquirers with dry powder should see ample opportunity, particularly if hedging cannot be extended by the vulnerable.  If the prediction is pain, staying financially disciplined can help a company weather the storm.  There’s a cringe-worthy admonition incorporating “I must break you” to be made here, but you get the idea.

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Six Predictions on How the Oil & Gas Industry Will be Further Transformed by the Digital Economy http://www.oilgasmonitor.com/six-predictions-on-how-the-oil-gas-industry-will-be-further-transformed-by-the-digital-economy-2/ Tue, 18 Aug 2015 06:48:57 +0000 http://www.oilgasmonitor.com/?p=9946 Brent Potts | SAP The recent fall in commodity prices has hit upstream oil and gas companies hard, impacting cash flow and restricting their ability to continue investing in high-risk projects. There is a pronounced shift from volume to value as they focus more on increasing the efficiency of existing assets rather than developing new […]

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August 18, 2015
Brent Potts | SAP
The recent fall in commodity prices has hit upstream oil and gas companies hard, impacting cash flow and restricting their ability to continue investing in high-risk projects. There is a pronounced shift from volume to value as they focus more on increasing the efficiency of existing assets rather than developing new ones. And yet, technology adoption has fueled massive shifts in global demographics, wealth, and consumer engagement. To thrive in these trying economic times, and be strategically positioned to capitalize on future prospects, it is critical that oil and gas businesses invest in developing a technology infrastructure that provides sustainable operational improvements, captures best practices and creates connections throughout the entire ecosystem.

The oil and gas industry has been highly automated and connected for decades, at least for high value assets. Fortunately, a recent reduction in the cost of sensors now is allowing companies to digitize and track nearly all assets – big and small.  This, in turn, is pushing more processing out into the field, creating opportunities to connect, compare and monitor, for example, multiple oilfields or multiple refineries, like never before. Connections between assets, suppliers, workers, and stakeholders are being used to streamline the flow of information, enable real-time decisions, heighten asset performance, improve process and product quality, empower people, and open up brand new opportunities for the industry.

Known as the Digital Economy, this hyper-connectivity is poised to transform nearly every area of O&G operations and customer engagement.  Technology involved in creating these connections include big data analytics, collaboration capabilities, smart applications, and security systems underpinned by abundant compute power, storage and data that can be delivered to any device instantaneously through the cloud. While the possibilities are just beginning to be discovered, below are six predications of how this newly connected ecosystem, or Digital Economy, will change the industry as we know it.

  1. Connected Oil Fields

Currently companies manage reservoirs, wells and facilities separately, which often creates organizational silos and results in suboptimal equipment performance or slow maintenance response times. In the future, oil field data will be connected and shared with one another, delivering numerous benefits such as being able to look at total assets across systems, plants or global locations. Connected oil fields will allow companies to dive down into safety metrics, production metrics or costs versus budgets, just to name a few. It will also offer the opportunity to proactively analyze and plan for optimal maintenance and notify operations managers or field engineer in real-time when production is falling greater than predicted so they can take immediate action.

  1. Connected Inventories

One of the biggest areas of cost leakage in the oil and gas industry is around inventory management. One reason is that limited visibility into global inventory can cause repeat or duplicate buys. By connecting inventories across the entire organization and among suppliers, companies will only purchase what is needed. They’ll also benefit from insights during and after receipt of shipments with mobile, user-friendly, real-time analytics and easy-to-use planning tools. Tracking systems linked to enterprise planning software will be able to monitor equipment movement, fuel levels, consumption, and all associated transactions. Taken one step further, O&G companies needing parts in remote locations can leverage each other’s inventory to purchase parts quickly and replace them at a later date.

  1. Connected Maintenance

Currently, companies can perform maintenance before problems arise using embedded sensors to monitor real-time environmental and performance indicators such as unusual vibrations on a pump. Taking the connections a step further, sensors streaming data from nearly every asset can be captured, analyzed and used to improve predictive models to make preventive actions more accurate. Should a potential problem be detected, maintenance can be proactively scheduled to eliminate unexpected failures, improve asset integrity, avoid costly emergency visits and increase asset uptime. Additionally, with improved asset integrity and predictive maintenance enabled, the digital economy reduces the likelihood of accidental environmental hazards in pipelines, or reduced safety incidents in a refinery.

  1. Connected Fuels

Connecting distribution companies and service stations in near-real-time is a very real possibility in the near future. Benefits of enhanced communications between fueling locations and O&G distributors could include:

  • Providing an interactive work place for truck dispatcher with geographical maps and truck compartment planning;
  • Helping service stations operate more efficiently with more accurate inventories, loss control, price management, credit card services, fleet card and dealer settlement;
  • Managing transportation fleets using route optimization and instant driving time calculation;
  • And responding in near-real-time to gaps in replenishment, changes in demand or pricing, and other deviations from forecast.
  1. Connected Workforce

Having a truly connected workforce means facilitating a new workforce model to hire and engage a multigenerational workforce, including contingent labor. It means being able to retain, deploy or retrain exiting talent as necessary and optimize succession planning. And connecting the entire workforce to suppliers, assets and stakeholders provides comprehensive visibility into total staffing needs and accelerates sourcing across permanent and contingent resource pools. From a cost perspective, having a connected workforce allows for mitigating risk in programs and compliance efforts by connecting to procurement activities to institute accountability and transparency throughout the entire requisition and project lifecycle. It also could help control costs by monitoring full workflow, time entry, expense entry, and budgetary controls.

  1. Connected Car

The final prediction for transforming connections within the O&G industry is the introduction of the connected car with integrated vehicle-related services.  Connected cars will be able to provide real-time services and offerings based on your location, route, and preferences. Examples of services include advising drivers of the best available parking spot and enabling payment directly from a smart phone.  Also, cars will be able to inform drivers where to get the lowest gas prices and, for example, which station serves the best coffee. Again, the possibilities of connections is just beginning to be envisioned.

To be in a position to take advantage of the nearly limitless opportunities being created by the digital economy, oil and gas companies should take three major steps: activate, optimize and transform. First, companies need to digitize, connect, and collect data on assets, suppliers, workers and stakeholders. Second, they need a high-speed processing platform to analyze the data from these connections and gathering actionable insights to help reduce waste, improve agility and make predictions. Finally, oil and gas companies will no longer be handcuffed by traditional processes, infrastructure, skills, and systems.  They must be open to new ways to completely transform. With these three steps, companies can not only survive the current economic conditions, but capture the discipline required in the current downturn to create a sustainable competitive advantage that will deliver future growth and success.

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Anatomy of a Meltdown http://www.oilgasmonitor.com/anatomy-of-a-meltdown/ Thu, 16 Jul 2015 06:55:43 +0000 http://www.oilgasmonitor.com/?p=9826 Jeff Jones | Blackhill Partners The acceleration in Exploration & Production and Oilfield Services company bankruptcies in June of this year is a harbinger of what is coming in the second half of 2015 and first half of 2016. As E&P and OFS companies downsize, rightsize and innovate though this difficult period, the industry’s cost […]

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July 16, 2015
Jeff Jones | Blackhill Partners
The acceleration in Exploration & Production and Oilfield Services company bankruptcies in June of this year is a harbinger of what is coming in the second half of 2015 and first half of 2016. As E&P and OFS companies downsize, rightsize and innovate though this difficult period, the industry’s cost structure will significantly ratchet down as it did in ’09 and in earlier price declines. With the possibility of oil prices remaining in the $60 range and following a pattern similar to natural gas prices since 2009, management teams may have to embrace a Low Cost Producer strategy, common in most other commodity markets but largely absent from the energy market throughout its history.  

How we got here

Halfway through 2014 the Saudis concluded that the surprisingly strong production numbers coming out of the US shale plays were legitimate and going to last. OPEC shifted its strategy.  Saudi Arabian oil minister, Ali al-Naimi, made his now historic announcement, “As a policy for OPEC, and I convinced OPEC of this, even Mr. al-Badri is now convinced, it is not in the interest of OPEC producers to cut their production, whatever the price is.” As oil prices plummeted and everyone’s (except the major integrated oil producers who saw this coming) shock gave way to realization of how the market had changed, questions began to be asked. Who are the Saudis trying to hurt? How long is this going to last? Who can hold their head under water the longest? Will this be a V-shaped recovery like 2009 or something longer?

But perhaps the question that everyone should be asking is: since oil production is coming out of shale plays in the same way that natural gas is, could oil prices get knocked down and stay down the same way that gas prices have been since 2009?

The chart below illustrates the trading pattern that gas has been in since gas shale play production began coming onto the market in volumes. Note in the chart the $2.87 to $4.77 natural gas trading range since 2009:

WTI & Henry Hub Prices 2001 – 2015
Chart1
 

If oil is being produced in the US shale plays at or even near the rate that gas is, could the same 6 year ratchet-down in gas prices be repeated in oil prices? It is not only possible; it is probable. A 2010 style, quick recovery that bailed so many industry players out five years ago is unlikely this time around. The current price decline is now seven months old and is already wreaking havoc in the industry.

Blood in the Streets

So far in this downcycle, there have been 13 major energy company bankruptcies, 10 of them E&P companies and 3 of them OFS companies. To put this in perspective, in the ’09-10 down cycle there were approximately 50 bankruptcies of E&P and OFS companies. With 15 to date in the current cycle, we are just getting started. The chart below highlights each of the ’14-15 bankruptcies that have occurred since WTI began trading down.

WTI Prices & Energy Company Bankruptcies October 2014 – Present
Chart2
 

The earliest of the bankruptcies –WBH Energy and BPZ Energy, for example – were substantially over-leveraged and slowly sinking ships that were sure to capsize with a price decline.

The more recent bankruptcies – companies like ERG Resources, American Eagle Energy, and Saratoga Resources have been specific victims of the current price slide amid inadequate hedge positions, high differentials and/or high operating cost structures that in combination sapped liquidity and hastened their bankruptcy filings.

The bankruptcies will continue as we enter the Fall 2015 borrowing base redetermination season for E&P companies. Lenders are currently stress testing the projected impact of E&P borrowers’ hedges rolling off and the impact on their cash flows, as well as considering their actions with borrowers whose reserves are worth a lot less than they were last Fall.

The catalyst for OFS company bankruptcies and restructurings will be the 2015 fourth quarter replacing the 2014 fourth quarter in the trailing four quarter OFS loan financial covenants. The Fall E&P borrowing base redetermination occurring simultaneously with the trailing four quarter OFS covenant breeches will create a perfect storm in energy that is going to be the biggest distress event in the history of our industry. Bigger than 1986 when Saudi Arabia last abandoned the “swing producer” role and deeper than the Asian debt crisis in 1998.

A Train Wreck in Slow Motion

For restructuring advisors tracking the performance of distressed public energy companies quarter to quarter, this is eerily similar to the weatherman in “The Perfect Storm” where, days before the storm hit, he watched the storm develop on his weather radar, knowing that it will be disastrous. It is possible to track the energy industry meltdown with financial data in the same way as a weatherman tracks storm data via radar, and predict with surprising accuracy – what is going to occur. One can see what the industry is headed for at the end of this year and beginning of next year with shocking clarity. Warnings are largely falling on deaf ears or being received by folks who, not unlike some who watch a storm approaching, think, “Aaah, it’ll change course before it gets to us.” This storm is not going to change course.

Riding the Storm Out

The smartest energy industry CEO’s and CFO’s have already prepared for the storm. Rex Tillerson and his team at Exxon issued $8 billion of debt in the largest debt offering in the company’s history in March of 2015 in order to have plenty of cash on their balance sheet. Mr. Tillerson explained the issuance by providing his outlook on the current marketplace when he stated his “view is people need to kind of settle in for a while” at the company’s annual investor conference in New York.

Middle market companies are preparing as well. In February 2015, Jones Energy launched and completed both a private PIPE and a public equity offering as well as a $300 million long term debt raise to pay off its reserve based revolving credit and eliminate its redetermination risk completely.

Balance sheets and cost structures alike must be addressed quickly. For any E&P or OFS company with substantial bank debt and covenants, this should happen as early as possible in the second half of this year. This should be coupled with talks with your lender(s) about collaborative efforts to get you through what could be a sustained down cycle in prices.

Energy companies – E&P and OFS alike- have got to reduce costs in proportion to their revenue decline: If you’ve lost 50% of your revenue then you need to try and reduce your expenses by 50%. There have been impressive cost reduction actions taken by a number of companies: Chaparral comes to mind in the E&P segment and Basic Energy Services comes to mind in the OFS segment.

The Reward

The graph below illustrates how public E&P companies drove down and to a large extent, permanently reduced their production cost structures in the 2009 downturn and are beginning to do so in the current downturn. Negotiating leverage swings back and forth with supply and demand between producers and service providers and in each down cycle the E&P operators have most of the bargaining leverage. As usual, they are using it to drive OFS pricing down. But E&P operators have also innovated impressively during the down cycles to reduce costs, improve efficiency and lower their breakeven points. Horizontal drilling, top drives, pad drilling, multistage fractured fields and the mobile and digital technologies being used by E&P and services companies alike are just some examples of the innovations that accelerate during down cycles in pricing.

Crude Oil & Natural Gas Pricing 2001 – 2015
Chart3
 

A Happy Ending for the Wise

Rex Tillerson and Exxon are going to make it through this downturn and so will many large and small E&P and OFS companies. Cost structures will be lowered not just temporarily but permanently as the industry finds new efficiencies, innovates and emerges stronger and leaner, with a cost structure that allows the industry to compete globally at any price level.

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Need for New Ideas, Even in a Time of Tight Cash http://www.oilgasmonitor.com/need-for-new-ideas-even-in-a-time-of-tight-cash/ Fri, 22 May 2015 06:15:41 +0000 http://www.oilgasmonitor.com/?p=9443 Simon Ede | Berkeley Research Group & Hugh Ebbutt | Independent Consultant The collapse in oil price in the second half of 2014 has brought a sharp cash crunch to the industry. R&D spending in oil and gas rose over the last decade, following prices and as companies have taken on more complex and challenging […]

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May 22, 2015
Simon Ede | Berkeley Research Group & Hugh Ebbutt | Independent Consultant
The collapse in oil price in the second half of 2014 has brought a sharp cash crunch to the industry. R&D spending in oil and gas rose over the last decade, following prices and as companies have taken on more complex and challenging projects. By 2013, leading researchers and developers in the oil and gas sector were spending over $15 billion annually, double that of a decade earlier.

Will oil company technology spending now be sharply cut as it was during the last sustained price collapse at the end of the nineties? That collapse led to a wave of mega mergers and cost cutting. A new wave of mergers (led by Halliburton-Baker Hughes and Shell-BG) may mean more technology projects will be canned. Shell was selling $15 billion of assets, even before its new acquisition, to pay for already significantly reduced capex and to maintain dividends. Like many other majors, it was struggling to grow reserves or production on its own before the price crash.

The UK is home to hundreds of businesses who supply oil and gas producers, as well as to some key global operators and a range of independents. Much expertise and many skilled jobs depend on this investment. As well as technology work in the larger enterprises, there is a strong interaction with academic institutions, mainly in research and in commercialising and applying key technologies. Nearly 200 oil and gas research projects are funded and spread across around 50 university programmes in the UK. In the tighter environment, where will investment in R&D now come from?

Lessons from the past

These cycles have happened before. Finding and development costs fell throughout the 1980s, driven in good part by improvements in technology. During the 1990s as that downward trend flattened, oil companies sought to prioritise investment by measuring the value that would be added by each technology. But this could be problematic in practice. For the majors, technology capabilities had often simply become an enabler, rather than a real source of value. Access is rarely gained by technology alone, it needs technology plus reputation and deal making confidence.

The price crash and the mega merger wave of 1998-2000 led to significant R&D cuts, including the closing of big technology centres, like those of Amoco, Arco, Mobil, Phillips, Texaco and Unocal. Some of this activity was not completely ‘lost’. A lot of technology development shifted to the service companies and their share of total R&D spend rose.

In the 2000s, the larger players steadily rebuilt their R&D investment. Companies shifted away from simply buying technology start-ups to developing their own technology capability in-house again. Integration between disciplines was seen as key to getting more from applying and connecting technologies. Internal and external teams (from leading universities and government labs) worked together. New research areas like biotechnology and then digital technology started rising up the agenda.

Same again?

It’s a different, more fragmented industry now which must confront this downturn. Technology priorities have changed, and some actors are different. Will service companies once again pick up the slack? Many parts of the service sector are under even more intense near-term cost pressure than the operators. They are losing both business volume and margin, as activity has dropped off a cliff. Deepwater rig rates have almost halved. Schlumberger and Weatherford, for example, each have announced reduced budgets and staff cuts in the thousands. More consolidation is likely. This time the service sector is unlikely to pick up so much of the R&D mantle—at least in the near term.

National oil companies and national champions (NOCs) control around 90% of conventional oil resources and 75% of production. Not traditionally at the forefront of R&D, leading NOCs have rapidly grown spending since 2005 (see chart below). By the start of this decade, Petrobras and PetroChina were matching and exceeding the traditional technology heavyweights, like Shell, Schlumberger, Exxon and Total. The NOCs, with different and often longer-term objectives, more driven by the economic and employment needs of their country, may start to play a stronger role in where key technology initiatives are focused. Many NOCs and governments look to Norway’s precedent, where the oil sector now employs around 10% of its workforce, around 20% of the country’s economic activity and nearly half of its export revenue.

R&D Spending by Global Oil and Gas Producers and Service Companies, 2003–2013

chart

Achieving these objectives will come in part through investing in new technology, just as Norway did, for example, with Statoil’s flagship R&D centre in Trondheim and incentives for in-country R&D. This will position some NOCs as creators rather than consumers of technology. Already, Saudi Aramco, Petrobras, Petronas, and the Chinese NOCs have in-house R&D capabilities and academic collaborations. Saudi Aramco is aiming to become a leading creator of energy technology by 2020. Last year, it announced it would triple its R&D spending. It now has two in-country R&D centres and also collaborations in Scotland, the Netherlands, the United States and China. Petrobras in Brazil has long leveraged its own and foreign universities, developed in-country research centres and collaborated with BG, GE, Schlumberger, Baker Hughes and Halliburton in various local R&D entities and capacities to address the challenges of deepwater drilling.

Newer producers, such as Ghana and those in East Africa, will want to follow countries like Trinidad in developing their universities, research capabilities and vocational training in oil and gas disciplines to provide more, better-qualified people to support their industry, especially when they eventually want to operate their own developments and producing fields.

Technology priorities in a fragmented industry

The number of R&D players may be growing, but there remain a number of common themes of cost, risk and productivity for majors and NOCs alike:

  • Costs have eaten significantly into margins over the last few years despite high oil prices. Getting breakeven points down below $40 to $50 per barrel is a priority in higher-cost basins. Drilling and development costs, especially in deep-water locations—from Brazil and Mexico to the Far East—are still prohibitive, and that is causing project deferrals.
  • Improving productivity and recovery of maturing resources in a lower-price environment is also a common theme. As older fields start to mature, there is an increasing need for better reservoir monitoring, modelling and management of flows. Secondary and tertiary recovery, including steam floods, will be of growing importance. Companies have underinvested in enhanced oil recovery (EOR) technology, perhaps because results are less striking and immediate. However, EOR matters greatly to NOCs. Some, like ADNOC in Abu Dhabi, have set ambitious targets for ultimate recoveries as high as 70%, but have yet to gain the wherewithal to achieve that.
  • Average field productivity is now only 60% in some mature areas like the North Sea. The excessive downtime is driven by failing equipment and so unplanned, reactive maintenance to fix or replace it. Sometimes, around 70% to 80% of operating costs are for equipment or services provided by outside contractors. Simplification and standardisation to more Lego-like modules and smarter management of supply chains and inventories could have enormous impact. So too could digital and other technologies.
  • The search for new reserves leads to a common demand to find ways to de-risk new plays and reduce finding costs. In any basin, the spoils go to those who can drill fewer, better-targeted wells while spending less. This means acquiring more-focused seismic data and a capacity to properly integrate data from key technologies. The challenge will be significant in basins that are little explored, hard to reach, and/or hard to develop, such as in China, India, Myanmar, Africa and Latin America. Here there will be need for faster and cheaper approaches, like airborne surveys (for example, airborne gravity gradiometrywhich has been used with success in East Africa), that can reveal key structures in new basins at sufficient resolution to highlight where to focus much more-expensive seismic analysis.
  • The need for diversity of supply at lower cost is also major goal for growing economies short of their own energy resources. For some—as in Asia and Eastern Europe—the cost of imports is an issue, and developing viable alternatives, including shales where possible, could be important. In China and other areas with dry remote basins, another challenge involves finding ways to get shales to flow where water is scarce.

Recognising the impact of technology and technical expertise

Views vary on how long prices will stay low. The current cash crunch may last into 2016. Geopolitical events, business innovation and technical breakthroughs will still happen—even though they may surprise markets. But whichever scenario plays out, more energy will be needed in the future, as more people want better jobs and better lives. Technology will be key. Those companies—whether leading operators, service suppliers or forward-thinking NOCs—that have planned ahead and nurtured a scarce and valuable resource—their key technical people and capabilities—will be in the strongest positions.

Less investment in R&D by traditional players offers a good opportunity for the increasingly capable national champions and their association research and academic institutions to focus on areas they can do something about and, as the Norwegians have, build up their own resources of exportable expertise. The need to better manage reservoirs, drilling and logistics systems—and to waste and pollute much less—may stimulate new thinking from fresh minds to develop more effective ways to supply and make good use of energy.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

 

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