January 10, 2017

New Year spells new hope for oil and gas

Posted by Andrew Bradshaw
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Is the onset of a new year creating an environment for generating cautious optimism in the oil and gas industry?

That certainly seems to be the case within the US shale sector, where increasing optimism is triggering a rise in oilfield service costs by as much as 40 percent.

A report on the 7th Annual Private Company Energy Conference by Simmons and Company International, energy specialists of Piper Jaffray, references an anecdote from an E&P company which issued a request for a proposal for a frac fleet and received bids that were 20 percent to 40 percent higher than current pricing. 

And the report states the number of such anecdotes is growing. 

Examples of efforts by the supply chain to raise frac pricing by more than 20 percent were reaffirmed among attendees at the event, while one frac company noted the delivery of price increases of more than 30 percent to some customers.

The decision by the Organization of the Petroleum Exporting Countries (OPEC) to cut production by 1.2 million barrels of oil a day, to 32.5 million barrels from the beginning of this year, sparked a significant rise in the price of oil from the high $40s to the mid $50s range, and this has generated a growth in confidence internationally.

“Pre-OPEC, the success of these increase requests was questionable. Post-OPEC, these increases likely stick,” says the report of the supply chain sector. 

In land drilling, the report suggests day rates for rigs, currently standing at between $14,000 and $17,000, would improve by $2,000 to $3,000 during this year.

Such optimism is reflected in the US rig count, which began 2017 with its eighth consecutive weekly rise, and the 28th increase in the past 32 weeks. An additional seven rigs (four for oil) were added for the week ended 6 January, taking the total to 665. 

Alongside this shorter-term confidence is the hope that there could be longer-term support for the US oil and gas industry from the Trump administration. President-elect Trump has made several encouraging comments in support of the hydrocarbons industry, particularly regarding a relaxation of regulations established in the Obama administration, which has been well received by the oil and gas community.

This apparent change in fortunes prompts the question: is the worst finally over for oil and gas?

Such positivity is welcome, both for the US and the wider international industry, particularly in the service sector, which has done its best in the lean times to adapt to the lower oil price through a review of business models, often leading to greater standardisation and collaboration.

In the UK, for example, where Oil & Gas UK anticipated in 2016 that unit costs would have fallen 45 percent in two years to $16 per barrel, the Maximising Economic Recovery strategy is leading the drive towards greater collaboration, while in the US the industry is starting to see stabilisation in employment levels. 

The upturn also provides a platform for building on much of the good work that has been done since the summer of 2014 to get the industry into a much better, more efficient, and more customer-focused shape.

Critical to the industry’s ability to capitalise on these early signs of improvement will be the developing relationship between service providers and the operators, where the service sector plays a much greater part in delivering on project outcomes rather than limiting its activity to the execution of prescriptive work orders.

An example of this new model was provided by Andy Samuel, chief executive of UK regulatory body the Oil and Gas Authority, who stated at a recent OGA conference that on one project an operator had engaged early with the service sector. Rather than presenting a prescribed scope of work, the operator had offered a problem that needed to be solved. As a result, two normally competing service companies provided a combined solution, which reduced costs and led to work being completed a year ahead of schedule. 

Anecdotes of enhanced collaboration between service companies and operators, and among the service companies themselves, are increasing and must continue.

These new business models, which reflect the widespread changes that the industry has undergone in the past two-and-a-half years and the central importance of a more efficient and responsive service sector, will play a large part in sustaining success against future challenges.

But the industry’s response to the recent rise in commodity price has to be cautious, measured and responsible. If not, as the Simmons and Company International report suggests: “A sharp uptick in pricing/utilisation, irrational exuberance on the part of Wall Street as manifested in lofty valuations and the rise of new/returning oil service franchise will likely ultimately lead to overcapacity rearing its ugly head once again.”

The onus is therefore on the individual entrepreneurs and investors within the industry to proceed over the next few months with the necessary care to ensure these early signs of growth are maintained. As Daniel Yergin, vice-chairman of research group IHS, told the Financial Times: “How production goes down and up is determined not by an oil minister, but by thousands of decision makers across the country.” 

Responsible actions taken individually and collectively by an industry committed to collaboration, focusing on long-term goals rather than short-term gains will hopefully create the solid foundations required for a new era of sustained growth in oil and gas.

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