Oil and gas producers have been made to endure one of the most turbulent episodes in the industry’s history, as the pervading issues of price volatility, oversupply and climate change – to name a few – have cast a shadow over the energy market’s future. However, while many rightly assume that the past year has been a difficult one financially for oil and gas, it’s also one that has seen much in the way of progressive and positive change.
The whole affair, as far as the oil price is concerned, has forced billions of dollars in cancelled projects and inflicted major pains on oil economies, which has demanded that such economies drastically rethink their strategies. For these countries, diversification is now the name of the game; a singular reliance on resource wealth just doesn’t cut it in today’s low-price climate.
For oil and gas companies, the challenge is arguably even greater, and without the assurances triple-digit prices bring, traditional operational models have gone under the microscope. Pressure from the public and shareholders is one thing, but falling oil and gas prices mean that anything less than fundamental change will fall short of what is required.
The World Finance Oil and Gas Awards recognise the companies that have done their utmost to weather the storm and, in what remains a trying period, come out the other side better for it. Far from succumbing to these conditions, the winners of this year’s awards have treated the current climate not as a challenge but an opportunity to outperform their peers. The recipients of this year’s awards offer an insight into what steps have been taken to avert collapse and how challenging circumstances can sometimes breed some of the most impressive achievements.
Falling prices
The issue of slumping prices arose first when fears were expressed about China’s economic slowdown, and again when the situation in the eurozone worsened. OPEC’s decision to leave production unchanged was the final nail in the coffin for a dramatic – if not unprecedented – price slide, and prices have failed to pick up in the months since. “This sharp fall is effectively the result of a price war, an attempt to alter some of the fundamental elements of the supply landscape in order to provide a stronger competitive position for OPEC members in the longer term”, according to HayGroup’s 2015 Outlook Paper for the Oil and Gas Sector.
As a result, the confidence shared by producers is down, and so too is investment, which has allowed new and often-innovative strategies move to the fore. Price assumptions on which future projects are based have come up short, and companies have kept investment on a much tighter leash now that profitability has taken a hit. The positive news is that astute names have taken the opportunity to double down on their existing projects, and taken to designing new and creative ways of cutting costs.
One way in which the sector has come good to this effect is in technology, and many of the industry’s better performers have recognised that this is an area where they can cut costs and get ahead of the competition. By focusing more so on emerging technologies than say M&A activity and capital spending, oil and gas companies have been able to streamline and simplify their operations.
Whereas companies in years past have invested in technology primarily for the purposes of making unconventional plays, notably fracking and arctic exploration, the pressure on prices means that the emphasis has fallen more so on efficiency imperatives, specifically those with regards to big data. In a period where much of the talk has centred on reduced spending and stranded assets, the steps taken by the industry’s leading lights means that the conversation has shifted to a more positive note.
“Though it may be surprising, the industry has demonstrated the ability to be innovative and to lower costs when necessary”, read a Strategy& report on oil and gas trends. “Producers and refiners have harnessed new technological advances, such as digitisation, robotics, and analytics, to squeeze out higher volumes with less investment.”
A different energy mix
Aside from the operational improvements made by those in the oil and gas sector, the geographic distribution of energy is shifting, and with this so too is the global energy mix. The US’ fracking revolution has handed the country a great deal more influence in global trade, and the flow of oil has switched from East to West to West to East in just a few short years. “This is likely to continue, with strong growth in China and India driving energy demand. We also expect to see the market in gas become more global as liquefied natural gas (LNG) integrates regional markets and leads to greater congruence in global price movements”, wrote BP’s CEO Bob Dudley in the company’s energy outlook.
Fossil fuels account for the lion’s share of the world’s energy supply, and will continue to do so for the foreseeable future, although analysts expect the share of unconventionals and renewables both to increase. The prediction implies that LNG is to remain as a major part of the global energy mix, and it, alongside oil, will form the bedrock on which most developed countries will depend.
The growing stature of LNG was underlined earlier in the year when Shell forked out $70bn for BG Group, in what remains one of the biggest takeover deals of the decade. The deal was done first to improve Shell’s production capacity, in a time where new exploration sites are proving costly, and second to shore up the company’s position in the oil, but mostly the gas, market. In deciding to go through with the merger, the two made clear the potential of LNG, and the landmark deal was struck on the basis that gas will play a far greater part on the global energy stage of the future.
Climate change
Closely in keeping with the emergence of LNG is a budding focus on climate change and its impact on not only the fossil fuels business but the global economy. Any oil or gas company that chooses not to heed these warnings in the present day risks reputational and financial damage, and the winners of this year’s Oil and Gas Awards have each done a great deal to spearhead the latest developments on this front.
“People are more interested than ever in making all industries more environmentally friendly”, wrote John England, Vice Chairman and US Oil and Gas Leader at Deloitte, in a recent report. “I think the oil and gas industry is most frequently viewed as an impediment to an environmentally friendly future, when in fact it is a major enabler of a greener future as it makes possible the transition to lower-carbon fuels like natural gas. It is also working to reduce its environmental impact by downsizing its footprint and bringing modern water management techniques to the industry.”
The environmental challenge is one that has at times asked oil and gas companies to put aside their profit expectations and consider how they might better the communities in which they operate, by making social, environmental or simply more sustainable contributions to the whole. A great deal more attention will fall on the issue of balance, specifically in balancing rising global demand for energy against stable emissions, and the responsibility rests with those in the energy market to find a more sustainable model for the future. While the focus on climate change presents risks, it also presents opportunities, and oil and gas companies have an important part to play.
