Oil and Gas sector Outlook 2016
Nowadays the Arctic is seen by many countries as a strategic region due to huge reserves of hydrocarbon resources and the strengthening of the role of factors and conditions underlying the political and energy security of the leading industrialized countries. Industrial development of the Arctic involves intensive exploitation of hydrocarbon resources, the development of transport, production of biological resources.
Now the global oil and gas industry is in the midst of one of the severest downturns in 30 years. Industry revenue for 2015 is estimated at 10 to 20% below that for 2014, with industry profits expected to shrink by 20 to 30%. That declining trajectory seems likely to continue in 2016.
Although the demise of oil is still some time away, it’s clear that the sector is going through one of the most transformative periods in its history, which will ultimately redefine the energy business as we know it. Navigating change of this scale will require smart, strategic judgment on the part of O&G company leaders. They must tackle cost and investment concerns in the short term while readying themselves to respond to the future impact of inevitable external environmental pressures.
The particular vulnerability of the harsh conditions of the Arctic requires international cooperation, research and solve the problems of the maximum preservation of the natural habitat, development and implementation of a rational model of balanced sustainable environmental management.
Despite the low price of oil and overall declining production, Norway remains a predictable environment that is unlikely to be overly impacted by the current downturn. While Norway is projected to maintain relatively stable production in 2016, the low price of oil is likely to contribute to closures of small and underperforming fields. Bids for Norwegian contracts are competitive, and significant commercial opportunities exist for U.S. companies specializing in offshore well abandonment, shut-ins, harsh-environment oil rigs, natural gas transportation, and monitoring and processing. Operation costs in Norway are high, and low-cost high-quality producers can be competitive once established in the market.
The sensational drop in oil prices — below US $ 40 per barrel at the end of 2015, down more than 60 percent from their high in the summer of 2014 — reflects rampant supply and weak global demand amid concerns over slowing economic growth around the world, especially in China. This imbalance is only going to worsen this year. Saudi Arabia continues to pump at full tilt, less concerned about propping up oil prices and more intent on securing market share, hoping to drive out marginal producers, particularly in the United States. As early as the second quarter of 2016, the flow of Iranian oil is likely to increase, adding to the glut. Even Middle East instability, such as the tension that erupted between Russia and Turkey in Syria toward the end of 2015, has not budged crude prices. Consequently, we expect oil prices to remain low for the near future, although it would not surprise us if volatility returns.
What can also affect the oil and gas sector, including Norway’s, is an announcement of the leaders of Turkmenistan, Afghanistan, Pakistan and India, to accelerate the construction of the gas pipeline TAPI (Turkmenistan-Afghanistan-Pakistan-India). The total length of the pipeline starting from the largest gas field of Turkmenistan Galkynysh (Revival) will amount to ca. 1814 km.
Presently, Turkmenistan is building the Turkmenian 214-kilometer section of the TAPI pipeline to the border between Turkmenistan and Afghanistan, for its own account ($45 million). To implement the project, the participant countries will have to invest ca. $12 billion. However, since the formation of TAPI corporate group, not a single large investor has been found to finance the project. Without additional funding, the implementation of the project does not deem possible to the participant countries.
Export of oil and gas is the main source of Turkmenistan’s income, accounting for 90% of the country’s export revenues. In the latest several years it has decreased because of reduction of oil and gas prices. On the other hand, Turkmenistan faces growing dependency on China because this is where 75% of its gas export goes (through the pipeline Central Asia – China). In their turn, Afghanistan and Pakistan are interested in this project to receive affordable gas, create jobs, and India, too, needs large amounts of energy to boost its industries.
The security of the pipeline is still a priority because tension is growing in the northern provinces of Afghanistan where the new gas pipeline is supposed to be built. The tension is caused by clashes between Turkmenistan’s border security troops and Islamist militants including terrorist organizations earlier responsible for attacks in India.
TAPI is envisaged to be a driver of economic and social development in the region and expansion of cooperation between the region’s countries. This will be possible only when the conflicts in Afghanistan and Pakistan cease or, at least, are frozen, and the other countries of Central Asia indirectly facilitate the cooperation. The region may also be united within the Eurasian integration. Russia, Iran, and China may also support the project. Thus, the role interaction and cooperation for regional security may be beneficial for all the participants of the project if they pursue the idea of multipolarity and respect each other’s interests.
These queries demonstrate the turbulence and complexity that energy company executives face — and they are only the beginning. As with any other transformation, managing the uncertainties requires a plan that takes advantage of current conditions and simultaneously prepares the organization to bet on options for a potential “new normal”: a stable business within the maelstrom of change.
Looking to 2016, we expect the start of a slow and steady recovery in prices, driven by global supply-and-demand dynamics. Transportation fuel demand —particularly caused by growth in developing economies — is largely responsible for sustaining global oil demand and for generating only minimal growth in some markets.
Companies should focus on developing and producing only the best acreage based on geologic characteristics and on avoiding marginal plays. Capital efficiency can also be improved by making efficient pad-drilling investments, sharing site infrastructure investment over multiple wells, and focusing on maximizing existing well production.
To succeed in the development of Arctic fields, oil and gas companies need to actively invest in exploration and technology, as well as build relationships with international partners. This will enable them to succeed in the development of the Arctic after the commodity markets have established oil prices.
Standardizing common tasks and implementing best practices can improve field productivity. Segmenting wells for divestment or shut-in and identifying wells with minimal operating activity and ones to be managed actively for repair and maintenance all help optimize the portfolio.
Companies must also focus on operations footprints and on rationalizing support structures for new development. They should simplify business processes, ensuring that their resources are commensurate with activity levels, thereby ultimately lowering the cost structure. Renegotiating with suppliers can also result in significant savings.
Since natural gas production and export will be an area of continued growth in Norway’s O&G sector, U.S. companies in the LNG technology and natural gas value chain that focus on clean production and transportation of gas from remote locations are especially well positioned. IOCs such as ExxonMobil, ConocoPhillips, Total, Shell and ENI have a substantial presence in Norway, in partnership with Statoil. Gassco, the Norwegian state-owned gas company, is the operator of Norway’s natural gas pipeline network, including for international pipelines and receiving terminals that export to the United Kingdom and continental Europe.
Norway’s efforts to expand O&G exploration and development in the Arctic Circle present opportunities for U.S. manufacturers and service providers in coming years, with the potential for additional opportunities as O&G development in the Barents Sea continues. In May 2016, Norway held a licensing round that awarded 10 production licenses for 40 blocks in the Barents Sea. The licensing round marked the first time in 20 years that Norway had opened new acreage to O&G exploration, signaling the country’s commitment to energy development in the Arctic. The Snohvit and Goliat projects are Norway’s only O&G producing fields in the Barents Sea, with oil production from Goliat beginning in March 2016. The next field to be developed in the Barents Sea is the Johan Castberg field, located 100 km north of Snohvit, and Statoil has announced its intentions to make a final investment decision on the project in 2017.