Moving forward in a ‘lower for longer’ oil and gas landscape
Long-term success is a matter of collaboration and innovation
Where is the oil and gas industry heading? What are the major trends, what challenges lie ahead – especially in Europe - and how to solve them in the long run? Bart Cornelissen, EMEA Oil & Gas Consulting Leader and Energy & Resources Consulting Leader at Deloitte Netherlands, on the state of the industry.
By Bart Cornelissen - 16 February 2018
- Lower for longer
- OPEX and CAPEX
- An adequate response
- Innovation and efficiency
- Strategy for long-term success
Lower for longer
After two years of decline, oil prices rose to $ 50 per barrel at the end of May 2016. At the time, this seemed a welcome indication of recovery – but was it? Nearly two years later, the price still struggles to stay above $ 50 - 55 per barrel, due to oversupply driven by an increase in US shale oil production and worsened by the slowing down of oil demand growth (driven, in turn, by a transition to gas and renewables). Cuts by OPEC have therefore not had the desired result. The global balance has shifted, OPEC may be running out of cards, and the new reality for oil prices is “lower for longer” or even more likely “lower forever”.
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OPEX and CAPEX
The industry’s main reaction has primarily been cost reduction and postponing new projects and major investments. At the same time, dividends were maintained. Recently we have seen recovery, such as in the rising number of FIDs, but since new projects are smaller and cheaper (and mostly onshore), the increase in CAPEX is still limited and service providers are still suffering. Therefore, cost reduction will remain important for many years to come.
An adequate response
Is the current approach towards cost reduction also a structural solution? Not in our view. In a world in which prices are under pressure for a long time to come, a longer-term perspective is based on changing the way we work (e.g. supply chain collaboration) and innovation. Oil and gas companies are aware of this and have taken steps to improve collaboration, but with mixed impact. They need to take the next step, because collaboration within the oil and gas ecosystem – e.g. through joint ventures, investing in tech start-ups, or working with NGOs and researchers – is essential for innovation, which in turn is necessary for long-term cost reduction solutions.
Innovation and efficiency
For instance, new technologies such as the Internet of Things (IoT) can make business processes more efficient. Sensors provide data about the drilling process and fields. Data analytics creates insight into this data and Artificial Intelligence can develop algorithms and pattern recognition to improve products and processes. And when it comes to robotics, even a 1% gain in capital productivity through e.g. intelligent robots could mean savings of about $ 40 billion, according to the Deloitte report “From bytes to barrels”. To put this into perspective: in 2016, a net loss of about $ 35 billion was reported by listed pure-play upstream, integrated, and oilfield services companies worldwide.
Strategy for long-term success
All of this requires a solid innovation and digital strategy based on the transformation that a particular company has to go through. What transformation is needed, what value should be created, what are the main upsides, what investments are crucial, how to organize cybersecurity? These are cross-functional challenges and certainly not merely an IT-issue. But when executed well, the result will be long-term success. Companies that are willing to invest in digital strategy and innovation can unlock huge value and will remain financially strong, regardless of what happens to supply and demand.
For more information about trends in the oil and gas industry, contact Bart Cornelissen via the details below.