2016 oil and gas industry survey
Optimism emerges in the aftermath of a long downturn
The latest outlook from oil and gas professionals reflects a renewed confidence in the future of oil and gas. However, this does not mean there are not challenges ahead. Explore the findings from Deloitte’s 2016 oil and gas industry survey, including the areas of expected opportunities and challenges along the oil and gas value chain.
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- Cautious optimism returns
- Prices are headed up
- Growth anticipated for 2017
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Current and future outlook for the oil and gas industry
The oil and gas industry’s success is always centered on geology and engineering. Over the last two years, however, above-ground risks have outweighed below-ground risks, primarily affecting oil prices and production.
The oil price collapse began in June 2014. It escalated by the end of that year when OPEC, led by Saudi Arabia, elected to reverse its historical swing producer policy, and it attempted to recapture market share by maintaining production levels after world crude oil demand growth faltered. Oil inventories rose dramatically and non-OPEC production declines in some countries did little to curb excess supply.
Natural gas production had been growing for several years before unconventional oil supply growth took off in the United States. This occurred as new technology unlocked heretofore uneconomical and difficult-to-access shale gas resources.
At the same time, LNG developments around the world unlocked stranded gas in places like Australia, Papua New Guinea, and Qatar, to develop more natural gas than US and global markets could readily absorb in the near term. With both oil and gas in their current state of oversupply, rising US and global demand will be needed to support a price recovery over the next years. Sustained global economic growth will be key.
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Cautious optimism returns for the future of oil and gas
When oil prices began deteriorating in June 2014, upstream producers initially delayed drastic cost-cutting measures normally associated with past oil price downturns, such as reducing personnel and down cycling drilling activities, likely because oil prices tend to be volatile and storage levels corresponded to historically high oil prices.
However, after OPEC met in December of 2014 and announced that cutting production in response to falling demand would no longer be the group’s policy, prices collapsed. Few expected the downturn to be still ongoing by mid-2016.
The study found optimism has returned for an industry recovery, tied directly to oil prices, expected to return to a level high enough to restore profitability and growth by next year.
The majority of respondents (33 percent) anticipate the recovery will begin in 2017, while two, somewhat smaller groups, believe the recovery has already begun (24 percent) or will begin in 2018 (29 percent). In total, 86 percent of professionals believe the oil and gas industry outlook could be close to a restart sometime in the next two years.
Industry professionals believe prices will move upward
West Texas Intermediate (WTI) prices
A price of $60 per barrel is an important boundary line in most people’s view, in order to be able to revive oil and gas exploration and production activity in the United States. It is possible to reach a $40–60 per barrel range as an average price for all of 2016, says 71 percent of professionals, or at least by the end of the year (61 percent). Otherwise, a higher price bandwidth of $60–80 is attainable by 2017 (44 percent) or by 2020 (46 percent).
Brent prices for crude oil track closely with WTI; so, it is no surprise the findings of the survey are similar to WTI prices. The survey found slightly less optimism that Brent prices would reach $40–60 by the end of this year, or by 2017 and beyond. For both WTI and Brent, a majority believe a range of $40–60 is possible in 2016 and $60–80 by 2017. A large majority do not foresee crude oil prices returning to $80–100 for WTI and Brent over the next three years; but, after 2020, more than a quarter think it is possible.
The US oil and gas outlook for 2016 is positive and growth is anticipated to accelerate in 2017
Oil and gas professionals anticipate US and world economic growth will finish 2016 at 1 to 2 percent annualized growth rate but believe it will accelerate in 2017. And, with more robust economic growth, West Texas Intermediate (WTI) and Brent prices would rise to $60–80 per barrel next year, a level most believe could restart an oil and gas sector recovery. However, even if prices could rise to a more sustainable level next year, it may not be until 2018 or beyond before the industry fully recovers.
While the industry waits for oil and gas prices to rise, the task at hand is to cut costs and make difficult capital expenditure decisions. The findings listed the most impactful cost containment initiatives for the upstream sector; yet, cutting costs was also at the top of the priority list for the other sectors as well.
The study also revealed an emerging confidence in an industry recovery as capital expenditures are expected to increase. From the upstream to downstream, most professionals surveyed expect to see an increase in capital expenditures next year.
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Deloitte, with strategy and market research firm Harrison Group, a YouGov Company, conducted a survey of 252 US oil and gas professionals via online interviews in early October 2014. Respondents were asked to provide their views on a range of topics including expectations for energy self-sufficiency, price and industry profitability, capital outlays and mergers and acquisition activity, regulatory issues, and the broadening of the North American energy renaissance.
View the 2014 oil and gas industry survey results.