The extent of damage experienced by consistently plummeting hydrocarbon prices has been unprecedented. Oil and gas companies have lost hundreds of billions of dollars since mid-2014 as prices slashed more about 100% since mid-2014. If you look at the average of three spot prices of the crude i.e. Brent, WTI and the Dubai Fateh, it has dipped 100% since July 2014 until December 2016. As a result, planned capital expenditures have been cut back over about 30% for two consecutive years across 2015 and 2016.
Shell reduced its 2015 capital expenditure by $2 billion as the company continued to adjust its business to the lower oil-price environment. Petrobras cut its 2015 investment budget down to $25 billion from its previous $28 billion target. The state owned company will also slash its 2016 budget to $19 billion from $27 billion, a 30% cut. Total will cut capital expenditure by $3 billion in 2016 compared to 2015, down from $23-24 billion to $20-21 billion.
Historically, an annual slump in cap-ex used to be recovered the following year as the market forces would re-adjust the prices. However, back to back losses have adversely impacted new and expansion projects, crippling even 2017 growth prospects. It is evident from the cap-ex chart that oil & gas majors, on an average, have reduced their capital spending by 20-30%, with exceptions of Andarko, Occidental and Devon who reduced their spending by 50%, 50% and 80%, respectively, in 2016 alone.
This downward trend offers the window when oil and gas operators, EPC firms, equipment manufacturers, investors and service providers have to change their strategies to survive. What makes the situation even more complex is that any plain Jane, run of the mill strategy which might have worked earlier, may not promise to be the Holy Grail. The reason is that perceived trough in hydrocarbon business cycle is also complimented by other dimensions such as resource depletion and growing environmental concerns. Both may lead to higher cost of production, besides the difficulty.
Now, the path which must be and is likely to change the landscape of the hydrocarbon industry has to be strategies which address both cost and sustainability factors. Envecologic devised a cost-sustainability quadrant which shows three primary paths toward cost competitive and sustainable oil & gas production.
Companies tend to adopt Path 1 when the immediate priority is to lower the cost and they think of incorporating sustainable practices. Most companies have traditionally been falling in this category. Path 2 is where companies who value environmental concerns and spend time and money to integrate sustainability in their value chain. They may be doing so in order to comply with some regulations or as part of their shared value strategy with the hope that these investments will bear returns at some point in the future.
It is, however, Path 3 which is going to shape the future oil & gas landscape. Adopting this route involves two main components:
- Structural realignment or reengineering of value chain
Structural realignment or reengineering the entire value chain
Oil & gas value chain management can be majorly divided into supplier management, logistics management and production management.
Supplier management: The long and complex supply chains in the hydrocarbon industry need foremost attention on supplier management in order to achieve cost effective and sustainable performance. These include supplier certification of environmental and/or social standards, supplier selection (including environmental & social criteria), information sharing, supplier audit, supplier integration & development etc.
Logistics management: Logistics play a significant role in the transition to low carbon economy, especially because the transport sector is one of the main contributors of GHG emissions. The long distance between O&G production facilities and the market requires solutions that are able to reduce emissions from logistics operations. Collaboration in logistics operation can result in cost savings and benefits associated with longer term contracts, safety, quality, operations and economies of scale. It can also improve the effectiveness of procurement activities and resource sharing for waste management and warehousing.
Production management: The O&G production and refining operations generate hazardous waste and emissions, such as ammonia and sulphur dioxide, which are toxic and can cause a severe impact on the environment. The E&P and refining operations are also water and energy intensive. Companies must be able to manage emissions, reduce waste and reuse resources which will help improve margins, or at least stop costs from going up. Companies must also treat and/or dispose of the by-products of production processes according to local, state or international laws imposed on the industry. The availability of water recycling facilities will help companies to gain economic benefits from water reuse and also reduce the environmental impact on water bodies. O&G companies could also increase their use of electricity generated from renewable sources in their production processes.
Innovation is paramount to developing cost effective technologies and processes which improve the performance of oil & gas value chains. Today’s low oil price scenario has created a new passion for efficiency, which highlights new technologies that can drive efficiencies—albeit at a limited investment cost. Advanced services—such as Logging While Drilling, which allows for the generation of well data during the drilling phase, Rotary Steerable drilling and smart (offshore) completions—are being sought by upstream operators. Many OFSEs (oil field services and equipment) now are redesigning equipment with more modular designs in order to drive out inefficiencies. In the absence of modular design, procurement and manufacturing cannot benefit from economies of scale and 15-30% cost saving if designing integrates optimisation of total cost of ownership.
Increasingly, equipment used in oil & gas operations are becoming IIoT (industry internet of things) compliant. Need for adoption of IoT at oilfield is more than ever mainly on two counts. First, low oil & gas price situation has compressed margins, making it necessary for operators to optimize processes and tighten up the supply chains. Second, upstream oil & gas segment is an abode of highly energy intensive activities. In the pursuit of achieving sustainability, it is vital to check energy inefficient operations. In this direction, IoT based decision making, such as equipment capacity is optimised based on real time load information, for example, will lead to lower carbon footprints. Growing need may lead us to believe that the digital oilfield equipment and service market may grow at about 4-5% per annum until 2022.
Oil & gas companies need to select their strategies by combining some or all of the options stated earlier in order to adopt path a to move towards greater cost competitiveness and environmental sustainability. The Oil & Gas Climate Initiative, CEO led initiative of 10 O&G companies, is a great step towards developing profitable and climate friendly practices. More and more companies should join in or develop independent approaches to adapt to the changing times, which demand sustainable growth, instead of either environment sustainability or financial growth.
[This article was originally written for, and published in Oil Asia Journal, (one of the most popular pan Asia petroleum and energy journals) for their March 2017 issue]