Oil and gas outlook: strategic choices in a changing world

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Companies in the oil and gas sector are seeking to rebalance business portfolios and reorganize for a new era, according to research of senior industry professionals on the outlook for 2017.

This picture emerges from Short-term agility, long-term resilience, DNV GL’s seventh annual benchmark study capturing industry priorities, concerns and confidence levels.

It indicates deep, strategic changes for sustainable growth beyond cyclical patterns. Amid a drawn-out recovery, nearly half (49%) of 723 senior professionals surveyed expect their organizations to diversify into or increase investment in opportunities beyond oil and gas this year, though investments are still planned in the sector.

In 2017, how likely are organizations to increase investment in, or diversify into, the following areas?

Every player in the industry is looking at diversification, suggests Eirik Wærness, senior vice president and chief economist, Statoil, an in-depth interview conducted for the report: “Whether it is to diversify across the value chain or into other energy sources, companies are trying to make future cash flow less dependent on variations in the oil and gas price.”

“The number of companies we now see pursuing opportunities beyond oil and gas signals a step change in the reshaping of the sector and demonstrates its ability to adapt and build a more robust, diverse and sustainable energy future,” adds Elisabeth Tørstad, CEO, DNV GL – Oil & Gas.

Companies target renewables for diversification

Energy sources with lower carbon footprints are a clear target, particularly as prices have fallen to the extent that, in most cases, subsidies are no longer necessary for renewable energy to be profitable. A quarter (26%) of respondents expect their business to invest or increase investments in renewables in 2017, and 59% regard this as a shift in long-term business strategy. In the research, 41% say their organizations have good understanding of how to assess renewable energy investments. Total, for example, has significantly increased focus on solar power and batteries.

“Companies across the spectrum are redesigning themselves as energy companies, not just as oil and gas companies,” says World Energy Council secretary general and CEO Christoph Frei for DNV GL’s research. “Many have started talking about their ‘energy blend’ – increasing the importance of renewables and electricity.”

Some are looking to leave the energy sector entirely. Malaysia’s export development agency MATRADE, for example, says companies in Malaysia are diversifying into aerospace because of reduced opportunities in oil and gas.1 The intention to invest outside of oil and gas is most common in the manufacturing sub-sector (61%).

A future for gas

Of respondents, 77% see gas becoming more important in the global energy mix by 2027: half view it as an increasingly attractive prospect for their business. This aligns with gas’s significant potential as a ‘cleaner’ fossil fuel than oil and coal.

“We view gas not only as a fuel that has an important role to play in the energy transition as the cleanest of all traditional fuels, but also as a fuel with a firm place in the destination energy mix,” says Maarten Wetselaar, integrated gas and new energies director for Shell in an interview for the research. The company completed the acquisition of BG Group in 2016 to form the world’s largest liquefied natural gas business.

“There will be all kinds of pockets of demand that simply need the energy density of a hydrocarbon, from heavy transport to producing steel, as well as chemical applications in glass, plastics, fertilizers and many others,” he added.

Liv Hovem, senior vice president, DNV GL – Oil & Gas, comments: “We are seeing divided strategies on gas. Some companies are clearly divesting, especially in upstream gas production, while others are investing and show strong optimism for the future of gas.”

Falling oil prices have made gas more attractive for 28% of respondents: 31% are scouting for new gas projects, with 27% seeking merger and acquisition (M&A) opportunities in gas.

Indeed, more companies look set to pursue M&As in general in 2017 to advance their strategies: 33% compared with 23% a year previously. In addition, 78% foresee increased industry consolidation this year. This should boost demand for due diligence expertise beyond the purely financial.

Ongoing cost control in a year of muted investment

DNV GL’s survey respondents forecast an average oil price around USD58 per barrel at the end of 2017, more than double the low of USD27 in January 2016, but little ahead of levels in early 2017.

Like oil prices, industry confidence has stabilized, but it remains dramatically lower than in 2014 and last year (32% versus 30% in January 2016). Rather than remaining ‘lower for longer’, oil prices could well be “lower forever”, warns Graham Bennett, vice president, DNV GL – Oil & Gas. “In the meantime, oil and gas companies need to start plans for developing new fields in 2018 and 2019 and beyond in order to retain shareholder value,” he adds.

Investments are still being planned across the oil and gas value chain, though at a lower level than last year. The percentage of industry leaders expecting to maintain or increase capital expenditure in the sector has dropped from 43% in 2016 to 39%. More than half (52%) say their organization will favour more agile projects that are more adaptable within shorter timeframes.

In this climate, companies are maintaining a sharp focus on cost control, despite 76% of their leaders saying their organization was highly or somewhat successful at meeting cost-efficiency targets during intense, industry-wide, short-term cost cuts in 2016. In the research, 85% still see cost management as a top or high priority for 2017. Organizational restructuring (37%), reducing operating expenditure (35%), and improving efficiency from existing assets (29%) are the top three priorities for controlling costs.

Encouragingly though, DNV GL’s survey hints at a longer-term, strategic approach to cost-efficiency; 63% see their current measures as marking a permanent shift towards a leaner way of working.

“After this period of volatility, our management is very aware that we must always be careful to invest cautiously, optimize costs, and improve efficiency,” says Ye Hua Huang, deputy director-general, China National Offshore Oil Corporation (CNOOC), Bohai Oilfield Bureau in an interview for the survey. “We cannot abandon this cautious strategy when prices are high.”

Collaboration and standardization gaining popularity

Improved focus on collaboration, standardization and digitalization will play a key role in enabling the industry to transform to meet the demands of the new era and become profitable in volatile markets, says DNV GL’s Elisabeth Tørstad.

Many company leaders agree: 66% say cost pressures are driving more industry collaboration. The leading drivers in 2017 are to make new projects financially viable (51%), reduce risk/downside exposure (42%), and to access new skills (33%).

Collaboration through processes such as joint industry projects is boosting standardization efforts. “The sector is talking in an unprecedented way about working with competitors to use standardization to support joint efficiencies,” says the World Energy Council’s Christoph Frei.

For example, a cross-industry project led by DNV GL to halt the boom in unnecessary subsea documentation shows that implementing a standardized approach can significantly reduce engineering hours.

Nearly half of respondents (49%) say the downturn is helping to reduce complexity in projects and operations. Standardization efforts are increasing as it helps to remove remaining complexities: 66% say their organization will seek greater standardization of tools and processes in 2017 (59% in 2016).

Digitalization on the rise

Digitalization involving technologies such as artificial intelligence, automation, predictive analytics and machine-to-machine communication is seen increasingly as another means to enhance operational and cost efficiencies in oil and gas. Among the 15 emerging technologies investigated in DNV GL’s survey, digitalization is the area in which companies are most likely to invest in 2017 – across R&D, trials and full-scale implementations.

DNV GL estimates that the industry could become at least 20% more efficient by making full use of digitalization. It is the emerging technology area in which companies are most likely to invest in 2017, indicating that the industry recognizes it as a path to improved profitability and reduced risk. Nearly half (49%) of respondents say their organization will embrace digitalization to increase profitability.

In addition, 39% expect their organization’s spend in this area to increase in 2017. The same proportion report that lower oil and gas prices have increased their focus on digitalization, while for 45% it has remained the same. Only six per cent have decreased this focus following the downturn.

“There’s general acceptance of the idea that big data, in particular, is important to the future of oil and gas,” says Paul Doucette, global leader, public policy and external funding, GE Oil & Gas, in an interview for DNV GL’s research. “Many operators are working on how to go about harnessing it. The struggle is to make data meaningful and actionable fast enough to make a difference.”

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