The global oil and gas industry will need to adjust to “lower forever” hydrocarbon prices, an audience at the third annual Energy Voice OTC panel debate breakfast heard in Houston yesterday.
Five industry leaders from the US and the UK joined the panel to discuss the future of the oil and gas industry and the results of the Energy Voice sector survey #Oil17: New World Order conducted in association with energy consultancy Calash.
Patrick Jankowski, senior vice president of research and regional economist for the Greater Houston Partnerships, revealed his analysis of historic oil prices adjusted for inflation which revealed its natural price is $50 per barrel.
“We are pretty much where we should be with the price of oil. You will likely only see oil go up with the rate of inflation for the next few years.”
Regina Mayor, KPMG’s global sector head of oil and gas, said: “You have heard these phrases, it is the ‘new normal’, it is ‘lower for longer’. We now believe it is lower forever.”
As a result, the industry has to overcome challenges to demand as clean energies deliver more supply and also learn from mistakes in the past such as cutting too much cost and talent from the business.
She said: “If we don’t figure out how to create those win-win relationships versus a zero sum game then we truly will not have learned from this downturn.
“There is tremendous opportunity to create win-win scenarios where the service providers deliver the technology, the quality and the qualified people and share in the gains the operators can extract from that type of relationship. That is the challenge I leave this room with.”
Mr Jankowski said he expects Opec to agree caps on production until the end of the year when slowly rising demand is expected to “roughly match” supply. And while he agreed with Ms Mayor’s view that the US shale industry is currently undergoing an exuberant “Permania”, he said the price of land in key shale areas, rising rig rates and pipeline capacity will limit production.
He said: “There are some constraints there. Right now US production is about 9billion barrels a day, from what I have read looks like we will probably top our at 10billion a day by the end of 2018. There is not going to be enough from the Permian to offset the decline in production elsewhere. So there will be some support for prices but I don’t think you will see prices ever get up to $100 a barrel again.”
Jim Milne CBE, chairman and managing director of Aberdeen’s Balmoral Group admitted he was worried about companies the North Sea that carry high levels of debt. Despite being a highly competitive market, he expects there will be companies struggling with cash flow when the market picks up.
“The North Sea is probably one of the most competitive areas of the world and one of the most difficult to get the oil out of,” he said.
“There have been a few hard years. It is when things begin to brighten up there is a worry companies won’t have the money to buy the raw materials to carry on their work. That concerns me very much especially when they are heavily borrowed.
“We are very fortunate to be cash rich. But we manage that very carefully.
“I am also sad to hear good people and apprentices getting paid off. These guys aren’t going to come back.
“There are a lot of lessons should be learned there. But one thing Balmoral never does is get rid of good people. We would rather create work for them. Never forget a company is people.”
Philip Rodney, Burness Paull chairman said oil and gas firms needed to adopt a long term view
citing that one of the only companies in corporate history that achieved un-interrupted year on year growth was Enron Corporation, a major US firm that collapsed due to a major accounting fraud scandal.
“Businesses take a very short term view and we have to learn there are cycles – there is a seven year cycle in the oil industry and we should recognise it,” said Mr Rodney. “We also have to recognise businesses can’t make more money every year. The only company I ever tracked that managed to do that was Enron. We have to accept there are business cycles and we have to forward plan for them.”
He added: “Looking at the future, there is always something that comes out of left field in terms of technology. Something that in five years time will seem so obvious but isn’t now.
Paul Latiolais, the director of the Center for Innovation, Commercialization and Entrepreneurship at Lamar University in Beaumont, Texas said new technology will be the industry’s the best way to mitigate risk and lower costs.
“We have gone through a really tough period. There has been some stabilisation and there is some positive things going on. New technologies – that’s really the game. It is the best way to mitigate your risk and lower your costs and yet be ready for expansion when the time comes.”
However, Mr Jankowski pointed out that adoption of new technology in automation and digital will likely mean the oil industry employs fewer people in future. Nevertheless he said the sector remains attractive.
“This is not the last downturn we are going to have,” he said. “We just need to be prepared. Hopefully the next downturn won’t be as severe as this one.
“The way you survive a cyclical business is you be flexible and innovative. I’m so happy my son is a geologist. I would continue to recommend people get in the oil and gas business or engineering. The bad times don’t last.”
Mr Milne said diversifying was a good option for companies that were suitably knowledgeable but that attitude was important.
“If you can diversify into other products do it. But make sure you don’t do something you know nothing about,” he advised.
“But never let anyone say, ‘I cannae do that’. I’ll take what Winston Churchill said: to do the best you can is not good enough. You have to go out and achieve what has to be achieved – two completely different mind sets.”
Ms Mayor said she remained upbeat about the sector’s prospects despite its challenges although she called for the oil and gas sector to try to improve its image by underlinging its importance in the energy mix of the future.
“I’m one of the industry’s biggest fans,” she said. “One of the things I don’t think we do well is manage our image. There are still 1billion people n the world without access to electricity, which is the single biggest driver of wealth creation. Your average Pakistani consumes about 450kw of energy a year – that is what your average Texas refrigerator uses every single year. It is our industry that will power that world economic growth. We need to change the dialogue.”