It is going to be better. 2017 is the year of the recovery. Demand will finally out strip supply, rig counts will come back. All things we heard this time last year and all things we are hearing now as we head to the end of this year. What happened? More importantly, what will happen?
The market is saturated with articles, investor houses and soothsayers trying to predict when and how the energy industry will move out of the current down cycle. It is complex and daunting as nobody has seen a cycle like this one. Despite the complexity, all the charts, macro and geopolitical factors, it boils down to one simple calculation; the industry will not cycle back to what we have been familiar with pre-2015 until demand balances with supply. In fact, this cycle has caused such a directional change in how capital is being applied and spent, coupled with a new evolving energy marketplace, we will most likely never see that same kind of industry for some time again – or perhaps never. Currently, the industry is still producing slightly more than we are using on a global basis and although The Organization of Petroleum Exporting Countries (OPEC) has shown restraint as we end 2017, it is estimated that supply will still slightly outgrow demand through 2018, pushed somewhat by the non-OPEC supplier’s inability to show appropriate restrain.
2018 should see the oil price index strengthening with a more consistent and stable range. However, it would be prudent to expect another year of a relatively flat index from $48-$65 bb/d for most of 2018. The survival of the fittest mentality has delayed the larger long-term projects for smaller, shorter cycle projects. Operators continue to hold back on capital to examine their cost base and shed expense as well as continue to push deep cuts onto their suppliers. As the operator base begins to reach their basement on cost structure and investment, the oil services sector will lag slightly behind and continue taking the brunt through the first half of 2018, resulting in another year of shedding workforce and cost overall. More jobs will go, and more projects will be shelved as reality sets in that we just don’t have room for more supply.
This all sounds bleak, but it needs to happen for the positive and bright future for our business. This long down cycle has fundamentally changed the industry for good in my mind.
All major industries need to go through a reset or awakening every now and then and that’s a good thing. This industry is not in a cycle as we know it but rather in realignment. There is no ‘Peak Oil’ theory to worry about. There is no foreseeable lack of energy. In fact, the world’s energy needs are diversifying and changing quicker than anticipated and the industry will change with it to less supply velocity and lower price points.
The good news, I believe, is that we are at the inflection point of the creation of a nimbler, innovative industry with plenty of upside. In particular, 2018 should be an opportunity for the hard-hit upstream oil services segment in the form of a return to investment.
It is innovation that will allow the industry to produce energy more economically and efficiently. Most of the key application innovation to do this comes from the oilfield services sector. Operators will realise that they must again begin to invest in this sector as they cannot cut their way out of the downturn. In turn, the upstream oilfield services sector must deliver cost-effective applications and technologies that truly produce more economical recovery per dollar spent. Those service companies that are still alive and want to survive and be relevant must produce innovation based on causation, not just cool stuff that looks great or is a fast follower twist on something already in the market.
Now is the time for truly, efficacious innovation. Innovation with a purpose that solves the problem at hand; more recovery for fewer dollars spent. Where will this come from? Not necessarily the usual suspects. Smaller, innovative service companies, not burdened by mandated product life cycles, constant restructuring or prisoners of mass amounts of SKUs to keep moving, can pinpoint the solution required and often develop amazing breakthroughs quicker and cheaper. There is an opportunity for the upstream services sector, with help from proper support and investment from the operator community, to quickly reshape the landscape and kickstart an industry that can easily operate under $50/bbl.
For those oil services companies that are nimble and have the ability to innovate efficiently, 2018 should be an opportunity to grow in the upstream sector as most of the cutting and trimming has been done and investment will be shifted to efficient execution. Instead of facing extinction in 2018, small technically advanced service companies will not only continue to exist but will thrive and produce remarkable innovation that our industry is known for.