A degree of certainty with regard to oil prices over the next year should help exploration and production companies in reaching decisions regarding capital investment while the service sector looks set to record further growth.
The question occupying many industry minds of late has been the impact of increased shale oil production. Most forecasters now predict that oil will be range bound over the coming years with Brent moving within a $90 to $120 a barrel bracket. The rationale being that increased production from oil shales will be offset by declining conventional production from older fields and better discipline among the OPEC members.
In the Middle East instability and conflict will continue to shut in supply from Syria and Yemen and despite the partial rehabilitation of Iran, doubts prevail over its ability to increase production from existing fields that have been starved of investment.
Demand for oil and gas is expected to accelerate as the developed economies recover from the effects of the financial crisis and developing economies, particularly China, see growth among the middle classes.
One advantage of unconventional oil being a material element of the supply mix – more than 45,000 land wells in US shale were drilled last year – is that if crude prices were to fall below the $85/bbl, operators would immediately lay down land rigs and supply would fall, bringing the market back into balance.
Meanwhile, in the offshore arena projects are becoming increasingly complex in higher risk, higher cost environments that require more sophisticated technical solutions. Good news for the flourishing subsea service sector.
In this context, the challenge for exploration and production (E&P) companies is to decide where to allocate capital in a world where service costs continue to rise but commodity prices remain relatively fixed. Marathon’s recent decision to sell its declining North Sea assets and deploy its resources into its growing US land shale business is a case in point. It should be a spur to the UK Government to act to ensure that as many major international oil companies remain in the UKCS as possible, otherwise it will be hard to fully monetise our reserves over the long-term.
Range bound oil prices provide a positive framework for global economic growth which is good for the UK and for the oil industry because it reinforces medium term demand and the underlying price.
The service sector is proving to be the significant winner in the current environment. The US-listed service companies saw their stock prices, as tracked by the US Oil Service Index, rise by 26% in 2013 and the large service companies are predicting top line growth of circa 10% in North America and internationally in 2014.
Mergers and acquisitions in the service sector have been a mainstay of our eastern hemisphere work out of Aberdeen since 1999 and we expect to see further consolidation and investment in 2014 and beyond.Simmons’ eastern hemisphere transactions completed out of Aberdeen over the past 14 years have an aggregate value of more than $14 billion and have encompassed domestic, cross-border and international deals involving companies in the subsea, well services, drilling and completions sectors.
The sale of Reservoir Group LLC to ALS Limited in August 2013 and the sale of Hydrasun Holdings Limited, a portfolio company of Equistone Partners Europe, to Investcorp International in March 2013 were two of 2013’s most prominent deals with the former representing the completion of Simmons’ 200th transaction. The sector’s strength relative to other industries is going to continue to attract investment.
In 2014, the industry’s fortunes will be determined by global political and economic factors but my hope is that we will see growth in demand and relative price stability.
The UK still has meaningful reserves and production and is successfully exporting its capabilities in technology, services, quality and safety to the industry globally. The challenge is to make sure this prevails long after the last drop of oil has been recovered from the North Sea.
Colin Welsh is chief executive officer of Simmons & Company International