Senior oil and gas professionals are expressing optimism for 2018 and are feeling better-prepared for the challenges ahead. Of 813 senior-level professionals surveyed for 2018 by DNV GL, 63% said they are confident about growth in the industry, nearly double the 32% that said the same in the survey a year ago. The annual report provides a snapshot of industry confidence, priorities, and concerns for the year ahead. DNV GL outlined five key trends that emerged from responses.
Green shoots
The industry’s rise in confidence appears to be underpinned by lower costs, stable oil prices, and fewer concerns about global economic headwinds, the report said.
“The big change in industry confidence is not because of a belief that the oil price is going to rise to previous levels,” says Graham Bennett, vice-president for DNV GL—Oil & Gas. “But instead, because industry participants now have their cost levels under control and can make a reasonable margin, even at $55[/bbl] or $65[/bbl] oil.”
Some industry participants believe that there could simply be overconfidence in the stability of prices at current levels: “The confidence and stability we are seeing are deceptive,” says Edward Morse, global head of commodities research at Citigroup. “The most significant response to the higher oil price outlook has been an increase in capital spending, which will turn into a supply surplus much quicker than the market thinks. We think the optimism is not going to last very long, and that by 2019—particularly if OPEC producers and Russia want to bring production back into the market to avoid losing market share—we will be back in a $40-45[/bbl] price environment.”
Overhaul
With the increased confidence, the sector plans to invest in research and development, digitalization, diversification, and—to some extent—in new exploration and expansion activities around existing fields in 2018, the report said. This year’s survey indicates that two thirds of respondents, 66% plan to maintain or increase capital expenditure in 2018, up from the 39% that intended the same for 2017. According to survey results, the industry segments most likely to increase capex are refining and gas processing, integrated companies, and E&P companies.
A focus on investments in more agile, shorter-term projects has increased from 52% last year to 60% this year. “New projects are likely to have a quicker return on investment,” says Liv Hovem, chief executive officer of DNV GL—Oil & Gas. “We see the majors driving a much quicker turnaround on megaprojects compared with a few years ago.” A necessary shift in gas markets, the survey report said, as buyers are pushing for shorter contracts based on natural gas indices instead of long-term, oil-price-pegged contracts.
The industry also may have to adapt to shorter investment and price cycles. “We know that the shale-oil cycle is a short one—a 9-month cycle, both when prices go up and go down,” said respondent Edward Morse of Citigroup. “But the fact is that the deepwater cycle has also shortened. It is no longer a 10-year cycle. Now that infrastructure is in place and so widespread, it really is five or fewer years from the time you decide to develop a project to getting it completed.”
More respondents this year expect to increase operating expenditure, 19%, and headcount, 20%, in 2018 than they did ahead of 2017—11% and 12%, respectively—to support leaner projects.
Energy transition
Apart from an increased focus on financial margins, DNV GL believes trends point to a new era for oil and gas connected to a long-term energy transition. Seen by many as a gradual process, already 44% of survey respondents said their organization is actively preparing for a transition to a less carbon-intensive energy mix. Thinking about the potential transition, said Eirik Wærness, senior vice-president and chief economist at Statoil, “makes decision-makers and the industry more cautious than they would be if this had been a normal boom-bust type of cycle.”
As part of focusing on doing things differently in the near term, while also reassessing long-term strategies, gas seen as critical to the energy transition.
Some organizations are directing investments towards natural gas and LNG—ahead of crude oil. Of those that participated in this year’s survey, 86% expect gas to become an increasingly important part of the global energy mix over the next 10 years—up from 77% a year ago.
Survey results also point to continued growth of renewable energy sources within the portfolios of oil and gas companies: 38% of respondents expect to increase their renewable energy investments in 2018, up from 27% a year ago.
Innovation, cleaner profits
One third, or 36%, of senior oil and gas professionals expect to increase spending on R&D and innovation in 2018. One in five respondents, 19%, cite a lack of investment in innovation as a key barrier to growth in 2018—on a par with oversupply of oil and gas, 19%, operating costs, 18%, reduced exploration activity, 19%, and competitive pressure, 22%. Only oil price, at 37%, is seen as a much higher barrier. Most likely to get the go-ahead in 2018 are digitalization, 37%, and cyber security, 36%. More than half of respondents said spending on subsea technology is likely.
Expect to continue to see momentum in the reporting and disclosure movement. “Issues of sustainability, climate, and social responsibility are becoming increasingly important to a larger number of players in the oil and gas industry,” said Brian Sullivan of IPIECA, a global oil and gas industry association for environmental and social issues.
In DNV’s survey, 56% of respondents said that sustainability, including environment, climate, corporate social responsibility, and workplace environment, is a top or high priority for their organization. Another third see it as a moderate priority.
