Global Oil & Gas: “Optimists hoping for $60 a barrel, not $115” – Interview

Global Oil & Gas Outlook

DNV GL has recently launched a report providing the 2017 outlook for the oil and gas industry. The company has interviewed 723 representatives from the industry hoping to get a better picture when it comes to what to expect in the year ahead.

Offshore Energy Today has, in turn, interviewed Senior Vice President of DNV GL – Oil & Gas Hari Vamadevan, looking for a more detailed insight into some parts of the DNV GL report.

DNV GL’s Hari Vamadevan

Q: According to your survey, the oil price is once again expected to be the biggest impediment to the industry’s growth prospects in 2017, with 64% of respondents citing it as a top three barrier. Do you agree, and can you comment on the findings?

I think I would agree. Oil price is a key decision making aspect. There is a phrase I use: “The oil and gas industry plans for the long term, thinks for the long term but takes its confidence and its sentiment from today’s oil price.”

And there’s a slight tension between that, especially in today’s world where you’re trying to plan for the long-term, but in the short term, you’ve got great price uncertainty, especially over the last twelve months.

Q: Only one third (34%) of respondents to your survey expects the oil price to rebound in 2017; 28% expect it will not, and 35% expect similar prices. My question is, what does ‘rebound’ mean in this context? Rebound to what level, and what is the optimism (with 34%) based on?

Forecasting the oil price is not easy. To some degree, when you ask people for the feedback you get one third more optimistic, one third expecting a status quo and a third expecting a more pessimistic account. However, in the survey I don’t think those who are optimistic expect the oil price to rebound to 2014 levels. They just hope to see an increase.

Q: So, would you say this is wishful thinking then?

Not so much wishful thinking. I just think there is an expectation the price may continue to rise.

If you compare it to last year – and this is maybe where the term “rebound” is coming from – we were at $27 a barrel.

Effectively, the price has doubled now so, to some degree, one could consider going from $27 to $55 as part of the rebound. Some people expect it to continue perhaps north of $60.

I think that’s the context the people are talking about. I don’t think there’s anyone expecting it go back to 2014 levels.

Q: To the question “Is the worst of the industry downturn already over?” almost half of your respondents said “no.” Does this mean they expect the prices to go back to below $30? 

Again, we’ve got half of the respondents thinking the worst is over and half the respondents saying the worst isn’t over.

I consider the 2014 / 2015 price reduction as a big shock to the industry. It wasn’t foreseen, and that then resulted in an industry still coming to terms with a lower oil price at the beginning of 2017.

There are still those who are not competitive at the current price and feel they have to do more, and therefore feel “the worst is not over.”

So, I think it’s very much a reflection of an industry that remains in transition, and still has to decrease cost.

 Q: Mr. Vamadevan is it possible that if the U.S. becomes “too confident,” OPEC will start pumping again, bringing us back to square one?

I don’t see any region of the oil and gas industry too confident. I don’t think you can have the last two years that we’ve had and find anybody who is too confident or too optimistic. US shale producers cut costs faster and deeper than most other regions and are therefore more confident at today’s prices.

In relation to OPEC. Will they deliver on the production cuts? They’ve started well, and if that continues I think we will be happy, but part of the reason we had the price shock was that supply was significantly greater than demand.

We still do not see much demand growth. Everything we see in the world today, all the socio-political-economic background, is not indicating demand growth. Hence the recovery is a fragile one.


Q: Is there a scenario where the U.S. firms would accept some voluntary output cuts, similar to those of OPEC, or are we talking about very different systems with private U.S. companies vs. OPEC’s NOCs?

I think it is simple economics that dictates how operators decide their production levels. Those companies that can make money at today’s prices will continue with production and those that can’t will cut costs and investment.

Q: What about the expected capital investments? What has the survey shown? 

Again, a pretty split picture, with 50% expecting an increase and 50% expecting a decrease.

BP approved Mad Dog 2, Total and CNPC signed $6 billion agreement for Iran, Chevron announced a Kazakhstan Joint Venture…so there are green shoots of E&P activity, some of it offshore, and that is a positive.

However, it is not a strong recovery of the capex market by any stretch. In the North Sea, we’ve seen some small steps, but we haven’t seen big developments move forward yet.

Q: Any notable offshore projects that have been cancelled due to the low oil prices?

Generally, projects don’t get cancelled, they just get delayed, and they remain in pre-FID stage. In the North Sea we’ve seen three big projects’ (Sea Lion, Rose Bank, Penguins) schedules slipping over the last year.

Q: More cost cuts ahead?

This time last year the oil price was $27 and most E&P companies were losing money. Today, at $55, most E&P companies are profitable again. However, companies will try to ensure that costs stay lower forever. This will mean most companies will still be looking to cut costs, just not at the levels that they did last year.

Over the last two years most of the cost reduction has been the “easier” actions around workforce reduction, delaying investment and squeezing the supply chain. At DNV GL we believe this is not enough to keep costs lower forever and we must do business in a smarter way – more standardized solutions and greater use of big data. This will require greater partnerships between operators and the supply chain.

Q: On that note, an innovative deal was recently made where a Chinese driller agreed to charter out a rig, and take payment later, dependent on successful drilling. What do you make of it?

I’m not familiar with this case but I think you highlight a good example of how we will have to be a little more creative in those partnerships, with the operators looking for the supply chain taking some of the risk.

We are likely to see more mergers, acquisitions, and divestments in the current climate. For example, in the subsea contractor market there’s been a number of significant mergers.

Q: On cost cutting, some of your respondents have said exploration costs have plunged significantly, with one oil company boasting of hiring a 6th gen drillship for a fraction of the 2014-cost. Can you share the story with our readers?

The survey shows that that E&P companies believe they have been very effective at meeting cost efficiency targets, with 90% reporting success.

Regarding this example, I think that is a question to be put directly to the parties involved.

Q: There is a view that even if the oil prices go up, the dayrates for the supply chain will remain subdued?

Lessons have to be learned from the previous downturn. I think that the industry is very conscious that even when there is a recovery we don’t want to see that resulting in cost inflation.

DNV GL is a supplier to the oil and gas industry and therefore to remain competitive we also have had to cut our costs and rates.

Q: More workforce reductions ahead in 2017?  

It is possible as costs need to stay lower forever. However, as stated earlier the easier actions have been taken.

It is important that savings also come from finding a smarter and more efficient way to execute our work and projects.

Q: The survey also shows aggressive cost cutting might compromise safety? There are stories of companies now having one worker do the job that once took two persons to do, as part of these cost cuts.

You can’t expect one person to do the work of three people. However, the function can be executed in a different way. That may make sense but reduces the amount of time involved.

There is a limit to what you can achieve through workforce reduction without efficiency and smarter ways of working.

I think every company in the oil and gas supply chain is looking at how to become more efficient, and DNV GL is no different.

The industry had to cut cost. The survey shows only 10% of the respondents think expenditure in HSE will rise and most of those cuts were across the board.

At DNV GL we would have liked to have seen a more selective basis with ring fencing of the areas that relate to managing major accident hazards.

There’s a quote in the survey from an operator that says, “safety facilities and management are affected when you cut costs. Many use cheaper facilities and cheaper services. Will that lead to accidents this year? Maybe”.

We need to be careful about safety all of the time, no matter what the oil price is. Safety can never be compromised, and at DNV GL we think everyone who is working in the industry has to be vigilant because safety has the potential to be eroded when there is a large reduction in staff and costs.

Certainly, if you look at the statements coming out from the regulators, and from the unions, they are concerned, and I think it’s important, for everyone in the industry, including the leadership to say we should be concerned.

Q: While senior executives don’t think safety is an issue, workers do. Who’s right, and why the discrepancy?

We have an expression that we use in safety culture training “that you need an organization in which bad news travels as fast, and as far, as good news.” We say this to make a point that if you see something wrong you must send it up the line.

There was far more drastic cutbacks at the beginning of 2016 than today. In June 2016 the Lord Cullen of Whitekirk KT opened DNV GL’s new £3 million hazards awareness training centre at our Spadeadam test site near the Scottish borders. Today we have significant bookings for safety training whereas this time last year we had few.

Q: Asked to expand on those severe cuts in safety programs in 2016, and whether that was a knee-jerk reaction, Hari said:

I think people took short term cost cutting measures when the oil price hit $27. Now, at $55 that kind of short term immediate thinking has gone, and there is much more of a medium term thinking.

Q: Does that mean the industry is willing to compromise safety at very low oil prices then?

I think at $27 the industry was in shock and our future was very uncertain.

Today we are less shocked, and we’re more an industry in transition with expenditure and  investments returning to our operations.

I know the industry does not compromise on safety, but when you’ve taken significant costs out, you should be concerned and vigilant.

Q: Would you be brave enough to give your forecast for the oil price in 2017?

Forecasting the oil price is very difficult. And the survey shows a very mixed picture, with a third expecting an increase, a third expecting a flat price and a third expecting a decrease.

The oil price is a function of supply and
demand, and right now, some supply has been taken out of the industry but demand growth remains flat. Hence, the recent oil price recovery is largely based on production being cut back.

I think it is fair to say that the supply demand picture is finely balanced, hence you get such a mixed picture for the forecast.

However in the long term, due to climate change concerns, companies are looking at a deeper strategic change beyond normal cyclical patterns on oil price. The survey shows they are looking to rebalance their business portfolios through diversification and consolidation to address  the future lower carbon economy.

Q: So, is there a reason to believe we won’t be seeing the $115 a barrel price any time soon, or even not in a long time?

I doubt we will see a return to $115 a barrel oil price for a very long time. We’re going to have to get used to operating in this $50-60 range, with some price volatility, depending on how the supply-demand balance looks at any given time.

Interview conducted by Offshore Energy Today’s Bartolomej Tomić


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