Roughneck Mag

Petroleum Club Lament Mourns Slow Oil Price Recovery

By Heather Douglas

“Where now the horse and the rider?
Where is the horn that was blowing?
Where is the helm and the hauberk,
and the bright hair flowing?
Where is the hand on the harpstring,
and the red fire glowing?
They have passed like rain on the mountain,
like a wind in the meadow;
The days have gone down in the West
behind the hills into shadow.
Who shall gather the smoke of the dead wood burning.
Or behold the flowing years from the Sea returning?

Lament for Rohirrim is sung by Aragorn as he, Gandalf, Legolas, and Gimli approach Edoras.
He originally chants it in the language of Rohan, then translates it for Gimli and Legolas.
The Lord of the Rings, The Two Towers, Book Three, Chapter VI:  The King of the Golden Hall.

The Petroleum Club Lament is neither beautiful nor poetic.  Rather, it’s an ongoing gnashing of teeth, pounding of fists, and mournful cry, “When the oil price hits $70/barrel (or name the right price) then things can get back to normal.  Life will be good again.”  Sadly, it’s the young bucks weeping in their beer, having failed to adjust to the oil price’s slow upturn — today’s current business model.
“Much of the oil and gas industry has survived an especially tough few years with weak demand and low prices,” says PWC’s 2017 Oil and Gas Trends:  Adjusting Business Models to a Period of Recovery. “It has been difficult to make strategic decisions and plan for the future.  Only now is the sector beginning to emerge from its upheaval.”

The price crash, which began its freefall in June 2014, triggered a wave of red ink almost indiscriminately across the upstream business.  Producers sliced capital budgets by about 40 per cent between 2014 and 2016, says PWC. “As part of this cost-cutting campaign, some 400,000 workers [U.S. plus another 100,000 Canadians] were let go, and major projects that did not meet profitability criteria were either cancelled or deferred.  These steps, combined with efficiency improvements, are beginning to bear fruit for the industry. A growing number of projects – including oil sands – can break even at oil prices in the high $20s/bbl (US) … This would have been unthinkable a few years ago.” Moody’s Investor Service is calling for “higher than $50/bbl WTI (US) and a Henry Hub natural gas price of at least $3/million BTUs” to give producers a meaningful ROI (return on capital).

The Recovery’s Green Shoots

PWC is prudently optimistic the price recovery is happening.  There have been approximately 65 or more multi-billion dollar projects cancelled globally and that loss of forecasted production will cause a spike in price sometime in the next five to 10 years, the company predicts.

The challenge for producers, who worked hard to cut costs, will be to keep this attitude.  “This may prove difficult,” reports PWC, “because of the wave of worker layoffs eliminated significant experience, knowledge, and skills.  The loss of those capabilities could push development project costs up substantially, if they are not carefully monitored.”  PWC believes that smart producers will embrace new digital initiatives as a means of offsetting expense escalation and continuing the drive to cost and efficiency improvements.

Challenges to Growth Ahead

PWC is doubtful that many producers have the talent, appropriate organizational framework, systems, processes, or attitudes to be sufficiently flexible and innovative to thrive in the next few years.  It challenges operators to examine their current business model to “pursue new drilling and extraction technologies and increase research into sustainability and clean energy.”
Most of the upstream producers used to focus on profitability through production and reserves.  Unfortunately, this abruptly changed with the shock of low prices, rising interest rates increasing the cost of debt.  The result today is that cash is king.

“A new focus on cost efficiency and profitability will require a significant shift in corporate culture and outlook, and ultimately a realignment of company portfolios,” PWC notes.  It anticipates a round of mergers and acquisitions of companies with similar operating models – oilsands companies pair with other bitumen producers, Montney gas companies marrying other Montney gas firms, and a consolidation of offshore producers who know how to safely handle those extra challenges.

“The evolution of the oil and gas sector from one dominated by large, generalist companies to one featuring specialists in narrower aspects of the operating environment will require companies to establish new ways to collaborate, ways that leverage the specific skill sets of each organization,” reports PWC.  “In our view, the model of a single integrated company discovering and developing an oil or gas field, and operating it until it is depleted, is being replaced by alliances and changes in ownership designed to ensure the company most able to extract value manages the field in relevant stages of its life.”

Ongoing Portfolio Reviews to Evaluate Global Trends

PWC cites France’s Total as a good example of a producer reexamining its portfolio of assets.  “Total has taken this step by implementing a plan that requires one-fifth of its asset base to be focused on low-carbon technologies and by acquiring a battery manufacturer to spearhead its efforts in electricity storage.”
It also compliments Dong Energy, headquartered in Denmark.  “Dong was originally an oil and gas producer and recently shifted its focus to renewable energy, using its legacy fossil fuel businesses to generate cash flow for the development of offshore wind farms.”

One the biggest obstacles in the past to M&A activity, was the challenge of two parties coming to an amicable agreement on field valuations.  “Now that prices have recovered somewhat,” says PWC, “and there is a growing sense that a price floor in the vicinity of $50/bbl (US) has been set, the pace of deal making is picking up.”  In recent transactions, Total and Statoil completed multi-billion deals for Brazil’s sub-salt deepwater oil reserves, while Exxon has bid on Papua New Guinea’s InterOil and Noble Energy acquired assets in the U.S. Permian Basin from Clayton Williams.
“Going forward,” PWC predicts, “we expect that companies will increasingly focus on asset deals to build their portfolios in a cost-effective way.”

New Forms of Technology Will Be Needed & Used

Not only are digital technologies continuing to revolutionize the way oil and gas is found and produced, new applications are in the works to transform how the office staff at headquarters get their work done.  “Digitization should be a lever for innovation that improves production and efficiency in the field,” notes PWC.  “For instance, robotics is likely to become more commonplace in the industry, handling complex and repetitive tasks such as connecting pipes and replacing broken machinery, which in turn will reduce labour requirements.”
GE has announced an array of agreements with large and small producers to implement digital devices, databases, and sensors to predict equipment breakdowns before they occur and expand exploration and production efficiency in deep sea and offshore platforms.

PWC thinks algorithms will dramatically change how the finance and accounting groups get their work done, meet regulatory and stock exchanges regulations, and better serve the shareholder community.  And it believes that human resources needs a dramatic revamping.  “From a management perspective, now is the time to recruit new talent from pools of highly capable men and women, casting a net in a range of global regions,” adds PWC.  “Younger employees expect somewhat less traditional workplaces – they are seeking more collaboration and open communication and less top-down decision making.”
Is the Canadian oilpatch up to this challenge?  Or, will its executives continue to wail the Petroleum Club Lament, gnashing their teeth, pounding their fists, and mournfully crying.

Courage, me lads.  It’s time to recapture the romance of inventing new business models to outwit the competition.

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