Survey Points to Bullish Outlook for 2019, With Some Caveats
Encouraging results in 2018, a greater sense of resilience for the year ahead, and confidence in the future of natural gas are behind senior oil and gas executives’ bullish outlook for the industry and readiness to increase capital spending, according to the latest annual survey from industry technical advisor DNV-GL. Two-thirds of survey respondents expect a rise in large, capital-intensive oil and gas projects this year.
“Despite greater oil price volatility in recent months, our research shows that the sector appears confident in its ability to better cope with market instability and long-term lower oil and gas prices,” said Liv Hovem, who heads DNV’s oil and gas division.
Resilience, Confidence, and Readiness to Spend
Confidence in the industry’s growth prospects has doubled, from 32% in 2017 to 76% now. The US has the most improved outlook, with 43% of respondents from the United States planning to increase capital spending in 2019, compared to 30% of respondents globally. Findings for operating expenditure (OPEX) are similarly optimistic, with 31% predicting increased OPEX in the US, outstripping both last year’s 20% tally and the 22% expected globally in 2019.
“There are brighter prospects for activity and investment across the value chain this year and beyond,” said Frank Ketelaars, DNV-GL Oil & Gas Regional Manager, the Americas.
“Deepwater projects are back on the agenda in the US after the sector has focused on reducing development costs while maintaining high safety levels,” Ketelaars said. “OPEC is among those predicting sustained growth in US unconventional oil production over the next few years. Additional LNG facilities will also start up or win approval in 2019 to support the country’s strong and growing role as an exporter of LNG. Rising availability of affordable natural gas and related liquids from unconventional plays is the basis for new investment in petrochemicals.”
High levels of confidence for 2019 and the coming decade suggest that the industry believes in its ability to adapt to both short-term volatility and longer-term shifts in supply and demand patterns.
Focus on cost control is ebbing, with the percentage of companies planning to increase strictness dropping to 44% from a high of 72% in 2015. However, the industry appears confident in its spending discipline.
Cost-efficiency measures implemented since 2014 have led to smaller investment requirements and much shorter drilling times per barrel of oil recovered. For example, applying technologies that have been tried and tested in the US shale boom is expected to shorten development cycle times for offshore conventional oil projects and reduce costs by 40–50%.
Digitalization is comfortably the leading priority for R&D spending this year, with 45% of survey respondents planning investments in 2019. That is more than twice the number of respondents investing in the second-ranked priority, subsea technology (21%).
Driving the sustained momentum are long-term efficiency and productivity gains the industry needs to maintain its competitiveness over the declining cost of renewable energy over the coming decades. Additionally, numerous barriers to digital adoption—including bureaucracy, insufficient funds, and lack of awareness of digitalization’s benefits among senior management—are falling. The top areas for digital investment relate to data sharing, integration, and access.
Looking at wider investment in digitalization—from R&D to full-scale implementation—60% of respondents expect their organization to increase spending in 2019. An even more impressive 73% of industry leaders say that their organizations need to embrace digitalization to increase profitability, compared to 49% in 2017.
Barriers to Growth
Competitive pressure now ranks as the biggest expected barrier to industry growth in 2019, surpassing the price of oil, which topped the list of worries for the last 5 years. These two issues are closely followed by the global economy, skills shortages, and an aging workforce.
Competitive pressure in the supply chain. Since the most recent downturn, oil companies have become very profitable, but service companies have been slower to recover. With some suppliers unlikely to be able to wait the one or two years for the market to rebalance itself, 66% of service providers and 64% of buying companies believe that consolidation among supply chain companies will increase in 2019.
Seventy-seven percent of survey respondents believe the industry needs new operating models. Overall, buyers continue to favor a traditional procurement model based on price competitiveness, while more suppliers favor models based on partnerships with shared risks and rewards. Yet, much of the supply chain has experienced disappointing outcomes from this type of relationship.
Will this lead to a re-engineering of the relationship between buyer and supplier as part of a wider drive to evolve more equitable operating models? DNV-GL Vice President Oil & Gas Graham Bennett believes there is not sufficient trust in the industry to foster acceptance of risk-reward relationships.
Survey results support Bennett’s opinion. Forty-one percent of respondents say that trust and relations between operators and suppliers have been harmed in the last 3 years.
Skills shortages and an aging workforce. Recruitment is now firmly back on the agenda after four years of consistent reductions. One-third of survey respondents expect to grow their workforce in 2019, compared to 10% 4 years ago. The aging workforce and skills gap are widest in Europe and North America, with 28% of respondents in the US and 39% of respondents in the UK citing these as the biggest barrier to industry growth. Thirty-seven percent of US-based respondents expect to increase headcount in 2019, compared to just 20% in 2018 and 34% globally this year.
Hovem sees the challenge of recruiting again after one of the industry’s toughest downturns as a significant risk to the oil and gas industry in 2019. She believes that helping young engineers understand the role the industry will play in decarbonizing the world’s energy system is important to offsetting this risk.
Half (51%) of respondents say their organization will focus on actively adapting to a cleaner, less carbon-intensive energy mix in 2019, up from 44% last year, as a result of stricter regulation. More than a third (36%) will increase investment in gas this year, and 28% expect greater use of hydrogen to decarbonize the gas mix. The long-term energy transition tops the list of drivers for this spending, followed closely by the growing importance of LNG as a transportation fuel.
Yet 46% of respondents believe high oil prices could delay the industry’s shift toward decarbonization, as firms seek to make short-term gains from more efficient practices and improved margins.
Participants in this year’s oil and gas industry outlook survey, the ninth since DNV launched it in 2011, included 791 senior professionals from firms with annual revenue ranging from $500 million or less to those with $5 billion and more. Respondents came from both public and privately held firms across the globe and from across the oil and gas value chain, representing functions from senior engineers to board-level executives.
Read the full report here.
Survey Points to Bullish Outlook for 2019, With Some Caveats
Judy Feder, Technology Editor
23 January 2019
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12 May 2020