If one thing is certain, it’s that oil prices fall, rise, and then fall again and that the dynamics driving prices are complex and will change faster than we might expect.
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Image from UTC Twitter. |
To manage long-term in such an environment, more must be done by oil companies, service firms and contractors, analysts and industry executives heard at the Underwater Technology Conference (UTC) in Bergen today (20 June).
Huge cuts to investment were seen in 2014-2016, a period which saw major (>$1 billion) project sanctions fall from 30 a year to just five. This, and a projected rise in demand in about 2020, means supply is likely to fall, driving higher oil prices in the 2020-25 period, said Torbjørn Kjus, oil analyst at Norway’s DNB Markets, who outlined some of the facets driving global oil prices at a pre-UTC conference seminar in Bergen. The boon could be short-lived, however, he warns, as markets re-adjust, with the potential of US shale looming like a large cloud – but only above a price it can achieve profitability.
Short-term, the industry, depending on the segment you’re in, might have to wait a little longer before significant contracts start flowing, suggested Eirik Reiso, partner and subsea expert at Rystad Energy, speaking at the UTC event. Reiso said the subsea segment had been relatively robust, thanks in part to a move to subsea tieback activity, and would see an uptick sooner than the likes of engineering, procurement and installation contractors, who will have to wait until 2018-19 before seeing a meaningful rise in work.
Rystad has drawn up the main themes it sees as impacting the industry overall, namely: a recovering oil market, the emergence of carbon risk; strong volume growth in global gas; a transitioning contract environment, with vessel owners taking on more scope and risk, for example; the adoption of digital technology; rapidly changing player landscape; and tonnes of obsolete steel, i.e. vessels and rigs, for which alternate pricing models need to be found, such as those being looked at by new entrant Borr Drilling, in which oilfield services giant Schlumberger has a stake.
Referring to digitalization, Reiso told the UTC seminar that, thanks to the low cost of sensors, Statoil’s Johan Sverdrup mega-project would have some 20,000 sensors installed. While a couple of years ago storage space to keep and analyze the data from this amount of sensors wasn’t there, it is now, with the likes of cloud computing opening up new possibilities.
But, there remain barriers to technology adoption, said Kjell Eriksson, regional manager, oil and gas, DNV GL. Giving a summary of the firm’s ‘Outlook for the oil and gas industry in 2017,’ based on an industry survey, he told UTC that 39% of firms expected to increase investment in digital, but this was weighted more to midstream firms, with upstream lagging. “This is something we should reflect on,” he said.
Priorities for investment were, however, cyber security and subsea technology, he said. But, cost cutting was also still high on the agenda, despite relatively stable confidence in the industry.
Indeed, Thomas Sunde, vice president technology at Subsea 7, and David Clark, executive vice president, Services, Aker Solutions, both reflected to the UTC audience that while much had been done to reduce costs and improve efficiency, both in terms of business structures and products and services, more was required – a sentiment reflected recently on the UK Continental Shelf.
“The cost is where we impact and can make a change,” Sunde said. “We saw quite a severe increase in cost of investment to increase capacity and there are several reasons,” he said. These were “a loss of cost consciousness, complexity and type of projects, lack of standardization…” While the latter had been a theme in previous downturns, benefits of any previous efforts had not been seen. “Expectations of perfection,” was another reason, with a fit-for-purpose ethos likewise being targeted previously, and not having an impact, at least long-term. Limited collaboration and slow adoption of new technology were further reasons.
“The market has responded and we have seen significant cost reduction and elimination of waste,” he said, with costs being driven out, efficiency gains made, and driving down onerous specifications, most of which was sustainable. “But is it enough?” For a step change, business models need to change and technology innovation is needed, he said, citing the change from consolidation in the market to vertical integration, as well as partnerships.
Next generation subsea processing would drive down costs and the likes of autonomous and subsea hosted remote operated vehicles would have their place, although while this technology was close to deployment it could be hindered by a lack of subsea infrastructure to plug into, he added. A standard subsea interface would help accelerate such technology, Sunde said.
Clark also said that business models need to change. “How we operate isn’t sustainable,” he said. To be sustainable, three areas needed to be addressed: how companies operate internally; how they leverage new technology and data analytics to further make those changes; and “arguably the most important, we need to work together in different ways to aligned and common goals.”
Aker Solutions is about two-thirds through an initiative to take NOK9 billion out of its business by the end of this year, he said. Simplification was a large part of the work, but also standardizing products and services, as well as using lean manufacturing techniques. Aker Solutions recently manufactured one of the largest umbilicals at about 1km a day, “a level not seen previously,” he said.
“The industry is in the deepest downturn since the mid-1980s, Clark said. “The industry has done a lot, but more needs to be done and the outlook remains challenging. There are some signs of recovery, break even costs are coming down, substantially in some cases,” and there are signs of projects coming through to project sanction, but these will most likely be in 2018-19, he said, and these would likely be brownfield related as companies look to maximize existing infrastructure.
“Long-term, we remain positive. Field developments are becoming more complex, new technology provides opportunities, digital will change our industry forever, but we have to maintain a lean mindset. The challenge is to make the industry viable in a $50/bbl world.”
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