Hart Energy Publishing

CERA Week 2010: Upstream oil future is bright

Though the industry is still recovering from the global recession, there are opportunities for operating companies that have the foresight to invest through the downturn.

By Judy Maksoud Murray, Editor E&P
March 10, 2010
Word Count: 892
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Peter Jackson, senior director, IHS CERA, opened the Upstream Oil Plenary session, “The Future of Upstream after the Great Recession,” at CERA Week in Houston Tuesday with a note of optimism. Despite the recession, he said, “What’s absolutely clear is that the upstream business has not shut down.” In fact, according to Jackson, “The upstream sector looks pretty healthy. There are a lot of major projects coming onstream.”

Though things are looking up, “The sector is not without its problems,” Jackson said, enumerating four of the most significant. First, he said, “Costs are stubbornly high” and are not likely to come down soon. Second, fiscal terms are toughening, which makes investing difficult. Third, access to reserves is still limited. And although Jackson believes “worries have temporarily waned” for some on the supply side, there are still concerns. And when demand picks up, the industry has to be ready.

Jay Pryor, vice president, business development, Chevron, agreed that the recovery is on the way, but cautioned that there is still uncertainty about the timing. Pryor presented the now-familiar numbers of increasing global demand over the next 20 years that will result in a 40% increase, explaining that all sources of energy will be necessary to meet the growing need.

Fossil fuels will still provide the bulk of the energy we use, Pryor said, which means two things. The first, he said, is “Upstream is a business that needs to focus on the long term.” And second “Upstream will constantly be challenged.” For these reasons, he said, the industry needs to invest through the down cycles, “but it won’t be easy.” Companies will need not only courage, but a strong balance sheet.

According to Pryor, the four key drivers for meeting long-term energy needs are access to reserves, a stable investment climate, technology, and collaboration. For starters, he said, a realistic US energy policy has to encourage investment in all areas, including oil and gas. One reason for this is that expansion in the oil and gas industry boosts the economy.

“Technology allows us to expand the boundaries of energy,” Pryor said, explaining, the value of technology is in how it is applied and integrated. “Working together to find solutions” expands the value of technology, he concluded.

“Our industry has risen to the challenge for the last 140 years,” Pryor said, “and I am confident we’ll be equal to the challenge for the next 140 years and beyond.”

J. Michael Yeager, group executive and chief executive, petroleum, BHP Billiton, gave a tongue-in-cheek assessment of the industry following the downturn: “If you have a lot of money, you’re in good shape. If you don’t, you’re not,” he said.

In Yeager’s opinion, “It does come back to financial fire power.” If the resources are in place, he said, the company that succeeds is the company that follows the fundamentals – safety, volume, and cost.

According to Pryor, the four key drivers for meeting long-term energy needs are access to reserves, a stable investment climate, technology, and collaboration.

 

Bill Schrader, president and chief operating officer, TNK-BP, discussed some of the challenges Russia is facing in the wake of the recession, identifying greenfield investment as one of the most critical. Russia needs new production in Eastern Siberia, the Far East, and the Far North, he explained, noting that it is a “very difficult task” to move into remote, harsh-environment areas where there is little infrastructure.

Despite the challenges, TNK-BP is investing in the Greater Yamal project, which includes the Messoyakha, Rospan, Suzum and Tagul, and Russkoye fields, which together hold 4.5 Bbbl of 3P reserves.

TNK-BP is a success story, Schrader said, despite the fact that Russia is not an easy place to operate. “Our journey has not always been smooth,” he said, but the track record has been strong.

Enumerating some of the challenges, Schrader said there is great need for investment, a shortage of human capital, and the burden of high taxes. Despite these obstacles, TNK-BP is in for the long haul because the region has great potential.

Jakob Thomasen, chief operating officer, Maersk Oil, talked about taking stock of the current status of the industry. “We have to face the reality,” before taking advantage of opportunities, he said. That “reality” includes a drilling environment that is becoming “more and more complicated.”

The outlook is promising, though, Thomasen said, with a strong demand for oil and gas that he believes will outstrip supply in not too many years. The two biggest challenges are the “more and more complicated drilling environment,” and what he called “The battle for talent.”

The problem with the latter, he said, is that we have “an aging talent pool,” which is good new “for those wishing to work up to 95 or 100 years,” he said, but is an enormous challenge in the industry.

A third challenge Thomasen identified is meeting environmental expectations. “We need to participate actively in the environmental agenda,” he said. “We want to make this value proposition attractive to governments and NOCs (national oil companies).”

In the end, he said, operators’ objectives are the same, to operate efficiently, to invest in technology and innovation, to return value to shareholders, and to work in an environmentally responsible way.
To achieve those goals, Thomasen said, Maersk oil intends to leverage its strengths, partner to improve weak areas, and “share risks to the risk picture is acceptable to all parties.”

In the end, he said, playing by these rules means that everybody wins.