BHP Billiton Petroleum’s Tim Cutt is clearly something of a motor racing enthusiast. The president of the Australian oil and gas major used the analogy of his country’s leading Formula One racing driver, Daniel Ricciardo, and his Red Bull team’s pit crew as an example of how the upstream industry will adapt, survive and thrive in the current oil price downturn.

Cutt compared the racing crew’s performance with advances made by the oil and gas sector while presenting to delegates at the annual Australian Petroleum Production & Exploration Association (APPEA) conference in Melbourne, Australia. “In the 1960s race car crews were able to have a pit stop completed in under a minute. Today Formula One teams achieve this in under three seconds.

“We have been applying the same methodology in our shale operations and have some great examples of success: Taking rig moves from eight days to three days, reducing frack pump maintenance from eight hours to 15 minutes, and today we have lowered our drilling costs by 50%. In addition, exploration and conventional business over the past 12 months has reduced time to load and analyze seismic data by 80%.”

Facing challenges

“It is when we face challenges that we achieve great innovation and growth,” Cutt said. “We must continue to deliver economic sources of oil supply, and driving productivity improvements to lower costs will help to ensure long-term price stability. We need to work collaboratively with governments and regulators to achieve appropriate policy reform.”

As the price recovers over the next two years, he said, people will get a little more active. U.S. shales bringing on more volume will help to offset some of the price pressure.

Cutt went on to admit he was more bullish than many of his peers on oil prices recovering, having experienced two previously significant oil slumps on world markets. “Volatile oil prices are nothing new,” he said, referring to accelerated production from non-OPEC members during the 1980s that plunged prices by almost half to less than $20/bbl and caused a steady decline between 1980 and 1985.

“In 1986 OPEC changed its strategy. Rather than enduring production cuts, it maintained and later increased its output. This drove prices down and allowed OPEC to steadily regain market share. Following more than a decade of flat prices and significant industry consolidation, the supply overhang subsided and prices did indeed recover. I expect to see a parallel outcome in today’s market, but with a much more rapid cycle time,” he said.

Supply-Demand overhang

Cutt added that supply conditions had been relatively tight over the past 10 years, and the industry had responded by increasing investment and exploration. “This led to several sizable discoveries in Brazil and the opening of the U.S. shale industry, which has grown by a staggering 3 MMbbl/d of crude and condensate over the past four years,” he pointed out.

With supply currently exceeding demand by 1 MMbbl/d to 2 MMbbl/d of oil, Cutt said the world needed to “work off the overhang” before prices stabilized over the next year.

While significant reductions in U.S. shale activity had emerged as the biggest contributor to global production cuts as a consequence of oversupply, Cutt went on to say that average yearly demand for petroleum liquids was expected to grow by more than 1 MMbbl/d per year. “On top of this, the petroleum industry must offset an annual base decline of approximately 3 MMbbl/d to 4 MMbbl/d. This means there is a gap of approximately 4 MMbbl/d to 5 MMbbl/d of effective demand that must be met with liquids production.”

He continued, “The question of where future supply will come from is very important, especially considering the declining trend of oil discoveries in recent decades. Annually the world consumes over 30 Bbbl of oil. On average, over the past decade, the industry has been finding less than half that amount each year on a recoverable basis.

“In the past four years discoveries were less than 10 Bbbl per year, and in 2014 they amounted to less than 6 Bbbl. That’s one-fifth of current consumption. This is a staggering trend and represents an opportunity and a responsibility,” he said.

This task was given added urgency, he said, by forecasts that by 2020 between 8 MMbbl/d and 10 MMbbl/d would be required to meet this demand at the steepest part of the cost curve.

Future opportunities

Fellow Australian operator Woodside Petroleum’s CEO Peter Coleman continued the theme of urging the industry to adapt or else. He warned during APPEA’s opening plenary session that the industry will miss out on future opportunities in the oil and gas space if it doesn’t start to think outside the box and challenge conventional methods of operating.

Despite natural gas being expected to fulfill 2% to 3% of energy demand per annum for the next 20 years, with demand predominately stemming from Asia, Coleman stressed that Australia’s proximity to that continent would not be enough on its own to secure lucrative opportunities to fulfill that demand. “We can’t sit here with our projections and think simply, just because energy demand growth is going up, that we have the right to fill that demand growth. We have to earn it by making sure we are competitive in our cost offering,” he said.

Transition period

With Australia well on its way to becoming an LNG force to be reckoned with, Coleman said the challenge for Australian LNG is the ability to shift from a project constructor and builder to an LNG “trader, marketer and producer.”

“We [Australia] are moving beyond being a constructor, developer. Are we ready as a country for that and as companies for that?” he said.

While low oil prices were forcing some companies into hibernation and cost conservation mode, Coleman stressed that investment in the sector was still pushing ahead and reiterated that Australia was competing on a global stage. “If we get stuck in this mode of ‘Well, we wouldn’t invest so nobody in the industry will invest’ and we come to conferences and talk about how we won’t invest, that’s not great. The Chenieres in this world go out and invest. The Freeports go out and invest.”

In May Woodside finalized terms with the above-mentioned Cheniere Energy relating to its purchase of gas from the Texas-based Corpus Christi liquefaction project after a positive final investment decision on the two-train project.

Coleman urged the need to think outside the box. “My point is we keep trying to predict the future as being something that is rational and stable. The reality is the industry has a history of about every 10 years fundamentally changing the business model, whether that is deepwater or 3-D seismic or shale gas. I think we need to look forward and really challenge ourselves and say ‘We really don’t know what the future looks like, but do we need to play?’”

Editor’s Note: Article compiled with assistance from Hart’s Oil & Gas Investor Australia editors Dale Granger and Lauren Barrett.