Faced with the recent plunge in oil prices and a weakening global economy, the oil and gas industry must search for innovative solutions to remain financially healthy in 2015.

According to DNV GL’s report, “A Balancing Act: The Outlook for the Oil and Gas Industry in 2015,” five major trends will dominate the industry in the coming year. These include shaken industry confidence based on falling oil prices; the need for innovative approaches to control cost; investment being on a tight rein; the emergence of new talent challenges; and the forging of a different path by profit-confident firms.

“The resultant environment will be more difficult than that which firms have had to cope with over the past five years, yet the new reality brings both opportunities and challenges,” according to the report. “Executives will have tough choices to make on spending, costs, headcount and growth strategies, but at the same time new possibilities should open up [including] the chance to refocus on core projects, ease up on talent pressures and explore more affordable acquisitions, as just some examples.”

Along with the low-price environment and weakening global demand, the industry also will face skills shortages, low gas prices, increasing operating costs and tougher competition. According to DNV GL, 33% of respondents in North America are confident about the oil and gas sector, compared with 26% of European respondents and 27% of respondents in the Asia-Pacific region.

As companies decide whether to respond to short-term pressure by cutting staff and investment, there is also a need also for long-term focus in the industry, according to Elisabeth Torstad, CEO of DNV GL’s oil and gas business area. “While the strong correlation between oil price and confidence is expected, a certain proportion of firms need to work beyond the cycle this year,” she said in the report. “It is bad for the long-term health of the industry to see behavior so tightly bound to oil-price fluctuations.”

The industry is likely to see a stricter focus on cost control in 2015, with 72% of respondents planning to intensify these measures. “While low margins are a key driver for the heightened focus on cost management, another factor is steadily increasing project complexity, which is leading to persistent budget overruns,” the report stated. A rise in project costs will necessitate “creative approaches to finding savings.”

“There’s a constant drive across the whole chain to reduce costs,” Torstein Indrebo, the outgoing secretary general of the International Gas Union, said in the report. “The majors are selling non-core assets to focus more on the core business, in a bid to drive their costs down and to secure financing of key projects.” The industry also may see an increase in mergers, as companies combine to operate more efficiently.

With the projected focus on cost efficiency comes a reining in of investment by oil and gas companies, according to the report. In 2015, only 12% of companies surveyed plan on increasing investment, compared with 45% in 2014. “This drop-off has to some degree moved in line with industry confidence levels and oil prices over the same period, although it is also driven by other factors such as sustained rises in operating costs, pressure from shareholders for higher dividends and lower returns from capital invested,” the report stated.

A growing number of oil and gas companies have announced plans to cut capex, with unconventional projects, in particular, becoming more difficult to prove economic. “A lot of the smaller unconventional oil producers will be susceptible in the downturn,” Graeme Pirie, business development manager for DNV GL’s North America oil and gas division, said in the report. “We expect to see an increase in acquisition and lease transfers during this period.”

As capex budgets decrease, opex budgets could be given more of a focus, especially regarding megaprojects in the Asia-Pacific region. “There is going to be more focus on opex, compared to capex, because of the greater emphasis on asset-integrity management in a cost-controlled environment,” said Paul Thomas, director of inspection services for DNV GL’s oil and gas division.

Profit-confident companies plan to cut costs by “putting greater reliance on automation and IT-related technology,” according to the report.

The majority of the industry is seeking out standardization of operations as a way to decrease costs. “Improving the workflow and work processes is the second-highest priority for those seeking to impose cost controls in 2015, cited by 40% of respondents, and standardization can have a big impact in this area,” according to the report.

In light of the recent focus on a lack of skilled workers, the oil and gas industry now faces several new challenges related to talent. Of respondents, 47% said their companies plan to reduce headcount during 2015. “For the major producing companies, their revenues are well down, so their budgets are being cut substantially and they’re hiring much less,” Simon Hatfield, CEO of WesternZagros Resources, said in the report.

Large-scale layoffs now could translate to a lack of skilled workers later on when the industry eventually rebounds, with young people possibly choosing not to join the industry. “This is especially the case in light of a large number of skilled workers now retiring, which will add pressure on business-critical skills and knowledge transfer in the years ahead,” according to the report.

“We’re bringing along younger people who see the opportunity, but they’re not going to be fit to take on these projects in 10 years’ time,” Paul Sullivan of WorleyParsons said in the report. “It’s going to take them 20 years to get to that stage, so you’re going to have a bit of a shortage in the meantime.”

Profit-confident companies can be seen as showing a “commitment to holding on to scarce skills,” with 18% of respondents in this group saying their companies plan to hire more and 53% saying their companies plan to maintain their current number of employees, according to the report.

R&D also will remain a focus of the profit-confident group, with 70% of respondents saying their companies plan to maintain or increase spending in this area in 2015.

Taking the lessons from past downturns, DNV GL advises the industry to be flexible regarding areas such as proactive cost and value management; to seek out standardization of processes and equipment as a way of preventing “unnecessary expenses;” to stick to a company’s core business, divesting non-core assets; to keep a focus on opex with operational cost reductions, life extension and EOR; and to not scrimp on quality.

“You should avoid cutting too much in your exploration program, because you’re going to hit your reserve replacement ratio 10 years down the road,” Eirik Wærness, chief economist at Statoil, said in the report.

Contact the author, Mary Hogan, at mhogan@hartenergy.com.