Caution has replaced optimism among oil and gas executives when it comes to how quickly oil prices will rise as the industry rebounds from the latest downturn, according to a recently released Deloitte survey.
Last year, 55% of the executives surveyed believed oil prices would reach $60/bbl in 2017, Deloitte said. That percentage plummeted to 2% this year.
This year’s survey also showed that 64% of the respondents believe the price for a barrel of West Texas Intermediate crude would stay between $40 and $50 in 2017, rising to as much as $60 in 2018 with hopes of reaching up $70 by 2020.
But U.S. crude was trading at $50.30/bbl the morning of Oct. 12, faring way better than the mid- to upper $20 range seen in February 2016 yet far off from the $107-plus highs of the summer of 2014. Moves by OPEC and a Russia-led group of non-OPEC members to lower output have helped market conditions as oil and gas companies have worked hard to bring down costs and improve efficiency.
But it appears that most now believe “lower for longer” is indeed reality.
The outlook for natural gas appeared more favorable, with nearly half of those surveyed saying they expect Henry Hub natural gas to be between $2.50 and $3 per million British thermal units (MMBtu). This percentage is up from less than 40% last year.
“The slow road back has gotten longer,” John England, vice chairman, Deloitte LLP and U.S. energy and resources leader, said in a news release. “The protracted holding pattern we’ve been in for the last two years seems to have shaken executives’ confidence in every sector—upstream, midstream and downstream. As the industry hunkers down to focus on cost reduction and productivity, one silver lining may be a drive to the next wave of digital technology adoption to uncover new efficiencies important to success.”
The survey showed that 55% of the upstream executives believe improving operational efficiencies is crucial to sustaining cost reductions. Digital could play a big role.
“Even a 1% gain in capital productivity would mean a savings of about $40 billion. For perspective, listed pure-play upstream, integrated and oil field services companies worldwide reported a cumulative net loss of about $35 billion in 2016,” Deloitte said. “The digital leap toward advanced analytics alone could potentially deliver annualized well-cost savings of about $30 billion to upstream players, while oil field service players can potentially create multibillion-dollar, high-margin revenue streams.”
However, adopting some of these new digital technologies and actually creating value is another story.
Other highlights from the survey included:
- 41% expected a reduction in headcount in 2018, while 20% see an increase and 20% no change;
- About 50% of the executives expect up to a 10% drop in capex in 2018 compared with 2016. This includes 58% anticipated a drop in rig deployment next year and 40% anticipated further exploration spending cuts; and
- About half believe changes in service and supply cost will have the greatest impact on their companies’ cost structure in 2017 and 2018.
“The new reality seems to have set in—waiting for a significant price recovery may be a long haul,” said Andrew Slaughter, executive director for Deloitte Center for Energy Solutions. “It possibly has never been truer now that the low-cost producers are the winners. The bottom line is that companies should focus on cost discipline and operational efficiency. Digitization is likely the next frontier in this new normal, offering a lifeline for new efficiencies, cost reductions and productivity.”
Working with research firm Harrison Group, a YouGov company, Deloitte’s survey include more than 250 interviews with industry professionals from the upstream, oilfield equipment and services, midstream and downstream sectors. The survey was conducted in the summer of 2017.
Velda Addison can be reached at email@example.com.