The cyclicality of the oil and gas industry is unlikely to impact the
long term trajectory of the sector, a report said, noting that the
current fluctuations may speed up some of the trends that were already
unfolding.
The new report entitled "Oil and Gas Reality Check 2015” released by
Deloitte, a leading provider of audit, tax, consulting, and financial
advisory services, outlines six of the major issues currently impacting
the oil and gas industry.
These issues include an anticipated shift in supply-demand
fundamentals, the emergence of new trading patterns, consideration of
Opec’s role in the market, falling LNG prices, the long-term costs of
complex projects and evolving dynamics between integrated oil companies
(IOCs) and national oil companies (NOCs).
"The oil and gas industry has been built on long-term investments and
has successfully emerged from cyclical downturns in the past,” said
Salam Awawdeh, partner and Energy & Resources leader for Deloitte
Middle East.
"As these trends play out, companies across the board need to adapt and remain agile to emerge a leaner, fitter business.
"At the same time, it’s worth remembering that weaker price signals
spur innovation and market consolidation across the value chain. With
that in mind, it’s not unreasonable to expect that lagging oil prices
will spur greater R&D investment in innovation, M&A and
scenario-based energy strategy development.
"Global markets are also shifting their supply-demand fundamentals. For
instance, while the Middle East can meet its current needs, demand for
both oil and gas in the region is growing. A number of emerging and
re-emerging major suppliers can also potentially change energy market
dynamics. Output from Southern Iraq and Iraqi Kurdistan could ramp up,
for example, despite the security issues that currently plague the
region,” he added.
The report highlights the following key trends:
Shift in supply-demand fundamentals
Fluctuating industry dynamics are fuelling a power play between
traditional and new oil suppliers. For example, the Middle East has seen
its US market share fall, for both crude and refined products, and is
now struggling to work out the fundamentals of how to operate in a
market awash with oil. To this end, Middle Eastern producers are aiming
to redirect their flow of oil east to Asia, rather than west to the
Americas, while simultaneously increasing their share of European
consumption.
New trading patterns emerging
As oil and gas supply and demand fundamentals continue to evolve, new
global trade patterns are emerging. As a result, this could threaten
Opec’s traditional position on global markets, although this is not a
likely outcome in the short-term. What is certain is that Opec will be
seeking new buyers as North America increasingly meets its own demand,
and it may aim to pick up market share from Western Europe.
Opec: under pressure
The Opec organization currently supplies approximately 32 per cent of
the world’s crude oil. However, Opec’s oil market share will fall by 5
per cent by 2018 as the supply of US tight oil picks up. While that
share may recover over the long term as supply patterns shift
(particularly if US production flattens), Opec will cede power in the
interim.
LNG prices: a buyer’s market
The price of LNG was once a model for stability, it is less so now.
Until prices stabilize, natural gas will trade in more geographically
proximate regions. That means Australian LNG will likely retain its
north/south advantage, providing supply to Singapore, Taiwan, Japan and
South Korea. Conversely, North American producers have a more natural
trading advantage with Europe. The most cost efficient producers are the
ones most likely to win global market share, especially as
supply-demand economics kick in. This may ultimately give the United
States (and perhaps Canada) a competitive advantage, as their breakeven
points on LNG projects are typically lower
Investing in innovation: the cost of complexity
Capital spending is likely to fall off in the near term; however
megaprojects will still be required to meet long-term global energy
demand. To avoid the cost and time overruns that have typically
characterized these projects, companies will likely want to explore a
range of strategies, including pre-project planning, integrated project
delivery, lean project management, modularization and talent management.
They may also want to invest in advanced analytics to enable agile
project monitoring and evaluation.
National and integrated oil companies: evolving dynamics
It is currently hard to foresee a future where IOCs don’t play a
pivotal role in oil and gas exploration and production. Yet, in areas
where the IOCs’ traditional strengths are not required, it is possible
to envision IOCs losing market share to large OFS players and to NOCs,
particularly for non-technical projects.
To prevent this slow erosion, IOCs will need to guard against the
instinct to engage in mass layoffs while commodity prices remain soft.
While there is always room for heightened cost consciousness, IOCs may
want to avoid putting themselves into a position where they lack the
talent and momentum they need not only to ramp production back up once
prices recover, but to maintain their edge in a shifting competitive
landscape.
(
TradeArabia News Service)