Oil and Gas Trends in 2018-2019

15 February 2019
As supply increases and prices of oil grow, volatility continues to build up strategy

As supply increases and prices of oil grow, volatility continues to build up strategy.

After years of oversupply, the oil and gas industry could very well move hotfoot into a supply crunch. This might seem hard to imagine, given the build-up of the U.S. oil production and the prosper sense of optimism spanning the sector. Generally, the industry feels much better than it did a year ago: The oil price has rebounced. After being limited to a range between the mid-$40s and $50 a barrel (bbl), now, Brent crude is trading above $70. Therefore, the industry is recovering from the harsh few years of low prices, enforced capital policy, productivity efficiencies and portfolio realignments.

At the same time, the International Energy Agency (IEA) has been noting the possibility of a supply decrease since 2016. Recently, the CEOs of Eni, Total, and Saudi Aramco have predicted one by the end of the decade. With oil demand increasing, and investment in major projects having been put off at the time of the downturn, there is less possible supply available. Oil corporations will need to boost their production, and there is still a risk that some might struggle to keep up.

Of course, the fundamental challenge is internal volatility in the sector. Manufacturers need time to meet the tricks of an over- or under-supplied market. They need to address the pace and volume of transition to energy from non-fossil fuel sources. Facing these ambiguities, oil and gas corporations must develop a strong strategy to reduce these risks.

In brief, the supply excess may have ended, but its aftereffects will go on. In the short term, oil and gas companies must maintain capital policy and the focus on productivity development and applying new technologies. In the long term, the companies need to make their portfolios profitable against reduced break-even prices. Moreover, they will need to understand how to future-proof their portfolio, and make it safe in times of the transition to a world with lower carbon usage.


Supply and Demand 2014-2017 

The supply challenge

Looking more carefully at the recent short-term recovery, it may seem to show rebalancing of market basics, in a way that is to make supply more competitive over the next few years. Growth of oil supply has slowed down, demand is strong, and inventory levels are finally decreasing. OPEC has been critical to adjustment in supply. What accelerated this rebalancing is the November 2017 decision, made along with non-OPEC members, to shorten supply by 1.8 million barrels/day (bbls/d) through 2018.

More broadly, world upstream capital expenses, which fell nearly 45 percent between 2014 and 2016 is now forecast to grow 6 percent year-on-year in the medium term. Oil and gas rig activity levels are increasing, effected by the North American market, and big projects are being approved. Here’s few examples. BP started a second phase of a floating production platform called Mad Dog, in the Gulf of Mexico. Shell made a decision to invest in redevelopment of the Penguins oil and gas field, its first new installation in the northern North Sea in 30 years. Exploration is on the upswing again for the first time since the global recession. Many companies made bids in the latest Mexican deepwater auction. Shell won nine blocks out of 19. Eni, Repsol, and Chevron picked up acreage. In other regions, Tullow won offshore licenses in Cote d’Ivoire and Peru, ExxonMobil entered Namibia and Ghana and offshore Mauritania. BP and its partner Kosmos began exploration offshore Cote d’Ivoire.

Globai oil and gas capital expenditures


In spite of the signs of a recovery, there is a number of supply-related challenges in the sector. First one is an continuing decrease in new discoveries. By the end of 2017, the volume of new oil and gas findings, was at its lowest since 1950s. Only 3.5 billion barrels of liquids (condensate, crude and natural gas liquids) were discovered in 2017, which was enough to meet just 10 percent of demand. The reasons for such decline are quite simple: It’s getting harder and harder to find big discoveries known as “elephants”. Most prospective areas have already been discovered.

This contraction was complicated by another challenge: the slowness of the growth in exploration spending since it declined with the price collapse of 2014–2016. Global spending dropped by more than 60 percent, from US$153 billion in 2014 to about $58 billion in 2017. It’s a forecast to recover moderately over the nearest term at a 7 percent compound annual growth rate. The investment drop in traditional supply sources is likely to continue to influence new production.

Global volumes of new discoveries of oil and gas

As a result of these challenges, we now have what the IEA calls a “two-speed oil market.” Although U.S. tight oil (shale oil) is a dynamic new supply source, investment in more traditional output sources has declined. As a result, according to the IEA World Energy Outlook 2017, “the world needs to find additional 2.5 million bbls/d of new production every year, only for conventional output to remain the same”. Given that it takes about three to six years from project initiating to coming onstream, the drop in investment approvals in time of the price slump could continue to damage the sector if financial investment decisions remain cramped.

A third major challenge the industry faces is supply destruction. In available oil fields, production is decreasing. This decline rate is accelerating by about 4 percent per year. Current expenses increase elsewhere are not enough to ensure discovery of such amount of new fields to compensate this decline.

In some countries, the supply collapse is directly related to certain geopolitical issues. For example, the economic crisis in Venezuela lead to production drop to some 1.5 million bbls/d, a 40 percent decrease from the 2.5 million bbls/d this country was producing back in 2015. In Libya, actual output is around 990,000 bbls/d, which is well far from the 1.5m bbls/d the country was producing in 2012. It’s not quite clear yet how this production could be replaced. According to the U.S. Energy Information Administration (EIA), because of its reserve shortening, OPEC’s spare capacity at the end of 2017, was 2.1 million bbls/d, which is almost half of the 4 million bbls/d it had in 2010.

A fourth issue limiting the world oil production system is deferred maintenance. In recent years, in order to reduce costs, operators have put off noncritical spending. For example, according to the Health and Safety Report 2017 by Oil & Gas UK, in the UK Continental Shelf the average number of person-hours in backlog per installation for corrective and deferred safety critical maintenance rose 25% between Q1 2016 and Q4 2016. Although maintenance is important everywhere, it is critical in basins with aging infrastructure. The recent crack in the North Sea Forties pipeline, which destabilized production in the region, highlighted the challenges for an asset that is more than 40 years old (it was inaugurated in 1975) with an original design life of 25 years.

A fifth challenge for operators involves the gap between the broadened capabilities they need, and the reduced capabilities they have. Workforce reductions made during the recession to save money resulted in lost technical skills and disrupted the industry’s ability to attract new talents. It is on top of the coming “great crew change,” a demographic shift that will happen in over the next decade as a big proportion of the sector’s aging workforce retires.

Change in number of employees around the World

The industry has a bigger challenge of dealing with the general momentum to build a lower-carbon world. The growing transport electrification, the probable plateauing of oil demand by the 2030s (according to BP’s 2018 Energy Outlook publication), and the development of smart technologies to better control supply and demand will require business models throughout the energy industry to develop.

As for U.S. oil (including tight oil), output has gained noticeably in the past few years, and today’s production is over 10 million bbls/d, surpassing the peak last reached back in 1970. But it’s not clear if the U.S. can plug any future shortages in global supply. From a financial perspective, U.S. tight oil operators are under mounting pressure from investors to shift from an “all-out production growth” model to more profitable operations. From an operations perspective, it should be noted that according to the EIA’s Drilling Productivity Report, the new-well oil production per rig measurement in the prolific Permian basin has begun to taper after having risen aggressively in early 2017.

A “future-proof” strategy

Encountered with the uncertainty of a potential supply crack and the energy transition, what should corporations do? The strategic principles laid out below may sustain your business, “future-proof” it, regardless of short-term instability.

Keep managing the overall portfolio with a much more moderate break-even price, whatever actual prices of oil are. Big market players are already doing this. In May 2017, Shell divested the majority of its Athabasca oil sands business because of poor economics in a lower oil price world (and possibly with an eye to the future, given the higher emissions produced by this nontraditional source). In January 2018, BP announced it would only approve new projects that were profitable at less than $40/bbl. In order to maintain this type of portfolio, businesses must undertake regular portfolio reviews to take away assets that do not conform. Such portfolio approach should resonate with companies of all sizes, including the smaller independents, some of which focus more on the technical challenge of exploring exciting new plays, rather than on commercial viability.

Hold on to the capital discipline. If the oil price grows, stay the course on cost reduction, standardization, and cooperation to make sure inefficiencies do not get back in. Ensure all strategic decisions — including new country entry, acquisitions, production optimization, and divestments — are reviewed under the lens of full-cycle project economics. All costs needs to reflect the focus of a company’s core and differentiated capabilities.

Supporting a high level of free cash flow is critical for oil and gas operators. Capital will flow to those companies that deliver positive returns in any kind of commodity price environment. As success in the market correlates with financial returns as opposed to production volume, the whole company will benefit.

Refocus investment and efforts on maintaining assets. As prices of oil grow, operators might be tempted to strengthen their equipment to produce more. Given the age of most assets, oil and gas corporations need to ensure sufficient funds are accessible to keep supply infrastructure in good condition. This is in particular true for businesses that delayed maintenance beginning in 2014. As growing levels of activity stress the production equipment, unplanned outages will do harm to the industry. Therefore, planned service should consider for the majority of future activity.

Replace the “owner-operator” model with an “owner”-only approach. Many oil production and exploration companies believe they have to build capabilities across the whole value chain, while in reality the providers of capital and shareholders simply want a return on the investment. In such a dynamic market, the owner-operator model is an obstacle. The spending underwent under this construct overbalance the value generated. Businesses need to parlay their exceptional capabilities into true partnerships with other best-in-class companies to stay together and create an ecosystem of expertise. This shift away from operational activities will help them replace fixed spending with variable costs, and construct trade terms that balance risk, roles and reward. Companies in other industries that got through similar downturns were forced to develop and now are more agile, healthier and more likely to win in volatile markets.

Double down on digitization. Today is the time to transform operations by leveraging digital technologies to drive efficiencies and open up new opportunities. Doing so may involve so-called digital twins (virtual simulations of assets) which can improve the efficiency of predictive maintenance. It may also take the shape of using drones to inspect offshore platforms that reduces workers’ exposure to hazardous tasks, data analytics to optimize reserves and production, and other new practices and processes. Oil and gas companies need to drive such innovation across their businesses.

Develop talents for a new era of technologies. The industry’s talent profile is constantly changing. Conventional disciplines such as surface and subsurface engineering are still important, but they are to be balanced against new demand for expertise in digital activities. As companies construct their capabilities in data science and software engineering for example, senior executives in talent management would need to figure out the right weighting of technical (engineers) versus technological (data scientists and software engineers) staff and how the sector can attract the latter. What is more, as companies become more efficient through application of new digital solutions and the likelihood of sustained lower prices of oil, it is not clear if head counts return to pre-2014 levels.

Consider how the business should evolve. Given the mega trends shaping the sector, in the longer term perspective companies must focus on exploring and executing the most resilient future-proof strategy for their unique capabilities. Entry into new kinds of energy operations may be one avenue. For instance, Dong has used its legacy upstream oil and gas business to invest in its growth segment in wind energy. In 2017, Dong exited the oil and gas business to focus only on low-carbon plays, subsequently rebranding itself Orsted. Engie also divested its upstream assets to focus on renewables and  power. Some of the major European oil corporations are also funding low-carbon plays, which range from conventional renewable energy (such as solar power generation and wind) to more recent acquisitions that involves electric vehicle infrastructure.

Shifting portfolios to further favour natural gas is another option. There is a rising school of thought in the market that oil-focused upstream businesses have perhaps 10 to 15 years of potential growth opportunity. For manufacturers who share this view, natural gas becomes a bridging fuel to a low-carbon economy. 


Many people in the industry keep neglecting the supply side of the world energy situation and assume an overconfidence in supply. Demand continues to exceed annual forecasts, inventories are being declined, and reserves are not being replaced. Market values —backwardation (in which futures prices trade below market prices) and forward pricing curves — reflect a thought that supply is easy to raise and demand will flatten out. Nonetheless, the world keeps being dependent on oil and gas. The need to explore more of both resources will become more pressing over the short to medium term.

Volatility is likely to remain in market fundamentals, thus affecting prices of oil. As operators estimate the impact of various scenarios from supply constraints to low carbon, they need an action plan. Portfolios must be resilient, innovation must thrive, and capital efficiency and productivity have to remain the bedrock of operations. Looking further, companies would need a robust strategy for hydrocarbon weighting: a strategy which will serve them no matter what the future brings. Only those businesses that can do all this will prevail in future.

Source: PwC