As society changes, oil industry must evolve

Greening lawns, blooming flowers and the Offshore Technology Conference are all staples of springtime in Houston, inspiring hope for new beginnings.

This year’s meeting at NRG Park will be no different, with investment bankers, oil executives and equipment salesman proclaiming that a declining rig count, eroding oil production and growing gasoline demand prove that the oil and natural gas industry is poised to rebound. Prices will stabilize this year and begin a steady climb, or so will sing the chorus of industry boosters brave enough to prognosticate.

There’s even some good data to back that up.

“Sizable capital and operating budget cuts over the last year are going to leave a lasting impact,” according to the latest analysis by consulting firm Deloitte. “We could see a supply shortfall of over 1 million barrels a day as early as 2018.”

But the upside ain’t that high.

“The major U.S. tight oil basins, Iran, Iraq, and possibly Russia, could potentially cover the first two years of production shortfall at the $58 a barrel price range,” the researchers concluded. But prices won’t climb high enough to get higher-cost producers back into the business until 2019, they added.

Deloitte’s analysis doesn’t anticipate prices above $75 a barrel until after 2023, far short of the $100 prices so common in 2014 that paid for so many great OTC parties.

Three more years of low prices will be hard for many smalland medium-size companies to survive, which is why the management consultant’s mantra will rule the conference this year: Do more with less.

Even then, that’s easier said than done. Drilling rigs already walk themselves across drilling pads, well completion teams can get oil or gas flowing within a week, and some pipeline companies have lowered their tariffs for delivering the product to market.

Oil field services companies have slashed overhead, laid off hundreds of thousands and are standardizing equipment to get the work done more efficiently, but even many of these companies are still racking up losses.

Nevertheless, price-conscious exploration and production companies will be comparing who can do what for how much, knowing full well that there is plenty of idle equipment and workers looking for contracts.

In past years, much of the ballyhoo surrounded liquefied natural gas as the next big thing. Natural gas is plentiful in some places, such as the United States and Brazil, and was in high demand in others, such as Asia and Europe. Turning it into liquid for delivery seemed like a surefire way to make money.

Not anymore. Ahuge amount of LNG capacity is coming online at once, just as Japan restarts its nuclear reactors and demand in Europe is dropping due to renewable energy.

Long-term contracts pegged to oil prices no longer make financial sense, and spot prices in some markets don’t even cover liquefaction and transportation costs.

“LNG producers with price exposure are likely to continue to face headwinds for profitability ... in the coming years. LNG revenues are low, and geographical price differentials, trade flows and market dynamics are more volatile than for many years as global supply capacity increases,” according to Standard & Poor’s Rating Service.

The only professionals who are in high demand at the moment are bankruptcy attorneys and debt restructuring experts. The oil and gas bust is culling the herd, hopefully producing a healthier industry for the next boom.

The losers are the banks, investors and private equity companies that contributed hundreds of billions of dollars to finance the boom.

Even if prices rise again sooner than expected, convincing financiers to open their checkbooks so soon after suffering such losses will be tough, possibly delaying a recovery.

This is not to say the industry is dead, or that deals won’t get done. The world still needs 93 million barrels of crude a day, and that demand grows at about 1 percent a year. Global energy consumption of all types is also growing, as more people move out of poverty and expect basic luxuries like electricity.

The market, therefore, didn’t go away. The industry simply oversupplied it. The challenge for everyone at OTC is to find and implement the innovations and technology that can make a company thrive even in this harsh commodity market.

One way companies can differentiate is to find ways to successfully comply with the new reality created by the Paris Climate Agreement and the Clean Power Plan, major efforts to reduce carbon dioxide emissions.

Rather than complain about regulation or argue about the finer points of climate science, the successful corporations of the future will be those that recognize that society’s expectations are changing.

Controlling fugitive methane emissions, recycling drilling water and boosting well productivity are all ways that the industry can conform to environmental demands while boosting profitability. OTC is full of clever engineers with even better ideas.

The parties this year will not be as extravagant, but there are still plenty of reasons to be hopeful about the industry’s future.

The key to success is anticipating what future markets will demand and not to live in the past.

This is not to say the industry is dead, or that deals won’t get done. The world still needs 93 million barrels of crude a day ...