Counter-Cyclicality in the “New Normal”
“The oil industry has changed for good.” This, at least, is the perspective of many an analyst when contemplating an oil price stubbornly languishing below $50 USD per barrel. The price of oil has, of course, dropped many a time in the past, but current market dynamics and geopolitical tendencies suggest a full rebound will not be forthcoming any time soon.
This harsh reality poses significant challenges for an Australian market addicted to what John Griffiths, CEO of Gas Energy Australia refers to as “gold plating of infrastructure investments” where “contractors are guaranteed a rate of return just for undertaking a particular project regardless of cost inputs.” Moreover it completely flips mega-project initiatives on their heads, built under the assumption of a stable $80 per barrel or higher market price. Despite this, many of Australia’s leading energy sector protagonists – whether the junior explorers, oilfield service providers or EPC outfits – have proven unexpectedly resilient, in rendering their market strategies ‘ fit for forty’.
In some instances, E&P players are even choosing to take advantage of the current market dynamics as the basis for new prospects, as Carnarvon Adrian Cook notes, believing, “that current distressed market conditions offer the most advantageous window in which to accumulate quality opportunities. We definitely see it as a window of opportunity and have been building and diversifying our portfolio during this downturn.” Rather than being pessimistic, a more proactive approach has been implemented to “identify what could be undervalued, quality projects and try to capitalize on such opportunities.”
“When life gives you lemons…,” as the saying goes, the moral is always to make the most out of what opportunities you can. This has been very much the outlook of Matthew Allen of Otto Energy, whose team found that the “oil price shift had created a vacuum in the market, and an opportunity for companies that had capital.” Otto took the initiative to sell their Filipino Galoc asset for USD 108 million, “which put us in a very positive position where we boasted a substantial balance sheet while many of our peers were been struggling with debt.” This allowed for the company to refrain from any negative repercussions that come with difficult market conditions, and rather capitalize on endeavors with promising future potential.
One of the major repercussions of the low oil price environment has been the curtailment and shelving of many green field developments and corresponding refocusing on ongoing operations. Geeta Thakorlal, Senior Vice President Global Offshore of INTECSEA ANZposits that, “operators all over the world are currently focused on developing their existing portfolios and, given the current pricing context, they indisputably need to assess development options with more scrutiny than ever.” Whereas capital expenditures are generally being slashed across the board, “operators still need to generate new sources of production to fulfill their requirements, which on the other hand bolsters a certain upturn in consulting services,” she reasons.
The ‘new normal’ of the current low oil price market is thus shaking up the foundations of effective strategies to succeed in the oil and gas industry. Thalkorlal emphasizes this fact in regards to how her company addresses clients, pointing out that, “low prices force us to rule out most of the solutions we would have historically advised, and to look at new technologies and processes that would better fit with our clients’ evolving needs.” Part of this fact is that previously higher oil prices initiated a culture in the industry eager for constructing larger projects in much faster times, with operators, “looking for faster project delivery and wanting to get their return on investment much sooner.” This is not to say that projects will no longer be able to enjoy the benefits of expedited construction phases, but rather, new strategizing will need to be considered.
One technique under increased consideration is the use of predictive analytics. “Many companies are now able to take data from their respective databases and utilize new algorithms to build insights to optimize their plants operations,” notes Ken Fitzpatrick, chairman of National Energy Resources Australia (NERA). “We are also hearing of exemplary cases in process engineering, where data is synthesized and interpreted to prevent shutdowns and considerably enhance productivity and competitiveness,” he adds.
Another trend is to devote more energy to Enhanced Oil Recovery (EOR). “There are a lot of people walking away from assets leaving more in the ground than they actually took out,” proclaims Brad Lingo, managing director and CEO of EOR specialist, Elk Petroleum. In the current operating environment, assesses Lingo, “the companies that come to this revelation and understand what it takes to excel using this type of oil production are the ones creating value…The notion that EOR is only profitable with high oil prices is a complete misnomer.” Considering that “the first budget to get cut by senior management is exploration, EOR is actually born out of low oil prices,” he concludes.
Even tangentially linked service providers have suddenly found themselves compelled to rethink their business models. “Our challenge in these straightened times is to retain relevance… increasingly our most formidable competitor is not another recruitment company, but rather a client’s internal talent pool and hiring process, which is a typical cost-saving measure. So it is vitally important to demonstrate that we make our clients’ lives significantly easier than if they had to do it themselves,” reasons Brunel’s Mitchell Buswell.
Australia has not experienced the challenges associated with a dip in oil prices alone, and the squeeze has been felt throughout many regions across the globe. The lessons to take away from the Australian model, however, has been the pragmatism to step back and review new strategies and opportunities that exist due to this new market dynamic, and remain both creative and adaptive to best achieve success and results. “If you’re hiding under a rock because the sky is falling, then you’re not going to be able to see the silver lining,” jokes 88 Energy’s David Wall.