Paula Dittrick, editor
Oil and gas companies are learning how to operate more efficiently given recent low oil prices, Deloitte LLP speakers told a February media briefing in Houston, noting that tight refining profit margins previously forced the downstream industry to learn this.
"There’s a strong school of thought that low oil prices will help the [upstream] industry reset costs and bring costs down for North America shale," said Rick Carr, Deloitte principal and leader of the firm’s oil and gas operations. "This will open up shale plays worldwide."
He noted exploration and production costs escalated in recent years given the rapid pace of US unconventional development and output.
"The North America shale market is still pretty embryonic, with nobody really having cracked the nut," of running a lean, efficient operation, Carr said. For instance, prices paid for activities in unconventional plays often were not set by the real cost but rather by what a company would pay to get a job done.
He said 2015 oil and gas price signals indicate industry needs to reset its cost structures because not only is a deflationary correction needed, but premium costs need to be taken out.
Peter Robertson, independent senior advisor for Deloitte’s oil and gas practice and a former Chevron Corp. vice-chairman, said he believes a move toward greater upstream operational efficiencies started 18 months ago.
It was triggered when US light, sweet oil prices flattened at $100/bbl on the New York Mercantile Exchange after continuous growth since 2000. During that time and through 2008, operational costs rose dramatically, pressuring profit margins, prompting asset divestitures, and pushing efforts for efficiency improvements, Robertson said.
Carr said companies are taking a two-pronged approach toward cost reduction and greater efficiency through changes in cost models, structures, and operations. He believes upstream companies will work with suppliers to obtain price concessions and drive innovation in drilling and well completions.
Robertson said companies are looking to introduce technologies while restructuring operations, such as selling certain assets or focusing on core areas.
M&A activity likely
Melinda Yee, Deloitte partner and leader of the transactions practice, said low oil prices could create interesting merger and acquisition opportunities for upstream companies having strong balance sheets.
She believes financially robust upstream companies will look to buy strategic assets, and service companies will consolidate to optimize margins and also to acquire what she called "innovative technologies" developed by smaller companies that enhance operational efficiencies.
For instance, Yee suggested companies might seek technology acquisitions related to liquefied natural gas or carbon-capture technologies.
Carr agreed about the likelihood of buyouts by big companies for small, newer companies having developed new upstream technology.
"Typically in industry, especially in oilfield services, many of the big guys have good research and development, but a lot of innovation comes from smaller types of service providers, such as technologies around fracturing," Carr said.
Robertson said manipulation of the upstream "Big Data" has grown because of the use of sensor technologies and newer devices that record higher volumes and more types of data. Such technology is being used increasingly by unconventional operators.
From a people perspective and a demographic perspective, Carr believes more companies are looking at "Big Data" analytics and Internet-type tools. He said this ranges from applications that can run off smartphones to using wearable glasses. Such technology could enhance operational efficiencies and improve how industry manages its workforce, he said.
Tight oil output gains
For 2 years, US tight-oil production has grown at a rate of about 1 million b/d/year. This growth rate is expected to slow during 2015, a Deloitte MarketPoint analysis said. While dropping crude prices squeezed the budgets of shale producers, some reportedly lowered costs to below $40/bbl through efficiency gains and better economics in the "sweet spots" of the shale plays.
As a result, production growth is expected to continue in the short term despite low prices, albeit more slowly than in previous years. While there is no consensus on the extent to which growth will slow, many analysts expect declines of 300,000-500,000 b/d off the 2014 pace.
Robertson noted it’s important to realize the world experiences a 4-5% production loss per year just from normal depletion.
"There’s a strong school of thought that low oil prices will help the [upstream] industry reset costs and bring costs down for North America shale,"-- Rick Carr, Deloitte principal
