Deloitte: Downstream, chemicals are ‘bright spots’ in industry outlook

A majority of oil, natural gas, and chemicals executives are confident in the industry’s continued recovery and expect the price of West Texas Intermediate crude to average $70/bbl or more in 2020, according to a recently released survey conducted by Deloitte. While in the 2018 Oil, Gas & Chemicals Executive survey—released Oct. 30—72% of executives held this view, upstream executives appear less certain about the recovery’s sustainability than those in the midstream, downstream, and chemicals businesses.

“The industry seems much better off than a year ago,” said John England, partner, oil, gas, and chemicals, Deloitte & Touche LLP. “Positive sentiments have emerged from all sectors, but the real bright spot is in the downstream and chemical sectors. Most upstream executives surveyed see better days ahead but are managing more with caution as they work through growing pipeline constraints, mounting geopolitical tensions, and rising oil prices that could also push up costs. With growth and recovery top of mind, digital technologies could become critically important for productivity and profitability and should serve as a lever to help mitigate rising costs brought about by rising oil prices.”

The main findings of the survey include:

• Even more bullish and in sharp contrast to last year’s findings, 41% of the respondents expect WTI prices to average $80/bbl or higher in 2020, up from only 5% from the prior year.

• More than half (54%) expect Henry Hub natural gas will average $3.50/MMbtu or higher in 2020, with a majority of those (35%) expecting $4/MMbtu or higher.

• More than half of executives surveyed from each of the four businesses—upstream, midstream, downstream, and chemicals—expect to increase capital expenditures in the coming year. Downstream and chemicals sectors see the highest confidence with 64% and 67% of those respondents, respectively, expecting an increase in spending.

• For upstream companies, digital solutions are now seen equally impactful at improving cost structures as increasing well productivity.

Upstream

Upstream is divided among focusing on growth, maintaining the status quo, and streamlining the business, the survey indicated. The shared challenge is to manage short- to medium-term costs and efficiencies, if indeed commodity prices and activity levels rise.

• About half of respondents expect spend, rig deployment, or headcount to rise.

• Maintaining or increasing production is the top priority (39%), followed by reducing or streamlining general and administrative costs (30%), making divestitures (29%), and reducing capital expenditures (29%).

• Most respondents (62%) believe 20-60% of realized cost reductions are short term or cyclical.

“Despite the price recovery, surveyed upstream executives seem to have been so battered by the downturn that they are a bit skittish about embracing a positive outlook,” said Andrew Slaughter, executive director, Deloitte Center for Energy Solutions, Deloitte Services LP. Added risks for the sector are uncertainty around the economy, trade, and rising interest rates, which have a greater impact on upstream more than other sectors, he said.

Midstream

Capital spending and investment outlook has turned the most positive for midstream companies this year—a reflection of the recovery in prices, projected consolidation, and rising export profile of the US, the report showed.

• Most 2018 respondents (71%) expect flat to higher capex growth for midstream, up from 34% in 2017.

• The Gulf Coast region, led by rising production in the Permian, is seen as a key opportunity by most (62%) respondents.

• Controlling costs and enhancing operations remain key growth factors for executives. However, the biggest midstream challenges are costs (40%), operational issues (39%), and environmental issues (37%).

Downstream

Most downstream companies surveyed have a positive outlook with modest growth and increasing margins, exports, and capital expenditures.

• Refiners expect a strong 2019 with average expected margins of $15.39/bbl, up from 2017’s $13.20/bbl.

• The biggest challenges noted by respondents were environmental issues (38%), costs (34%), and permitting issues (31%).

• A small portion (28%) noted fuel specification or biofuel mandates as a challenge.

Chemicals

The chemicals business expects to experience strong growth with its focus on innovation and digital to address challenges and sees itself with the most potential for consolidation. Some opinions seem counter to key indicators:

• More than half (56%) expect the US to be the fastest growing region—yet, China remains the fastest growing chemical producing region globally.

• Six out of 10 respondents expect merger and acquisition activity to increase by 2019, while valuations are near all-time highs.

• Nearly all (85%) think that the business is moderately to highly digitally mature, despite it lagging other industries on digital maturity.

“We are witnessing the rise of US downstream and chemicals dominance and the steps companies continue to take to innovate, digitize, and streamline their processes is bolstering that position as these sectors make their presence known on the world stage,” said Duane Dickson, vice-chairman and US oil, gas, and chemicals leader, Deloitte LLP.

Digital

While two thirds of surveyed executives characterized the digital maturity of the overall industry as relatively moderate, businesses are defining viable applications and near-term return on investment.

• Operational efficiency and productivity were ranked as the top benefits of deploying digital by oil and gas, as well as chemical executives.

• Almost half of oil and gas (44%) and chemicals (49%) executives see artificial intelligence, machine learning, and advanced analytics as the technology having the largest impact on the industry, due to their early ROI and proven role in achieving specific business objectives.

• Almost half of oil and gas (41%) and chemicals (49%) executives listed energy storage and efficiency as technologies having a huge impact on the industry.

• Wearables, blockchain, and digital twins were ranked as having the least impact on the industry right now.