A recent column in the Financial Times made reference to a comment by Irving Fisher (1867-1947), in his heyday one of the world’s most renowned economists.
A recent column in the Financial Times made reference to a comment by Irving Fisher (1867-1947), in his heyday one of the world’s most renowned economists. Fisher apparently once remarked that ‘the sagacious businessman is constantly forecasting’.
Leaders of the oil and gas industry and the service sector have good reason to be frustrated by this apparently sage advice. They could ponder whether any year could be less predictable for the oil and energy business than 2020, and hence question the value of forecasting as a valid tool. That sentiment would also apply to the opinion polls ahead of the two most recent US presidential elections. In November, they were spectacularly wrong about the margin of defeat for the incumbent President Donald Trump, and Hilary Clinton was expected to win in 2016. In pollsters’ defence, the margins of error may have been more to do with the inherent problems of all canvassing, i.e., unrepresentative sampling, untruthful responses, assessment of intention to vote, etc., and how to allow for this.
Fisher himself came unstuck with his own predictions. A revered early advocate of neoclassical economics, he also made pots of money from selling some of his practical inventions while professor of political economy at Yale, notably an ‘index visible filing system’. Unfortunately, he lost his fortune in investments and his reputation as an economic soothsayer by failing to predict and then acting on the reality of the 1929 Great Depression.
Looking ahead, 2021 looks daunting for the oil and gas industry and the service sector. It seems obvious that business life will not get back to anything like normal until the Covid-19 pandemic abates. When that happens is anyone’s guess. With the onset of winter in the Northern Hemisphere, rates of infection have gone up alarmingly in many countries and continue to be sky high in the United States, a challenge acknowledged by incoming President Joe Biden. Continuing efforts to contain the spread of the virus won’t make it go away. The early development of a proven vaccine will take time to have an impact, and it is unclear how quickly such an antidote can be made available. There is of course another whole issue: how many in the population will be willing to be immunized?
Assuming a continuing period of intermittent lockdowns and pandemic interruptions in many countries worldwide, commonsense suggests that manufacturing, transport and consumer spending is going to continue to be muted and unlikely to significantly drive up the demand for oil. That means an increase in the price of oil leading to a relaxation of oil company budget restraints is not on the cards.
Probably the best that can be said for geoscience-related oil business in 2021 is that it won’t get any worse. That’s seems to be the consensus of some leading companies such as CGG, PGS, Polarcus and TGS in recent reporting of their third quarter results. Their conclusion is based on the understandable assumption that oil companies have to keep up at least a minimum of E&P activity.
However, it seems likely that it will be 2022 before we can expect to see more than just maintenance money being dedicated to exploration. Even then, there is almost nil chance that oil companies will suddenly engage in a spending spree. No need to consult the energy agencies and/or analysts who keep tabs on supply/demand to know that in the short term at least the industry is taking an extremely cautious view on oil demand.
Conventional wisdom suggests that we are currently awash with oil and plenty to spare. The OPEC+ countries which include Russia have been reducing output since January 2017 in an effort to balance the market, support prices and reduce inventories. They are currently curbing production at 7.7 million barrels per day (bpd), down from 9.7 million bpd, and are in a dilemma over whether to ease restrictions or hold off amid signs of a secondary wave of Covid-19. Whatever they decide, it is clear that there is no shortage of OPEC+ oil reserves that can be tapped to serve the market should demand pick up in the short-term. The same applies to the North American shale oil industry, which has temporarily lost its lustre. It would not take much of a change in the price of oil for the sector to rediscover its mojo.
The incentive to invest big in new reserves is not seen as an attractive option for oil companies. It is too much of a gamble when the impact and pace of energy transition remains uncertain. In addition, the optics are not good. The European section of Big Oil is pivoting towards alternative energy and shrinking their core oil and gas business, in BP’s case quite spectacularly. To launch ambitious E&P programmes at this juncture could stoke the objections of those stakeholders who are already lobbying for more environmentally sensitive business decisions.
The flaw in this thinking is that the end of the oil era may not be closing nearly as fast as many choose to imagine. This is probably what prompted Dr Sultan Bin Ahmed Al Jaber, Group CEO of the Abu Dhabi National Oil Company (ADNOC), to tell the recent Abu Dhabi International Petroleum Exhibition Conference (ADIPEC) that oil demand could reach more than 105 million bpd within the next decade and that the petrochemicals sector has room to grow through to 2050.
This prospect would justify the unabashed wager on continuing global demand for oil that has set ExxonMobil apart from its supermajor peers. The company continues enthusiastically to pour money into the development of the giant fields in the Stabroek block, offshore Guyana. It is doubtless hoping to get the last laugh on those who see ‘peak oil’ occurring later this decade when everyone will be driving electric cars and countries such as China will have weaned themselves from coal. Analyst Rystad Energy recently revised its view stating that oil demand could peak in 2028 at 102 million bpd rather than 106 million bpd in 2030.
The many head-spinning future energy scenarios are beyond the control of the service sector of the oil business. However, as the economist Irving Fisher implied, business cannot go on without a plan. Judging from their public statements, the bosses of the big geoscience-related businesses are adopting a policy of waiting out the crisis. A recent statement by PGS sums up what most of the other players are experiencing: ‘PGS believes it will take time for seismic demand to get back to pre-Covid 19 levels. However, combining the effects of potential pent-up demand, a more stable oil price through second half of 2020 and an expectation of higher oil prices in 2021, PGS believes in increasing activity levels through 2021. Despite the impacts of the Covid-19 crisis, energy consumption is expected to continue to increase in the future with oil and gas continuing to play an important role in the energy mix. Offshore reserves will be vital for future supply and support the demand for marine seismic services. The expected future recovery of the seismic industry is likely to benefit by the recent further industry capacity reductions’.
Reading between the lines, this seems like an expectation of a modest future for the towed-streamer seismic survey market in which the main players – PGS, Shearwater GeoServices and Polarcus – are engaged. The pre-Covid-19 levels of business referred to were still pretty harsh and led to the increasing global fleet size reductions, also mentioned. The marine seismic market business model has also changed significantly. Available exploration expenditure by oil companies is increasingly being channelled through multi-client programmes in which TGS, CGG and Schlumberger are now fully engaged. As a consequence, operating companies do not get the big share of the cake they once received from old-style proprietary surveys.
Some speculate that the future for this sector lies in seabed seismic using ocean bottom nodes (OBN). The technology is gradually improving to make it an attractive alternative to towed streamer seismic in an increasing number of geological settings. The prospective market is mainly made up of those oil companies focusing on extracting the maximum from existing oil reserves and limiting exploration investment to near field prospects that can be tied to existing producing field installations. There is a move towards sparse node distribution and other techniques that are expanding the scope and coverage of OBN, previously thought of as suitable for imaging over very targeted areas, for example for 4D seismic monitoring. This takes the fight into towed-streamer territory. It seems only a matter of time before all marine seismic contractors will have a serious seabed seismic offering. That of course could put a strain on profitability of the emerging OBN survey market.
In a way the Covid-19 pandemic may provide the pause required for marine seismic contractors and equipment suppliers to review the options. The contraction in the business, really since the end of the last boom in 2013/14, is surely a message that there is only room for a few if companies are going to be able to sustain viable enterprises. That may mean some more very tough decisions ahead.
So far diversification has not emerged as a possibility. The very specific equipment involved in seismic operations does not readily lend itself to any other activity. People can of course evolve. Interest in geoscience-related activity in the years to come, especially for the next generation, may very well trend away from the oil business and extend towards geothermal technology, carbon capture and storage, site surveys for wind power, geohydrology, smart cities, and many other applications.
Another famous economist John Maynard Keynes made two very apposite comments that may well apply to the whole geoscience-related business – ‘The market can stay irrational longer than you can stay solvent’ and ‘difficulty lies not so much in developing new ideas as in escaping from old ones’.
‘Business life will not get back to anything like normal until the Covid-19 pandemic abates.’
‘So far diversification has not emerged as a possibility.’
