In normal times the topic for this month would have been a comment on what was being said at the Annual Meeting about the current state of the oil and gas industry, its immediate prospects plus the longer term outlook, all in the context of what...
In normal times the topic for this month would have been a comment on what was being said at the Annual Meeting about the current state of the oil and gas industry, its immediate prospects plus the longer term outlook, all in the context of what this might mean for the business and technology of the geoscience and engineering community.
Obviously the global pandemic has interrupted that potential conversation. We can however imagine what might have been discussed. Moreover, we can be fairly confident that no conclusions would have been reached. The one exception would be agreement that no one has a clue how the industry is going to evolve in the aftermath of the Covid-19 outbreak and the brutal oil price war waged over the past few months. Ominously for geoscientists no likely future scenarios offer much cause for optimism.
The big picture is that the industry is experiencing unprecedented turmoil and uncertainty. The supply and demand of oil has been thrown into total disarray. On the supply side it’s anyone’s guess how Saudi Arabia, Russia, the rest of OPEC+, and the US shale oil industry will behave in the months to come. Tensions between all the parties continue to simmer. Any apparent oil price equilibrium achieved this summer seems fragile. It will be subject to all the pressures that caused the big upset earlier this year.
Meantime, no one really knows what global economic recovery will look like and to what extent it will drive increased demand for oil. Any agency or analyst hazarding a prediction is almost bound to be embarrassed. No amount of modelling can factor in all the uncertainties affecting future oil consumption, e.g., manufacturing output, business and commerce, domestic spending, international travel, leisure pursuits, etc.
It hasn’t discouraged the US Energy Energy Information Administration from predicting crude prices averaging $34 a barrel in 2020 rising to $48 next year. Goldman Sachs suggests $55.63 for Brent Crude in 2021. For something surreal, try longforecast.com: it provides precise numbers to two decimal points for the price of oil every month up to July 2024.
Traditionally the oil price has been a surprisingly accurate indicator of oil industry investment sentiment, especially exploration and production spending upon which the welfare of the services sector largely depends. That correlation has become hugely complicated. Covid-19 and the spat between the three main oil-producing powers has caused extraordinary volatility, including in April an unheard of negative oil price as low as minus $37.63 a barrel for West Texas Intermediate (WTI).
There is no reason to argue much with the World Energy Investment Report 2020 published by the International Energy Agency (IEA) in its statement that, at the beginning of this year, global energy investment was on track for growth of around 2%, the largest annual rise in six years. It now warns that such investment will plummet by 20% or almost $400 billion. A widely quoted report from Fitch Ratings suggests that the oil and natural gas industry could lose as much as $1.8 trillion in revenue this year.
The year started off with the assumption of a stable oil price hovering around $50-60 per barrel. A modest increase in E&P oil industry spending was expected outside the US, where disenchantment with the investment returns from shale were weighing on the market. Any new offshore hydrocarbons investment would continue the trend of maximizing production from existing developments and near field opportunities. Oil companies were still hesitant about committing to further large exploration projects requiring significant seismic activity.
As a result the marine seismic towed streamer contractors were facing another year of barely hanging on even with a seriously depleted global fleet. If there was to be any growth in seismic demand, the ocean bottom survey sector was the likely potential beneficiary.
The reaction of the oil business to the chapter of disasters of the last few months does not require a spoiler alert. It has been entirely predictable. The hammer has come down and wherever you look it is a story of slashed budgets. Cuts announced by nine major oil companies, including Saudi Aramco, ExxonMobil and Royal Dutch Shell, come to a combined $38 billion, or a drop of 22% from their initial spending plans of $175 billion, according to a recent Reuters report.
Analyst Wood Mackenzie has calculated that the 11 ‘top spending’ NOC explorers, comprising three Chinese NOCs, PTTEP, Petronas, ONGC, Qatar Petroleum, Rosneft, Gazprom, Petrobras and Pemex have reduced their combined budgets by about 26%, or $5 billion. It comments that ‘most NOCs consistently spent between 12% and 35% of their upstream budgets on exploration, an average of about 17% over the 2015-2019 period. This is significantly higher than the majors’ average spend of 8% of upstream budgets on exploration.’
Other reactions to the crisis include the shedding of 10,000 jobs by BP. Foreshadowing the future, CEO Bernard Looney noted in an interview last month that BP would produce less oil and gas over time; that oil demand is probably slowing and that focusing on ‘value’ rather than ‘volume’ makes it possible to meet carbon goals and satisfy investors’ expectations. Shell shocked its shareholders by cutting its dividend (by two thirds) for the first time since World War II, a move also made by Equinor.
A sign of the times, Shell in its explanation made reference to meeting its net zero emissions goal. The potential for energy transition to disrupt energy supply and demand estimates is clearly a source of major uncertainty for Big Oil. A recent report by Rystad Energy suggests that big players are still not totally on board with the alternative energy wagon. Its analysis suggests that investments in solar and wind energy projects by the world’s oil majors until 2025 are expected to exceed $18 billion. But some $10 billion, or 55% of the amount is expected to be invested by a single company, Equinor. To date it is the only operator poised to direct a majority of its greenfield capex towards renewable energy projects.
Almost all of the renewable investments by oil and gas players will come from only 10 oil majors, which are collectively poised to spend just over $18 billion on specific renewable energy projects through to 2025. Rystad says that this investment pales in comparison with the $166 billion forecast to be spent on greenfield oil and gas projects during the same period. It acknowledges that some of the companies may accelerate their alternative energy spending and that the report came before Total announced the purchase of a 51% stake in SSE’s Seagreen 1 $3.7 billion offshore wind farm project in the UK.
The impact of all this on the immediate prospects for seismic service and equipment suppliers to the oil industry requires little analysis. The evidence is already out there. For example, a recent check revealed that between them the three leading high-tech marine seismic contractors had 11 vessels active along with six other mainly Chinese and Russian vessels. All the main contractors have been cutting deeper into their already depleted resources at the risk of becoming unsustainable. Most recently PGS stacked three of its operational vessels, announced a 40% reduction in office-based staff and a reduction in its annual gross cost run rate to around $400 million from a guidance of $600 million at the beginning of the year.
No one expects the overall situation to change much until some unspecified time next year when an uplift in demand is hoped for. The much hyped ocean bottom seismic market has also gone extremely quiet. The few offshore licensing rounds in prospect seem unlikely to generate many new seismic projects. Petroleum Economist lists planned rounds by Australia, Eastern Canada, Colombia, and Norway. Current open rounds include Georgia, India Lebanon, Liberia and Senegal.
A similar tale of woe is of course affecting the land seismic business, no detail necessary. So the issues that might have been raised at the EAGE Annual Meeting in June would surely have focused on global oil price, oil company strategy going forward, the pace of energy transition and just how drastic are the circumstances facing the geoscience and related engineering organizations involved in the oil and gas industry. Such questions are still unanswerable and will probably remain so when the postponed conference and exhibition is convened in Amsterdam in December.
More positive talk in June would probably have explored two questions: 1) How to adapt to the new kind of business represented by digitalization: big data, artificial intelligence, machine learning, etc. and 2) How to take advantage of opportunities for geoscience in energy transition initiatives such as carbon capture and storage, geothermal developments and the like. The dialogue has really only just got underway.
The most disconcerting and long lasting aspect of the latest plunge in oil industry fortunes could be the threat to the discipline of geoscience itself. Can we really expect the next generation of science-minded students to put geoscience at the top of their list? They are witnessing once again the volatility of the oil and gas market and its chronically undependable career prospects. Push back in light of the industry’s perceived poor environmental and ethical image has also been evident from declining student numbers in Europe and the US.
Of course there are other areas for geoscientific endeavour, but the oil industry has been always been a vital source of research initiatives and sponsorship. That is now ebbing away. Associations such as our own EAGE, with a mission to promote and support the geoscience community, are not immune from the forces in play. We could easily be at an inflection point where we have to reimagine what the geosciences can offer society. That is an issue that no major gathering of professional geoscientists should dodge.
‘Ominously for geoscientists no likely future scenarios offer much cause for optimism’
‘The most disconcerting and long lasting aspect could be the threat to the discipline of geoscience itself’
