Oil & Gas

Positive Projections for the Oil and Gas Industry.

An eventful year-2016 is just completed and the New Year 2017 is expected to deliver results for all; a Good Luck wish is much desired for the oil & gas sector. It seems in 2017, oil price dynamics will continue to remain uncertain and volatile. The bright spot is that most of the projections, including from the World Bank, indicate that oil price is on recovery path but it is far away from the sweet spot. EIA forecasts Brent crude oil prices to average $52 per barrel in 2017 compared to $43 per barrel in 2016, close to 21% upward correction. West Texas Intermediate (WTI) crude oil prices are projected to average about $51 per barrel in 2017.

The World Bank prediction is giving a more optimistic oil price value of $55 per barrel. Whereas BofA Merrill Lynch predictions are highly optimistic with WTI Crude priced at $59 per barrel and Brent – at $61 per barrel in 2017. Investment bank Goldman Sachs predicts average WTI price to be $55.6 and Brent to be $57.4 in 2017. Such optimistic predictions would make the upstream investors quite hopeful if not very comfortable. History suggests that oil price predictions have been tricky, therefore on many occasions’ forecasts have been missed by miles. Generally, predictors either over estimate or underestimate oil prices. Now most analysts are inclined towards a bullish oil market. On the contrary Standard Chartered Bank predicted oil prices falling to as low as $10 per barrel in 2016 — such a slump was last seen during the Asian financial crisis in 1998. Arguably, the prediction completely went wrong. Rather oil prices have shown good recovery towards the end of 2016. The upward oil price corrections are likely to continue in the first half of 2017 and the second half may deliver even better performance.

Factors affecting price
Major factors which influenced price of crude in 2016 include oversupply, strengthening of US dollar, increase in US crude stock, and delayed production decision of the OPEC. Fall in crude prices resulted in lower revenue realization for oil exporting countries. As a result most of the OPEC countries suffered severe financial loss. To keep their economic activities going OPEC countries were forced to maintain the production level beyond expectation.

Hope for growth
Despite slight sluggish projected growth in China and India , higher global economic growth of 3.1 percent is projected in 2017 compared to 2.9 percent in 2016. Loss of economic growth in China and India is expected to be compensated by the revival in Euro-zone, Japan, Brazil, and the USA. As a result, in 2017, world oil demand is projected to grow by 1.15 million barrel per day to average 95.56 million barrel per day. Despite marginally lower projected growth, oil demand in
India is projected to increase from 4.33 mb/pd in 2016 to 4.49 mb/pd in 2017.

As per OPEC Monthly Oil Market Report of December 2016, in 2017, demand for OPEC crude is expected to be at 32.6 mb/pd and Non-OPEC supply is expected to average 56.50 mb/pd. At the 171st Ministerial Conference, OPEC decided to implement a new OPEC-14 production target of 32.5 mb/pd, effective from 1 January 2017. The production rationalization decision of OPEC is intended to address the oversupply and alter prevailing global crude oil prices. However, the real impact on crude prices may be minimal as prices of global crude are dependent on many other factors. Tsvetana Paraskova raises plenty of questions over implementation and sustenance of OPEC production cut. Bloomberg reports that OPEC dynamics are principal driver of global crude fundamentals , therefore close monitoring of administrative and operative decisions of OPEC is critical to understand pricing dynamics.

Exploration & Production Outlook
Due to oil price slump in exploration & production (E&P) activities total rig counts in the USA has fallen from 737 in the year 2015 to 597 in 2016, 19 percent year-on-year drop. However, on the backdrop of projected oil price, the US oil and gas companies are expected to speed up E&P activities in 2017. Similarly, oil & gas companies in OPEC countries, Europe, and other oil & gas producing countries are expected to step up E&P activities in 2017. Almost $50 billion of U.S. upstream merger & acquisition deals were announced in 2016, higher than the $30.7 billion for 2015. This is a clear indication that an anticipated price recovery excites the investors. Further, better pricing may act as a catalyst for revival of unconventional oil and shale gas activities in the US 2017.

Ongoing Challenges
The OPEC Bulletin (Oct. 2016) highlights that the oil & gas industry, especially the upstream faces multiple challenges such as: the uncertain prospects for the global economy; managing excessive speculation; geopolitical dynamics; attracting investment, managing advances in technology for efficient exploration and production; and environmental and sustainable development. Further, during the downturns bringing together all the stakeholders to develop comprehensive approaches to address complex issues remains as challenging as before. These challenges will continue to remain in 2017 and beyond.

Conclusion
Global oil & gas industry is on the recovery path which is going to strengthen in 2017. Oil price is predicted to be in the reasonable zone of $55-60 per barrel, which would reduce stress on E&P sector. Slump in oil price proved beneficial for Indian economy and downstream companies strengthening their financial position. The government’s strategic decisions and policy reforms in the petroleum sector are poised to bring positive results starting 2017. All segments of petroleum sector namely: upstream, mid-stream and downstream are expected to attract higher investments. Improvements in the areas of oil & gas production, LNG infrastructure, pipeline network, and CGD network would be seen in 2017. Mr. Modi’s drive for cashless society would have bigger impact on petroleum sector. The petroleum retail outlets are going to play a critical role to make cashless society a reality.

Innovation the key to long-term industry success.

Over the past months, the global oil and gas sector has experienced a number of widespread challenges. However, it’s at times like these that innovation becomes even more critical. Here, Denise Smiles, OMS’s CEO, discusses the pivotal role innovation and R&D plays within the company, as well as its importance to driving long-term economic success for the oil and gas industry.
In a recent article published by The Oil & Gas Journal, Erik Milito, API Upstream and Industry Operations Group Director at the American Petroleum Institute, wrote about the importance of innovation within the oil and gas industry. As well as associating continued progress to have “made the difference in allowing the industry to produce the oil and gas we rely on in our daily lives”, Milito presented innovation within the sector as a real-world case study of “how the nation can continue to make its general economy grow”.
Furthermore, he explains that R&D has “enabled companies to operate more closely together”, highlighting the offshore energy sector as “a perfect example of how innovation and standards development have combined to enhance the safety in operations”.
I thought the piece was interesting on a couple of levels. As well as being a glowing review of the sector’s continued progress, the article reflects a number of key values shared within our business. At OMS, we pride ourselves in leading the way when it comes to innovation, R&D processes and technological development – both for the oil and gas industry, as well as wider sectors. Working with clients worldwide, we specialise in providing precision measurement products and services to minimise project risk, reduce timescales, streamline processes, improve programme results and help reduce project capex.
Over the next two or three generations, the biggest driver for the oil and gas sector won’t be a fluctuating price point, but instead the question of efficiency and process improvement. Globally, there is only a finite amount of oil remaining and it is our duty to make sure that we are maximising the capability of the industry to extract as much of it as possible, in as efficient, sustainable and risk-free way as possible.
Innovation is therefore key – it has been central to the industry’s past success and will be to its future

5 Biggest Risks Faced By Oil And Gas Companies

Whenever an investor approaches a new industry, it is good to know what the risks are that a company in that sector must face to be successful. General risks apply to every stock, such as management risk, but there are also more concentrated risks that affect that specific industry. In this article, we’ll look at the biggest risks that oil and gas companies face.
 
Political Risk
The primary way that politics can affect oil is in the regulatory sense, but it’s not necessarily the only way. Typically, an oil and gas company is covered by a range of regulations that limit where, when and how extraction is done. This interpretation of laws and regulations can also differ from state to state. That said, political risk generally increases when oil and gas companies are working on deposits abroad.
Oil and gas companies tend to prefer countries with stable political systems and a history of granting and enforcing long-term leases. However, some companies simply go where the oil and gas is, even if a particular country doesn’t quite match their preferences. Numerous issues may arise from this, including sudden nationalization and/or shifting political winds that change the regulatory environment. Depending on what country the oil is being extracted from, the deal a company starts with is not always the deal it ends up with, as the government may change its mind after the capital is invested, in order to take more profit for itself.
Political risk can be obvious, such as developing in countries with an unstable dictatorship and a history of sudden nationalization – or more subtle – as found in nations that adjust foreign ownership rules to guarantee that domestic corporations gain an interest. An important approach that a company takes in mitigating this risk is careful analysis and building sustainable relationships with its international oil and gas partners, if it hopes to remain in there for the long run.
 
Geological Risk 
Many of the easy-to-get oil and gas is already tapped out, or in the process of being tapped out. Exploration has moved on to areas that involve drilling in less friendly environments – like on a platform in the middle of an undulating ocean. There is a wide variety of unconventional oil and gas extraction techniques that have helped squeeze out resources in areas where it would have otherwise been impossible.
Geological risk refers to both the difficulty of extraction and the possibility that the accessible reserves in any deposit will be smaller than estimated. Oil and gas geologists work hard to minimize geological risk by testing frequently, so it is rare that estimates are way off. In fact, they use the terms “proven,” “probable” and “possible” before reserve estimates, to express their level of confidence in the findings.
 
Price Risk
Beyond the geological risk, the price of oil and gas is the primary factor in deciding whether a reserve is economically feasible. Basically, the higher the geological barriers to easy extraction, the more price risk a given project faces. This is because unconventional extraction usually costs more than a vertical drill down to a deposit. This doesn’t mean that oil and gas companies automatically mothball a project that becomes unprofitable due to a price dip. Often, these projects can’t be quickly shut down and then restarted. Instead, O&G companies attempt to forecast the likely prices over the term of the project in order to decide whether to begin. Once a project has begun, price risk is a constant companion.
 
Supply and Demand Risks
Supply and demand shocks are a very real risk for oil and gas companies. As mentioned, operations take a lot of capital and time to get going, and they are not easy to mothball when prices go south, or ramp up when they go north. The uneven nature of production is part of what makes the price of oil and gas so volatile. Other economic factors also play into this, as financial crises and macroeconomic factors can dry up capital or otherwise affect the industry independently of the usual price risks.
 
Cost Risks
All of these preceding risks feed into the biggest of them all – operational costs. The more onerous the regulation and the more difficult the drill, the more expensive a project becomes. Couple this with uncertain prices due to worldwide production beyond any one company’s control, and you have some real cost concerns. This is not the end, however, as many oil and gas companies struggle to find and retain the qualified workers that they need during boom times, so payroll can quickly rise to add another cost to the overall picture. These costs, in turn, have made oil and gas a very capital-intensive industry, with fewer and fewer players all the time.
 
The Bottom Line
Oil and gas investing isn’t going anywhere. Despite the risks, there is still a very real demand for energy, and oil and gas fills part of that demand. Investors can still find rewards in oil and gas, but it helps to know the potential risks that go along with those potential rewards.