Oil and gas executives' confidence in a quick industry recovery seems to have materially shifted this year from a return to optimism to more caution, according to Deloitte's 2017 Oil and Gas Industry Executive survey. With lower expectations of a rapid price recovery, the need by many to find new efficiency gains and reduce costs could push the digital revolution to its tipping point.
These findings contrast with prior executives' views that the moderate-growth global macroeconomic outlook of the past two years remains unchanged. Whereas respondents were increasingly hopeful for a strong recovery in 2016, this year's survey results indicate the oil and gas sector seems to have been hit disproportionately harder when compared to the broader economic outlook.
In fact, respondents across the oil and gas value chain expressed more caution about the state of the industry and indicated business strategies would need to adapt accordingly.
"The slow road back has gotten longer," John England, vice chairman, Deloitte LLP and U.S. energy and resources leader, said in a statement. "The protracted holding pattern we've been in for the last two years seems to have shaken executives' confidence in every sector—upstream, midstream and downstream.
“As the industry hunkers down to focus on cost reduction and productivity, one silver lining may be a drive to the next wave of digital technology adoption to uncover new efficiencies important to success."
Can digital bridge the price divide?
Fifty-five per cent of upstream executives see improving operational efficiencies as the best path forward for sustained cost reductions. Additional Deloitte research indicates that although many companies are seeing value in digitizing operations to find new opportunities and drive efficiencies, cut costs and increase safety and productivity—especially when they have exhausted other means—they are still immature on the adoption curve, compared to other industries.
Even a one per cent gain in capital productivity would mean a savings of about $40 billion. For perspective, listed pure-play upstream, integrated and oil field services companies worldwide reported a cumulative net loss of about $35 billion in 2016. The digital leap toward advanced analytics alone could potentially deliver annualized well-cost savings of about $30 billion to upstream players, while oil field service players can potentially create multibillion-dollar, high-margin revenue streams.
"The new reality seems to have set in—waiting for a significant price recovery may be a long haul," said Andrew Slaughter, executive director, Deloitte Center for Energy Solutions, Deloitte Services LP.
"It possibly has never been truer now that the low-cost producers are the winners. The bottom line is that companies should focus on cost discipline and operational efficiency. Digitization is likely the next frontier in this new normal, offering a lifeline for new efficiencies, cost reductions and productivity," Slaughter said.
Other findings include:
• The majority (64 per cent) of respondents expect the price of West Texas Intermediate crude to remain between $40–$50 per barrel in 2017, slightly rising to $50–$60 in 2018, and then only increasing to up to $70 per barrel by 2020. In contrast, last year executives were markedly more optimistic about a more rapid price recovery.
• The pessimism was more pronounced in oil prices, with the outlook for natural gas slightly more stable. Almost half expect Henry Hub natural gas to be between $2.50–$3 per million British thermal units (mmbtu) in 2017, with price increases expected for 2018, and into 2020 (up to $3.50 per mmbtu).
• Half of upstream oil and gas executives expect up to a 10 per cent decrease in capital expenditures in 2018 versus 2016, including four in 10 expecting exploration expenditures to decrease; and 58 per cent of executives expect a net decrease in rig deployment in 2018 versus 2016.
• Oil field services is seen as the sector with the greatest potential for increased mergers and acquisition (M&A) activity, followed closely by upstream exploration and production (E&P), integrated oil and midstream.