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Oil and gas investment to revive as confidence surges

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The outlook for the oil and gas industry in 2018
Research forecasts oil and gas capital and operating expenditure boosts in 2018, but the industry still promises to keep a cap on costs
  • Most professionals expect a step up in capex and opex in 2018

  • Confidence levels have doubled in a year

  • All regions display greater confidence in immediate prospects

  • Cost control remains a priority now and for the long term

The global oil and gas industry is expecting a boost to capital and operational expenditure (capex and opex) in 2018 after a sharp rebound in confidence over the past year. 

Two-thirds (66%) of industry leaders surveyed for the DNV GL report Confidence and Control: the outlook for the oil and gas industry in 2018 plan to maintain or increase capex in 2018 (figure 1). It is the first rise in this measure in three years. More than half (58%) of respondents expect to maintain or increase opex in 2018, up from 41% last year. 

Confidence and Control is based on a survey of more than 800 senior oil and gas professionals and in-depth interviews with 15 business leaders. Published in January, it is DNV GL’s eighth annual benchmark study on industry sentiment, confidence, and priorities. 

Despite intentions to increase spending, the industry clearly expects to keep a cap on costs, with measures to increase efficiency from existing assets emerging as the top priority upstream, midstream, and downstream (figure 2). Half those surveyed expect to increase cost efficiency in 2018 – more or less the same share as in 2017. Moreover, nearly two-thirds (62%) think that these measures will be permanent changes. 

Figure 1: Percentage of respondents expecting their companies to increase or maintain capex and opex, by year
Figure 1: Percentage of respondents expecting their companies to increase or maintain capex and opex, by year

Higher capex expectations are global 

All regions expect capex increases in 2018, according to the study, with investment most likely to increase in the oil refining and gas processing sectors, from integrated companies and from exploration and production (E&P) companies. 

Signs of an increasing appetite already started to emerge in 2017. In the Middle East, for example, Saudi Aramco recently approved plans to spend around USD20 billion (bn) building the world’s largest petrochemicals plant, the first in Saudi Arabia. Exxon Mobil confirmed it will invest the same amount over the next five years in chemical and refining plants along the US’s Gulf Coast. These developments highlight the attractiveness of the downstream segment. 

Some major offshore projects were greenlighted last year or moving towards eventual approval announcements in early 2018. In the UK, Shell is proceeding with redevelopment of its Penguins field and Premier Oil is progressing toward approval of project sanction for Tolmount. Exxon Mobil said it will spend USD4.4bn on the initial phase of the Liza development offshore Guyana, within a block expected to hold 2.0–2.5bn barrels of oil equivalent. Meanwhile, Statoil announced the largest offshore project approved in 2017: the USD5.89bn development of the Johan Castberg field, which will be the northernmost development on the Norwegian Continental Shelf. 

Greater agility for shorter cycles 

Eirik Wærness, senior vice president and chief economist, Statoil, explained in an interview for DNV GL’s report that after three years of significant cutbacks in investment, the industry has accumulated many potential projects, most of which have lower break-even points than before. “These projects have been run through the mill several times in terms of cost reductions,” he said. “Some of them will certainly come to investment soon.” 

Figure 2: Top priorities for cost-cutting in 2018
Figure 2: Top priorities for cost cutting in 2018

The findings from DNV GL’s survey highlight an increasing focus on new projects being nimble; 60% of respondents report that their organization favours investments in more agile, shorter-term projects – up from 52% a year ago. 

“New projects are likely to have a quicker return on investment,” said Liv Astri Hovem, CEO, DNV GL – Oil & Gas. “We see the majors driving a much quicker turnaround on mega-projects compared with a few years ago.” 

Standardization has also assisted some new projects to get off the ground, and will remain a focus in 2018: 87% of respondents will increase (48%) or maintain (39%) spending on standardizing operations in 2018. 

Investment revival reflects confidence rebound 

Reviving investment reflects the survey’s finding that after three tough years of cost cutting, redundancies, and overhauling business models, the industry’s mood has lifted markedly (figure 3). 

Confidence levels have doubled from 32% in 2017 to 63% this year, as measured by the share of respondents expressing confidence in the industry’s prospects in 2018. This is faster than the rise in oil prices whereas, previously, the rates of change in oil prices and confidence were closely correlated. When it comes to individual companies, two-thirds (66%) of respondents are positive about prospects for their own organizations in 2018 compared with 43% a year previously. 

Frank Ketelaars, DNV GL - Oil & Gas on the outlook for the oil and gas industry in 2018
DNV GL experts summarize regional challenges, opportunities and responses to the outlook for the oil and gas industry
 

Oil prices and cost reductions underpin rising optimism 

Two key drivers of restored confidence stand out, according to Maria Moræus Hanssen, CEO and chairman of the management board, DEA Deutsche Erdoel AG. In an interview for the DNV GL report, she said: “The first is oil and gas prices. Short-term prices seem to drive a lot of sentiment about longer-term perspectives for the industry. Second, costs have come down - both running costs and investment costs.” 

“The big change in industry confidence is not because of a belief that the oil price is going to rise to previous levels,” said Graham Bennett, vice president, DNV GL - Oil & Gas. “Instead, it is because industry participants now have their cost levels under control and can make a reasonable margin, even at USD55 or USD65 oil.” 

Cost efficiency remains a priority 

Rising expectations for oil and gas industry investment this year do not signal a return to pre-2014 norms in cost-efficiency, however. Cost-containment lessons learned in the downturn remain fresh and seemingly embedded for the longer term. 

Nearly a third (31%) of respondents still view cost control as top priority – the same as in 2017 – and half of those surveyed forecasted it would be greater in 2018. Nearly a fifth (18%) expect operating costs to be the biggest barrier to growth this year – the highest proportion recorded by the survey since 2014 (33%). 

Nearly two-thirds (62%) believe cost-efficiency measures introduced since 2014 are now permanent. Like last year (63%), this supports the view that the industry currently intends to sustain change aimed at protecting margin in a ‘new normal’ oil-price environment. 

Figure 3: Oil price vs. overall industry confidence
Figure 3: Oil price vs. overall industry confidence

“It seems to be that we are perhaps beyond the bottom of this cycle and that we are slowly heading up,” commented Thore E Kristiansen, chief operating officer E&P and executive director, Galp, for the DNV GL report. “But we are preparing for lower-for-longer prices. We do not believe that we will go up towards the past highs [for oil prices], but that we will stay at the levels around where we are currently for many years to come.” 

A new confidence for the future of the industry 

Climate change, the energy transition, digitalization and technology innovation will cause unprecedented disruption across the oil and gas industry between now and mid-century. Companies are already reacting to the risks and opportunities this presents, while balancing short-term priorities. This strategic challenge looks set to persist for several years, but many leaders start 2018 ready to meet it with greater control over their enterprises and a new confidence for the future of the industry. 

Liv A. Hovem, CEO DNV GL - Oil & Gas on the outlook for the oil and gas industry in 2018
DNV GL’s Liv Astri Hovem predicts that in the improving business climate this year, the greatest rewards will go to companies embracing the new normal
 

Disclaimer: 

DNV GL prides itself on providing accurate information but makes no claims or guarantees about the accuracy, completeness or adequacy of contents in this publication, and disclaims liability for any errors or omissions. The authors’ views here do not necessarily reflect DNV GL’s views.