thoughts from the Granite City: Offshore Europe 2017

Despite having spent 5 great years living in Aberdeen between 1999 – 2004 working as a recent graduate for BP as a Petroleum Economist, this was my first visit to the Offshore Europe Conference and Exhibition held at the Aberdeen Exhibition and Conference Centre.

timing is important

Things feel a little different since my last visit to the city. The first thing I notice as I arrive in Aberdeen, is the airport expansion underway. I jump into a taxi and the driver quickly points out the new Exhibition Centre being built – a large sign hangs saying it will be ready for the next conference, OE ‘19! The long debated (and much needed) Aberdeen city bypass is under construction, I’m also told multiple new office buildings and hotels have appeared. In the years since I left, Aberdeen has been investing (and there is more to come with the continuation of the ‘City Region Deal’ announced back in January 2016). Unfortunately, it is true that some of these investment decisions, much like many oil & gas industry decisions such as those which generated the new production that is just coming on-stream (2016 North Sea production was up 16% on 2014, according to UK Oil & Gas Economic Report 2017), were made in fairer times. This should serve as a reminder to all of us in the industry that timing in the oil & gas investment space is extremely important.

To reinforce this, given the oil companies and supply chain have worked in the North Sea to drive down costs at an extraordinary rate. Combined with a stabilisation of the Brent oil price (more on that later), suggests that now is ever more critical a time to roll up our sleeves and work together to deliver the much-needed investment opportunities in the North Sea.

who came to the party?

The conference appeared busy and well attended, with the international mix you would expect in our industry. However, with the exception of some notable presentations, the conference seems to be more of a supplier conference with operators few and far between. Large and small stands from all areas of the supply chain, as well as an excellent decommissioning zone, stood facing each other with few stands (that I saw) from the operators. Since the name of the ‘new game’ is a different approach, a more collaborative way of working between the operators and the supply chain, this feels like an opportunity missed. ‘Big Oil’ showed up at the start and then mostly bowed out. Its kind words about the historic basin and future investment sounded a little hollow against a backdrop of the recent Shell and BP asset sell offs. The North Sea appears resilient and welcoming of these moves by the majors, making way for the second wave of smaller independent operators such as Siccar Point, Neptune, Chrysaor following the lead of Apache and Nexen.

data, data everywhere

Big data, the cloud, digitisation, the 4th industrial revolution: we had it all. A key theme of the conference, was a final recognition (albeit maybe a little late) that the upstream oil & gas industry has been left behind by others, including its close relative in downstream. An insightful presentation by the mining company, Rio Tinto, demonstrating the autonomous drilling they have designed, built and deployed with real tangible improvements in safety, efficiency and costs served to underline this theme. However, it seems operators, industry bodies and the supply chain have now all recognised that digitisation needs to be a key focus to improve our efficiency. The good news is the industry collects a massive amount of data but now it needs to work together to utilize this to good effect; and turn the multiple trials and concepts that were presented at OE ’17 into real business improvements, like Rio Tinto has done. It took them 8 years to develop the autonomous drilling and it was recognized that although the digitisation of the oil & gas sector will drastically change our industry, it may be another decade before we really start to see major impact from the transformation.

oil price, peak oil

Of course, you cannot attend an industry conference and not talk about the oil price! There were several good sessions on the issue of the ongoing energy transition, when peak oil demand is forecast and whether demand for oil is decoupling from GDP growth. Indeed, this is the view of the DNV GL modelling with peak oil demand in 2022; and could be the case as increasing efficiency in energy generation overtakes the increase in GDP allowing developing nations to skip steps in the lifecycle of energy use in much the same way as they missed out on the joys of dial tones and dial-up internet by going straight to mobile technology. However, nobody should be too concerned about lack of oil demand, more important is to make the projects as competitive as possible. All seemed to agree that, aside from some short term localised subsidies, the economic cost of relative forms of energy will ultimately be the deciding factor.

In Aberdeen everyone, from taxi drivers to restaurant staff, has a view on the oil price and many seem to still be holding out for a shock oil price rise, which is unlikely to come. However, overall, the conference attendees seemed to have accepted the ‘lower for longer’ sentiment. Whether you buy the “new $45-$55 equilibrium” scenario (see my previous article: http://iooilandgas.com/from-cartels-to-perfect-competition/) or, as an optimist, you think the expenditure cuts we have seen in the non-OPEC world will cause the “>$70 Supply Shock” scenario to kick in after 2022; the crucial fact is that change is not coming anytime soon. An examination of all the factors at play give no suggestion an oil price rise is coming: there are large stocks in place and the sentiment of traders keeps any price rise in check; US Shale can do a lot (not it all); non-OPEC has continued to perform well with some regions increasing production; and OPEC itself is stuck between and rock and hard place likely leading to some continuation of the cuts that were made last year. The view seems to be that with the absence of any type of major supply shock – the oil price is in equilibrium and at best will slide slowly to a slightly higher equilibrium over the next few years as we see some cost inflation return to the supply chain. This should be well received and necessary, as it was pointed out by Statoil, that the IOCs have done an excellent job of cutting back and have largely got to the same free cashflow positions in 1H ’17 as they were in 1H ’14. However, the cuts the supply chain made to stay afloat and offer the industry a way to still invest, is surely un-sustainable for much longer.

All in all, it was an excellent conference, well organised and well attended overall, with a host of great (and free) conference key notes speeches, technical presentations and panel discussion sessions. It is clear that the industry, the North Sea and the city of Aberdeen are going through a massive amount of change; in fact, the only thing that’s not changing is the oil price. Here at io oil & gas consulting we believe we can help Operators and the supply chain work together to create value for all involved and generate more certainty in the investment decisions being made in industry.