Author: Shana

With a new government about to take power and promises of relevant changes that will impact the economy in Brazil, the O&G industry could be facing a new chance to rise. We hope that this time it will be for a long flight.

The video below shows a very simple and realistic discussion of the industry environment in Brazil, what is changing and the fundamentals that need to be built to increase the countries chances to succeed.

Things may not be changing as fast as it could but the signs are pointing to the right direction.

I know this is a polemic topic, but when looking at the graphs below I can’t stop thinking that there must be a relationship between the openness of the O&G market and how much O&G exploration and production becomes healthy to a country.
Whereas in Brazil, 94% of the production is with the state owned Petrobras, in the North Sea the same 94% is distributed among 14 companies and in the Golf of Mexico, 19 companies. Not to mention that the top producers’ in the latter two regions are not state companies nor even companies originally from these countries. In the UK North Sea, top crude oil producer is CNOOC, a Chinese company and in the Golf of Mexico, Shell, a Dutch company.

Why does it seem to me that the models in the UK and US are healthier to a country and for the industry itself? My four main reasons:

• COMPETITION: More companies running for production means more competition and competition is necessary in any market. It drives efficiency, technology development and the creation of jobs.
• DIVERSITY: Different companies will bring different ideas to the industry and the regions they are at. New ideas will generate more opportunities that should have a positive impact in the economy.
• RISK MANAGEMENT: Most investors like to diversify their bets as it helps manage risk. A variety of companies means investments are coming from different sources, bringing money into the country and diluting the risk.
• POWER CONTROL: Energy can drive the economy of a country, prices of every single product can go up or down as consequence of O&G prices. It can be dangerous to leave all this power in the hands of one company (even if it’s a state owned one, or maybe worse if it is).

Interesting to see Statoil´s CEO view of the O&G industry and what is to come on an interview with Bloomberg today. Some aspects that called my attention and are aligned with our point of view are:
a) It´s unlikely that crude prices will go above $70 a barrel this year despite OPEC´s effort on holding back production.
b) The industry has a new dynamic after the shale revolution, but shale cannot supply all demand, conventional still plays a role.
c) Operators have become more efficient and pushed break even numbers down, but pressure on prices from suppliers may return.
d) Everyone wants to know when the peak of demand for fuels will be. The real question should be: “How will things be after that this peak?”. In any ways, the path is long and still being paved. For those in the O&G industry, we still have a lot of work to do.

If you wish to see the interview, please find the link below:
https://lnkd.in/ezF8qMf

The flexibility US shale drillers have introduced to O&G operations has completely changed the dynamic of the industry. Things can now shift extremely fast making any prediction of oil or gas production outcome even harder than it was before. It’s simple, if OPEC decides to boost production and bring prices down (I mean, really down) the Shale Independents can quickly slow down drilling and reduce outcome, on the other hand, if O&G prices are again attractive (and with all the efficiencies they have introduced to operations, we are talking about anything above $50/ barrel) they get back to business. For us, ordinary people that consume energy, it’s good news. The probability of the world facing an underbalance between supply and demand now is very low. Of course, there is always a risk when we are dealing with OPEC.

The US shale phenomenon is a result of a couple of factors combined: 1) US shale operations are onshore, with relative shallow wells, meaning projects can start and end pretty quickly when compared to the rest of the world. Wells can be drilled in a matter of days versus months of an offshore project. 2) Infra-structure and resources availability in the US, of course nothing is perfect, but I guess no one can deny that in the US these are most of the time in place. 3) Finally, we add to that the flexibility of the US economy, their entrepreneur culture and the limited influence of the government (again compared to the rest of the world), and we get the perfect environment to make things happen quickly. All that is needed is the prospect of good returns.

When I was living in Houston I was quite impressed about how gas prices in the pumps would follow the fluctuations of the barrel. For me it was a big “wow” and it makes so much sense….in fact, in an open market this is how it should work. But that´s not true in most of the countries around the world thanks to the strong regulations around fuel/energy prices or to some distribution companies trying to cash more profit out of it, no matter what is the case, we won´t be saving any money because of lower prices of the barrel. In fact, most of the time, if O&G prices go down the only “real impacted” population are those working for the industry who will most likely start losing their jobs; and indirect business that live of it and will have to close their doors. Now…. us consumers… do we really see any reduction on energy prices? Are our gas bills much less expensive (about half of what it was 3 years ago)? Some would say because fuel is less expensive, products would be less expensive (some sort of impact on distribution costs)…. I don´t really see that. I haven´t seen any major discounts in Amazon because of lower gas prices, nor are flight tickets cheaper. Reality is, as consumers, we don´t see the impact of lower oil and gas prices (unless you live in the US), but we do see the impact when the barrel goes up. At that point, we can all be sure, “our prices” will rise.

The other day I was having dinner with some colleagues from the O&G industry and two things caught my attention. First being, people still talk about the crisis of the O&G industry and how it’s been affecting their businesses etc. Well, as harsh as it may be, there is no more O&G crisis….in fact, it’s been long over, since 2015. We are now living the new norm of the O&G industry, oil prices are unlikely to reach the $120/ barrel like in 2014 for a while and companies need to adapt if they want to survive and remain profitable. It feels like we are still within a crisis because it took long for companies to accept the new norm and effectively acting for a change, making it all a slow transition. The second thing that caught my attention is how people (specially those with more than 20 years seniority), enjoy talking about the golden times of the O&G industry, that time when it was one of the most attractive industries to work for despite all the risks (we all remember Piper Alpha). It´s a nostalgia feeling that fills in the room, we spend most of the dinner talking about the good old times (as if it would somehow come back) instead of debating about the future. And again, here I am to deliver the bad news. I strongly believe that the golden times are not to come back (at least any time soon), even if oil prices rise. Companies now recon they need to remain efficient and won’t be wasting any dime to hold the glory of the industry if it doesn’t bring additional return.

Source: macrotrends.net