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International and national oil and gas companies always assess the macro business environment and make careful assumptions or assessments of their positions in such uncertainty.
Such insights are attempted for a 5-year planning cycle and the analyses below is for 2014 to 2018 by Peter Perry Resource Analyst a Partner with Bain and Company in its London office and published in ‘Finding Petroleum’ magazine of October 2013. Accordingly, I have attempted to summarize these findings below.
These insights will define the coming year’s performance targets, confirm priorities, and set expectations of the board and shareholder .If this exercise is done satisfactorily; it will serve as an effective backdrop for establishing plans, budgets, and the 5 year operating plan updates.
A check list of 10 key issues for the 2014 oil and gas planning and budgeting cycle covers macroeconomic trends, industry themes and specific tactical considerations .It has been recommended that applying such a structural framework to challenge thinking and ensure a highly effective planning process will contribute to quality and accurate results.
A. Macroeconomic trends
Global macroeconomic trends have changed with the modest stabilization in the advanced economies including the US and EU in contrast to deteriorating conditions in major developing economies.
It is also expected that China’s growth will continue to be volatile during the planning period and will affect many upstream trading partner countries that have relied on China’s economic dynamism for their own growth. The effect of stabilizing west and a more uncertain east may lead to overall net growth and low cost capital will make conditions attractive for large short –term swings in the oil industry. These statements of caution are a passing stage of uncertainty as medium GDP growth and low cost capital create a possible future for the oil and gas industry.
1. Low real interest rates
Plans for 2014 should give consideration to the possibility of continued low –cost capital driven by low interest rates. Oil and gas companies enjoy balance sheet positions in gearing below 30 per cent, while low- cost capital creates new investment and expansion opportunities. More ambitious investors and governments may begin to lower their investment bottom line rates, pushing oil companies’ capital spending levels even higher and increasing National Oil Companies (NOCs) plans for acquisition. However, for oil majors with lagging profit-to- equity ratios, a growth push is one route to close the gap between them and other sectors with higher private equity (PE) ratios
2. Political risk
The oil industry has managed for long periods by shifting political risks from various parts of the world .However, in 2014 the industry will have to contend with a new administration in Australia , energy reforms in Mexico and India , difficulties in Egypt , Nigeria , and perhaps strengthening energy alliances among the Russian federation , China , Brazil and the Caspian countries. Tensions in the South China may be exacerbated by a resurgent Japan combined with China’s ongoing changes.
Few companies have structured their plans to overcome short-term political risk in their annual planning process and this level of sophisticated planning is what oil companies need in an uncertain environment. It is likely that some companies will have disadvantages by planning to increase performance targets and investment bottom line rates in the background of unstable political environments without creating plans that explicitly deal with a range of possible political developments.
B. Oil and gas industry trends
Capabilities , inflation and price volatility were important trends in 2013 and will continue to increase in the 2014 planning cycle of the IOCs ,NOCs , independent oil investors and service providers and the first two lowered the results in the first half of 2013 , suggesting these factors were underplayed in 2013 plans. Price volatility though not dramatic, was cited by many as a surprise in the first –and –second quarter of 2013.
The above trends are joined in 2014 by weaker capital project inventories beyond 2017 and the uncertainty form where the next growth could come but some companies could differentiate themselves their next generation growth in projects.
3. Capabilities and capacity
Specialist skills are more important now than in the past but many companies do not know how many staff in key technical fields and such needs for the next five years. ExxonMobil, Shell and BP have moved their upstream operating models to technical thematic organizations – a glaring shift from operational organizations.
Some US shale gas players such as Hess and Chesapeake are moving to focus on asset- based models to get a better handle on costs and build specific technical needs. This will allow strong development with differentiated core capabilities, a pre requisite for sustainable growth and it is expected that most companies will follow this trend.
4. Inflation
Growth areas such as Brazil, Australia and the Middle East as well as the unconventional shale gas activities in the US lead to annual energy industry cost inflation rates from 10 to 15 per cent in some equipment and services. Budgets often assume that increased spending will generate more activity but it is noted that many companies are spending more on operations without corresponding increases in production volumes.
However a few companies have structured productivity and cost improvement programmes (Occidental) restructuring plans (Hess) or projects cost reviews (Chevron’s review of the Gorgon LNG project in Western Australia) underway. It is expected that many companies will need to do such changes in 2014.
5. Oil and Gas price volatility
Price uncertainties continue to challenge energy companies as they estimate net incomes and liquidity of capital project budgets .Several companies including ExxonMobil, Shell and ConocoPhillips reflected this uncertainty in their 2013 second-quarter results. Lower price realization is a challenge when many companies are still running border line “marker” gas or crude price in their budgeting
6. Long-term projects for pipelines
It is noted that with many large developments and expansion progrmmes for scheduled completion in 2017, the industry has to define the next generation of projects. Gas export terminals in the US, complex East African gas, ultra-deep water Arctic drilling along with a new round of refinery upgrades to meet new fuel specifications it is difficult to see these as high-return projects. Accordingly there are strong indications that many companies will return to mature sites for oil still untapped with improved recovery techniques, including advanced seismic testing digital oil field applications and the next generation of advanced drilling technology.
It is predicted that the industry will move away from mega projects to large re activation and infill programmes upstream and selective expansions of advantaged sites downstream.
C. Planning priorities
Planning priorities will vary for each company but it is noted will include exploration, gas, projects and operational performance.
7. Exploration targets
Exploration is difficult to target due to licence round schedule, drilling success rates, and the costs and availability of rigs that as a whole lead to uncertainty. For larger IOCs crude and gas quality, maturation speed are constant concerns, and this is why many companies are now quoting resource addition annual performance in addition to proven (P1) additions. To extract 100, 000 barrels of oil equivalent (BOE) per day, producers need to consistently find extra 35 million to 45 million BOE per year. For the super Major IOCs and large NOCs to sustain production finding 1 billion to 1.5 billion BOE is a major challenge.
Accordingly the priority exploration themes for 2014 include
The target area required by an oil company depends on the size. However with exploration budgets of US$ 500 million per year for NOCs and as much as US$ 5 billion per year for super major IOCs, there seems to be no shortage of investment risk dollars targeting emerging trends and new opportunities.
8. Gas
Unconventional gas in the US has caused major swings in market prices and the value of gas assets. Recent examples include writing off by companies that had built up big reserve positions such as Anadarko , BHP Billion, Encana, Noble, Statoil, Shell, and Total; cost escalation for mega off shore projects as experienced by Chevron Australia ; and large new discoveries in East Africa, India, Argentina Central Asian Republics and Australia.
Gas remains a very strong part of the energy mix and contributes to a large part of volume growth for the IOCs over the next decade. However project delivery is likely to be slow with commercialization subject to greater gas to gas competition .It is predicted that the best projects will still yield solid returns and support growing demand .But it is more important to hold “advantaged” assets to deliver strong results.
9. Major projects start up
Large conventional projects have two main performance challenges in addition to cost: will they start up on time and perform to expectations? Larger the project these uncertainties will apply with hick ups after completion from transfer to operations. Unconventional projects such as shale gas will be different similar to a manufacturing programme with a moving work site .For effective planning the yard stick is how many wells can be completed and hook up and how quickly and at what unit cost. Accordingly for the 2014 Plan it is vital to know if these criteria are escalating, steady or declining
10. Realistic operational deliveries
The reliability of operations in the oil and gas industry is a major challenge and a huge opportunity to realize value. For example in the North Sea the average oil production asset performs well below its theoretical potential and has to have a large backing of maintenance work. From a planning perspective , it is critical to have a clear view of historical performance , as well as reasons to expect longer or weaker future delivery and the extent to which planned programmes and interventions will increase operational performance.
Getting 2014 right
It is seen that there is a greater possibility in getting forecasts and guidance right not only for internal performance management but also for IOCs to meet stock market requirements and for NOCs to contribute to national budgets. The lower profit- to- equity ratios in oil and gas indicate a performance gap between this sector and other commercial sectors – which has also to do with planning and delivery.
It is noted that wherever possible planning should focus on the quality of information and sensitivity analysis around P50 numbers – those with at least a 50 per cent confidence level of being commercially recoverable. Accordingly it is noted the importance to have a realistic view on timing for new projects as well as the upside to be found in mature assets in terms of the above check list for 2014 planning cycle.
Fallout on oil and gas exploration in Sri Lanka
The off shore oil and gas potential in Sri Lanka is presently being effectively pursued by the Petroleum Resources Development Secretariat (PRDS) headed by a very efficient and articulate Director General and is directly under His Excellency the President and his Secretary.
It is creditable that within a short period of less than 10 years, the regulatory and operational regimes for off shore oil exploration have been effectively established and after the First Bidding Round one block has yielded gas that is now being further evaluated for commercial exploitation.
The Second Bid Round in 2013 included 13 blocks in the Mannar as well as Cauvery Basin, the southern extension of the Bay of Bengal known to contain commercially exploitable oil and gas. However, the response from IOCs was not encouraging but according to the PRDS the three bids received are of good quality and are presently being evaluated.
The above insight to the status of world oil and gas industry and the 5 year planning cycle from 2014 indicate that the priority is for mature and known oil reservoirs and the major thrust is to apply new seismic and drilling techniques thus avoiding major capital as well as exploration dollars in getting into partially explored areas and comparatively small areas like off shore Sri Lanka. Further the unconventional oil and gas from shale deposits together with the other priority areas have also not attracted the oil majors to Sri Lanka (See Section 7 above)
This does not imply that we should abandon our off shore oil and gas exploration but give priority on collecting more and more data by carrying off shore seismic and other surveys and also look for on shore prospects. If this is pursued by the GOSL under any bi lateral or multi lateral aid programmed or under the sharing of information with prospective exploration companies on a mutually agreed arrangement, more refined data will be available so as to seriously attract the major IOCs to off shore Sri Lanka in the west as well as the east including the extended continental shelf.
(The writer is a retired Economic Affairs Officer United Nations ESCAP and can be reached at fasttrack@eol.lk)
http://www.dailymirror.lk/business/features/45266-world-oil-and-gas-planning-cycle-2014-and-its-fallout-on-sri-lanka-.html
Such insights are attempted for a 5-year planning cycle and the analyses below is for 2014 to 2018 by Peter Perry Resource Analyst a Partner with Bain and Company in its London office and published in ‘Finding Petroleum’ magazine of October 2013. Accordingly, I have attempted to summarize these findings below.
These insights will define the coming year’s performance targets, confirm priorities, and set expectations of the board and shareholder .If this exercise is done satisfactorily; it will serve as an effective backdrop for establishing plans, budgets, and the 5 year operating plan updates.
A check list of 10 key issues for the 2014 oil and gas planning and budgeting cycle covers macroeconomic trends, industry themes and specific tactical considerations .It has been recommended that applying such a structural framework to challenge thinking and ensure a highly effective planning process will contribute to quality and accurate results.
A. Macroeconomic trends
Global macroeconomic trends have changed with the modest stabilization in the advanced economies including the US and EU in contrast to deteriorating conditions in major developing economies.
It is also expected that China’s growth will continue to be volatile during the planning period and will affect many upstream trading partner countries that have relied on China’s economic dynamism for their own growth. The effect of stabilizing west and a more uncertain east may lead to overall net growth and low cost capital will make conditions attractive for large short –term swings in the oil industry. These statements of caution are a passing stage of uncertainty as medium GDP growth and low cost capital create a possible future for the oil and gas industry.
1. Low real interest rates
Plans for 2014 should give consideration to the possibility of continued low –cost capital driven by low interest rates. Oil and gas companies enjoy balance sheet positions in gearing below 30 per cent, while low- cost capital creates new investment and expansion opportunities. More ambitious investors and governments may begin to lower their investment bottom line rates, pushing oil companies’ capital spending levels even higher and increasing National Oil Companies (NOCs) plans for acquisition. However, for oil majors with lagging profit-to- equity ratios, a growth push is one route to close the gap between them and other sectors with higher private equity (PE) ratios
2. Political risk
The oil industry has managed for long periods by shifting political risks from various parts of the world .However, in 2014 the industry will have to contend with a new administration in Australia , energy reforms in Mexico and India , difficulties in Egypt , Nigeria , and perhaps strengthening energy alliances among the Russian federation , China , Brazil and the Caspian countries. Tensions in the South China may be exacerbated by a resurgent Japan combined with China’s ongoing changes.
Few companies have structured their plans to overcome short-term political risk in their annual planning process and this level of sophisticated planning is what oil companies need in an uncertain environment. It is likely that some companies will have disadvantages by planning to increase performance targets and investment bottom line rates in the background of unstable political environments without creating plans that explicitly deal with a range of possible political developments.
B. Oil and gas industry trends
Capabilities , inflation and price volatility were important trends in 2013 and will continue to increase in the 2014 planning cycle of the IOCs ,NOCs , independent oil investors and service providers and the first two lowered the results in the first half of 2013 , suggesting these factors were underplayed in 2013 plans. Price volatility though not dramatic, was cited by many as a surprise in the first –and –second quarter of 2013.
The above trends are joined in 2014 by weaker capital project inventories beyond 2017 and the uncertainty form where the next growth could come but some companies could differentiate themselves their next generation growth in projects.
3. Capabilities and capacity
Specialist skills are more important now than in the past but many companies do not know how many staff in key technical fields and such needs for the next five years. ExxonMobil, Shell and BP have moved their upstream operating models to technical thematic organizations – a glaring shift from operational organizations.
Some US shale gas players such as Hess and Chesapeake are moving to focus on asset- based models to get a better handle on costs and build specific technical needs. This will allow strong development with differentiated core capabilities, a pre requisite for sustainable growth and it is expected that most companies will follow this trend.
4. Inflation
Growth areas such as Brazil, Australia and the Middle East as well as the unconventional shale gas activities in the US lead to annual energy industry cost inflation rates from 10 to 15 per cent in some equipment and services. Budgets often assume that increased spending will generate more activity but it is noted that many companies are spending more on operations without corresponding increases in production volumes.
However a few companies have structured productivity and cost improvement programmes (Occidental) restructuring plans (Hess) or projects cost reviews (Chevron’s review of the Gorgon LNG project in Western Australia) underway. It is expected that many companies will need to do such changes in 2014.
5. Oil and Gas price volatility
Price uncertainties continue to challenge energy companies as they estimate net incomes and liquidity of capital project budgets .Several companies including ExxonMobil, Shell and ConocoPhillips reflected this uncertainty in their 2013 second-quarter results. Lower price realization is a challenge when many companies are still running border line “marker” gas or crude price in their budgeting
6. Long-term projects for pipelines
It is noted that with many large developments and expansion progrmmes for scheduled completion in 2017, the industry has to define the next generation of projects. Gas export terminals in the US, complex East African gas, ultra-deep water Arctic drilling along with a new round of refinery upgrades to meet new fuel specifications it is difficult to see these as high-return projects. Accordingly there are strong indications that many companies will return to mature sites for oil still untapped with improved recovery techniques, including advanced seismic testing digital oil field applications and the next generation of advanced drilling technology.
It is predicted that the industry will move away from mega projects to large re activation and infill programmes upstream and selective expansions of advantaged sites downstream.
C. Planning priorities
Planning priorities will vary for each company but it is noted will include exploration, gas, projects and operational performance.
7. Exploration targets
Exploration is difficult to target due to licence round schedule, drilling success rates, and the costs and availability of rigs that as a whole lead to uncertainty. For larger IOCs crude and gas quality, maturation speed are constant concerns, and this is why many companies are now quoting resource addition annual performance in addition to proven (P1) additions. To extract 100, 000 barrels of oil equivalent (BOE) per day, producers need to consistently find extra 35 million to 45 million BOE per year. For the super Major IOCs and large NOCs to sustain production finding 1 billion to 1.5 billion BOE is a major challenge.
Accordingly the priority exploration themes for 2014 include
- Onshore Oil (East Africa, India, California and Egypt)
Re-exploration: going back to mature provinces with improved seismic and well drilling technology and knowledge (Norway, UK and the Gulf of Mexico).
Big gas (East Africa, Australia, and the Central Asian Republics)
Deepwater oil (Brazil, West Africa, and a full re- start in the USs Gulf of Mexico)
Unconventional Oil and Gas –Shale oil and gas (US Argentina and Australia)
The target area required by an oil company depends on the size. However with exploration budgets of US$ 500 million per year for NOCs and as much as US$ 5 billion per year for super major IOCs, there seems to be no shortage of investment risk dollars targeting emerging trends and new opportunities.
8. Gas
Unconventional gas in the US has caused major swings in market prices and the value of gas assets. Recent examples include writing off by companies that had built up big reserve positions such as Anadarko , BHP Billion, Encana, Noble, Statoil, Shell, and Total; cost escalation for mega off shore projects as experienced by Chevron Australia ; and large new discoveries in East Africa, India, Argentina Central Asian Republics and Australia.
Gas remains a very strong part of the energy mix and contributes to a large part of volume growth for the IOCs over the next decade. However project delivery is likely to be slow with commercialization subject to greater gas to gas competition .It is predicted that the best projects will still yield solid returns and support growing demand .But it is more important to hold “advantaged” assets to deliver strong results.
9. Major projects start up
Large conventional projects have two main performance challenges in addition to cost: will they start up on time and perform to expectations? Larger the project these uncertainties will apply with hick ups after completion from transfer to operations. Unconventional projects such as shale gas will be different similar to a manufacturing programme with a moving work site .For effective planning the yard stick is how many wells can be completed and hook up and how quickly and at what unit cost. Accordingly for the 2014 Plan it is vital to know if these criteria are escalating, steady or declining
10. Realistic operational deliveries
The reliability of operations in the oil and gas industry is a major challenge and a huge opportunity to realize value. For example in the North Sea the average oil production asset performs well below its theoretical potential and has to have a large backing of maintenance work. From a planning perspective , it is critical to have a clear view of historical performance , as well as reasons to expect longer or weaker future delivery and the extent to which planned programmes and interventions will increase operational performance.
Getting 2014 right
It is seen that there is a greater possibility in getting forecasts and guidance right not only for internal performance management but also for IOCs to meet stock market requirements and for NOCs to contribute to national budgets. The lower profit- to- equity ratios in oil and gas indicate a performance gap between this sector and other commercial sectors – which has also to do with planning and delivery.
It is noted that wherever possible planning should focus on the quality of information and sensitivity analysis around P50 numbers – those with at least a 50 per cent confidence level of being commercially recoverable. Accordingly it is noted the importance to have a realistic view on timing for new projects as well as the upside to be found in mature assets in terms of the above check list for 2014 planning cycle.
Fallout on oil and gas exploration in Sri Lanka
The off shore oil and gas potential in Sri Lanka is presently being effectively pursued by the Petroleum Resources Development Secretariat (PRDS) headed by a very efficient and articulate Director General and is directly under His Excellency the President and his Secretary.
It is creditable that within a short period of less than 10 years, the regulatory and operational regimes for off shore oil exploration have been effectively established and after the First Bidding Round one block has yielded gas that is now being further evaluated for commercial exploitation.
The Second Bid Round in 2013 included 13 blocks in the Mannar as well as Cauvery Basin, the southern extension of the Bay of Bengal known to contain commercially exploitable oil and gas. However, the response from IOCs was not encouraging but according to the PRDS the three bids received are of good quality and are presently being evaluated.
The above insight to the status of world oil and gas industry and the 5 year planning cycle from 2014 indicate that the priority is for mature and known oil reservoirs and the major thrust is to apply new seismic and drilling techniques thus avoiding major capital as well as exploration dollars in getting into partially explored areas and comparatively small areas like off shore Sri Lanka. Further the unconventional oil and gas from shale deposits together with the other priority areas have also not attracted the oil majors to Sri Lanka (See Section 7 above)
This does not imply that we should abandon our off shore oil and gas exploration but give priority on collecting more and more data by carrying off shore seismic and other surveys and also look for on shore prospects. If this is pursued by the GOSL under any bi lateral or multi lateral aid programmed or under the sharing of information with prospective exploration companies on a mutually agreed arrangement, more refined data will be available so as to seriously attract the major IOCs to off shore Sri Lanka in the west as well as the east including the extended continental shelf.
(The writer is a retired Economic Affairs Officer United Nations ESCAP and can be reached at fasttrack@eol.lk)
http://www.dailymirror.lk/business/features/45266-world-oil-and-gas-planning-cycle-2014-and-its-fallout-on-sri-lanka-.html
