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So, in this blog post we'll look at the global supply and where
we're heading, at the nature of spending (the mindset of the
companies and the industry players in that regard) and how they're
focusing their efforts, and at the challenges facing the industry,
from a government's point of view globally and for India.
So first of all, considering long term global supply, the
outlook in the figure below has base production declining at two or
three percent per year, and oil and condensate demand peaking
around 2030. What stands out in this outlook is the importance of
the tight oil wedge and unsanctioned projects in the mid -term and
of course the need for further volumes from Yet-to-Find (that is,
Exploration) for the longer term.
Figure 1: Global crude and condensate production by
development (2000-2050)
The point to make is that in the long term, we should keep an
eye on the importance of moving forward with currently unsanctioned
projects and yet-to-find. While the short term is full of great
news about the growth in tight oil, these other components play a
big role.
Looking more closely at shorter term (out to 2024) if you
consider the decline in the base and what's required to replace
that decline, the call on unsanctioned and sanctioned projects, and
tight oil combined, have near equal contributions.
Figure 2: Global crude and condensate "call on new supply",
2018- 2024
Capital Spending Outlook
Roughly six million barrels-a-day new production is required
from currently unsanctioned projects by 2024. We see a good
pipeline of unsanctioned projects at $60 a barrel - which is a
typical planning assumption for many players, but the industry must
make those spending decisions now if we are to avoid a tight supply
market in the early to 2020's.
Figure 3: E&P capex by region
A year ago, IHS Markit commented on how cautious the industry
was when it comes to spending. That is still the case. There's a
mindset in the industry that "lower for longer" prevails. We say
"mindset" because the industry is anxious not to allow its costs to
get out of control, as it did in the years leading up to the oil
price collapse. Although there is a lot of caution, there is
positive sentiment, as the industry is increasing its spending. We
see a seven to eight percent increase on average, year over year,
but there remains the overriding focus on capital efficiency and
selectivity targeting the highest-return projects.
Out of that there are winners and losers in terms of investment
areas. The winners in the short term are the shorter-cycle (or
quicker-return) type projects, notably North America onshore. North
America still makes up about 40% of global upstream spending.
Projects which attract less prominence in terms of investment are
the longer-cycle ones. Deep water, long-term gas projects are still
important, but it's harder for companies to make that commitment to
all those segments, hence there is a lot of selectivity in which to
take forward.
Innovation and the Controls on Costs
The graph below shows representative break-even costs by
country, comparing the 2014 average and the third quarter of
2017.
Figure 4: Full-cycle costs in terms of Dated Brent breakeven
at 10% rate of return
Break-even costs have come down dramatically across the
industry, and today, there are many countries that have potential
projects that break even at $60 or less. That doesn't mean there is
a commitment to those projects, but it does mean there's a good
potential pipeline. There continues to be an imperative for all
players to think about their portfolio, and to aim to perform to
match assets at the lower end of the cost of supply curve. So,
whatever your portfolio, get your costs down and innovate, and be
ready for that "lower for longer" environment!
Figure 5: E&P aggregate cost reductions (2014- 2017) by
resource class
In the past few years, costs have been reset. We track this
closely and have seen that cyclical cost reductions (or market
driven deflation, meaning service and supplier costs) have come
down. But there are also structural cost reductions that have been
evident in each of the classes of assets shown here. By structural
cost reductions, we mean where projects have been redesigned,
efficiencies built into work processes. Such cost reductions
prevail, regardless of the ups and downs of oil price. We see a lot
of radical redesign, standardization, re-phasing of projects, and
high-grading; there are lots of digital solutions coming in to help
accelerate the design and early development and implementation of
projects.
Digital Transformation
A little more about innovation. Innovation is, of course, a
well-used word, but there's interesting things going on in the
industry. Digital transformation was a phrase used daily several
years ago, but did the industry truly know what that meant?
Companies said things like "we need to transform digitally, we're
going to have AI, big data, etc.", and today, through progress in
the industry, it's real and the industry needs to embrace digital
transformation.
One of the benefits is it is as much about the organizational
change as it is about technologies.
This image represents different parts of an upstream
organization, from the assets and the data they provide, through
the different functions (internally and in the field), to the
suppliers or partners. That orange circle represents the operations
centers that integrate the control of the assets, effectively
gluing all the different elements together.
A key way to characterize the benefits that we're tracking, is
the ability that digital technologies bring to enable more
centralized analysis and decision-making. This allows for more
cross-functional solutions to be developed in parallel. In other
words, the breaking down of barriers in the organization, enabling
collaboration, enabling new ideas to proliferate, helping to
enhance performance.
In this new world of transparent and accessible information, new
opportunities for partnerships and alliances (with existing players
and new entrants) are available; there are more options in terms of
where analysis is done within the oil companies or suppliers, and
so on. The ability to integrate solutions around what were
previously different silos of technology (e.g., field development
planning), is now greater, because we have access to the right
digital platforms and analytics. It is now easier to have different
functions in field development stages work in parallel - for
example to have seismic interpretation concurrent with appraisal
drilling, engineering design, and work to prepared to submit of a
field development plan. This parallel tracking helps to reduce
times from discovery to first oil. .
Advanced analytics elements - like the use of business
intelligence tools, using data in the cloud and AI that go with it,
are important also. These capabilities will help to increase
productivity, optimize development approaches and production
systems, while predictive analytics are important to improve
operational uptime.
Portfolio Restructuring and Focus
Since the downturn, companies have been able to make choices on
where they want to focus.
Figure 7: Share of global incremental new source volumes by
asset type (2018- 2027)
On the right are independent US companies and, on the left, are
the larger companies. The different colors here present different
asset types, including the production and the contribution to new
production over the next 10 years for these companies. The story
with the US companies is relatively straight-forward: those
companies have retracted to North America, and they're playing and
succeeding in driving shale tight oil growth.
Among the bigger companies, there's a more diverse range of
activities. But the fact is, specialization and focus has become
the name of the game. If you looked at the data behind this, the
choices being made by these majors not just on asset type but on
regional focus (oil versus gas), they're quite distinct. This is
great because companies start to focus, and by doing so, they
enhance their performance and improve their cost position on that
cost of supply curve. From a government viewpoint, that focus can
also mean even more competition for capital for your resource
offering to the industry.
M&A activity is always interesting to review, because it's a
tool that can be used to help restructure portfolios, especially
for companies that use M&A to buy the assets that they want to
focus on.
Figure 8: Global upstream M&A activity (2008-
2018YTD)
In the last few years, the M&A activity has been
constrained, because outside North America, there hasn't been much
free cash to buy. We're seeing a buildup now, and even if
acquisitions are still at a relatively modest level, if you look at
certain areas outside North America, there are interesting things
going on.
In the North Sea, for example, there's an influx of private
equity that's been active for a few years. They have taken some of
the assets, often from larger companies, with the result that some
new specialists have come in to drive value in specific areas.
This is always a slight contention in this topic. But, if you
are an NOC or a company that has money and want to grow quickly in
E&P, buying assets can still be a good option in some ways
relative to a full cycle approach from Exploration through to
Production.
The graph below shows the cost per barrel of recent
acquisitions, comparing the US with the rest of the world. The
differences are because of the way the US reports; on 1P (or
proven) reserves which are more certain than for proven + probable
as are generally reported for deals in the rest of the world. But
still, the range that we're talking about for acquisition, $10 -
$15 is interesting, and something to think about for those
companies in expansion mode.
Figure 9: Weighted-average (oil-weighted) global deal
pricing by region (2008-2018YTD)
Challenges for Government
Let's get back to the competition for capital. We've discussed
modest increases in spending, focus around the major parts of the
industry, innovation, all of which are bringing costs down. These
are all good things. It does mean, though, that if you're a
government, you're competing for limited capital.
This chart represents IHS Markit's framework that we use for
ranking the E&P sector from a country point of view. There's
three overarching criteria from an above-ground point of view: the
overall activity, the fiscal terms, and the sector risk, including
the political risk that would be part of that.
Figure 10: 2018 IHS Markit Petroleum Economics and Policy
Solutions Global Rankings
India is in a relatively strong place as it is in the second
quintile, and it's improving its score on this ranking. It's moved
in a positive direction from 52nd to 44th out of 130, over the last
three years. This can be attributed to the positive things that
have been happening in the reforms around the gas-based economy,
gas pricing, the various incentives for discovered small fields,
and the various bid rounds.
But, it's a competitive world, and many countries are doing a
lot of positive things on fiscal terms. Latin America have moved
towards more progressive fiscal terms, in many of the
jurisdictions, and there are large openings with Mexico and Brazil.
In short, the policy reforms that India's showing are great, and
may continue to improve on this curve. But on this too, the scale
of the resource base is very important.
Let's look at a specific example in exploration, including deep
water. We've evaluated basins around the world and shortlisted the
ones that we thought were most attractive from an exploration point
of view. We have classified approximately 130 basins this way, and
we also classified them in terms of their maturity. This is
important, because exploration these days is not all about
frontier. Often, it's about emerging areas where there's something
to chase that's already been proven. There are also mature areas
where there's opportunities to do things around existing
infrastructure.
Figure 11: Basin maturity map
India is on the map in that sense. It has a good upside in the
frontier area, and of course it has the emerging, and mature areas.
But in a world which is competing for capital, there are not as
many players interested today in deep water exploration as there
were a few years ago, making it a challenge to find partners, and a
challenge for the governments to get the investment in
exploration.
For India, the positive is that there is a whole menu of
opportunities on offer; the diversity of opportunity of what is
presented to the market.
