Analyst: Uncertainty Is the Oil Industry's Greatest Challenge

The oil and gas industry faces some significant near-term business challenges, which implies a difficult path forward for geoscientists and other professionals in the industry.

Uncertainty might be the biggest challenge, which makes today’s situation especially tricky.

“The heartburn that North American unconventionals is experiencing seems to be trickling to the other parts of the worldwide industry,” said Scott Sanderson, a principal in Deloitte Consulting LLP’s Oil and Gas Strategy and Operations practice in Houston.

From geopolitical tensions in January to ongoing price uncertainty, to the coming U.S. presidential election next November, the industry finds itself in an unsettled and unpredictable year.

In its “2020 Oil, Gas and Chemical Industry Outlook,” Deloitte cited these near-term factors affecting oil and gas:

  • Market fundamentals remain mixed.
  • Liquid natural gas keeps growing.
  • The energy transition is gaining momentum.
  • Global oil supply seems secure.
  • The industry’s financial performance needs to improve.

That last item has special importance because “the industry struggles to appeal to investors as weak cash flows and high levels of debt offset robust dividends and strong production growth,” Deloitte reported. The emphasis has returned to investment returns and profit levels, not production levels and reserve additions.

“That means the investment community has to look at the entire picture with a different lens,” Sanderson noted.

He said the day is gone when investors would blindly chase after any possible entry into U.S. unconventionals. But, while nobody now thinks every deal is a good deal, “that doesn’t mean every deal is a bad deal,” he observed.

“There are still gems out there. It just takes more looking,” he said.

Agility, Steel and Digitalization

Agility and balance can help companies respond to tighter capital markets and the need for diversified asset portfolios. Yet flexibility in response to uncertain conditions can be challenging for the oil industry as a whole, he said.

“It’s difficult for the industry to be agile because you’re putting steel into the ground. And steel, by definition, is not agile. It’s literally a sunk cost,” Sanderson noted.

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The oil and gas industry faces some significant near-term business challenges, which implies a difficult path forward for geoscientists and other professionals in the industry.

Uncertainty might be the biggest challenge, which makes today’s situation especially tricky.

“The heartburn that North American unconventionals is experiencing seems to be trickling to the other parts of the worldwide industry,” said Scott Sanderson, a principal in Deloitte Consulting LLP’s Oil and Gas Strategy and Operations practice in Houston.

From geopolitical tensions in January to ongoing price uncertainty, to the coming U.S. presidential election next November, the industry finds itself in an unsettled and unpredictable year.

In its “2020 Oil, Gas and Chemical Industry Outlook,” Deloitte cited these near-term factors affecting oil and gas:

  • Market fundamentals remain mixed.
  • Liquid natural gas keeps growing.
  • The energy transition is gaining momentum.
  • Global oil supply seems secure.
  • The industry’s financial performance needs to improve.

That last item has special importance because “the industry struggles to appeal to investors as weak cash flows and high levels of debt offset robust dividends and strong production growth,” Deloitte reported. The emphasis has returned to investment returns and profit levels, not production levels and reserve additions.

“That means the investment community has to look at the entire picture with a different lens,” Sanderson noted.

He said the day is gone when investors would blindly chase after any possible entry into U.S. unconventionals. But, while nobody now thinks every deal is a good deal, “that doesn’t mean every deal is a bad deal,” he observed.

“There are still gems out there. It just takes more looking,” he said.

Agility, Steel and Digitalization

Agility and balance can help companies respond to tighter capital markets and the need for diversified asset portfolios. Yet flexibility in response to uncertain conditions can be challenging for the oil industry as a whole, he said.

“It’s difficult for the industry to be agile because you’re putting steel into the ground. And steel, by definition, is not agile. It’s literally a sunk cost,” Sanderson noted.

However, “your company can be agile,” he said, and that’s important for geoscientists to remember.

Sanderson sees a current need for both industry efficiency and an “acceleration” of distributing, processing and applying data, and of introducing artificial intelligence techniques like machine learning.

“Many, many oil and gas professionals I talk to are aware of this. And they are very smart. They are a lot smarter that I am,” he said.

But “to say, ‘I want to design an entirely new process,’ it’s rare that a professional can effect that kind of change across all those other technical and operational disciplines,” he added.

Sanderson said people have been talking about the digital oilfield for years, and now “I think what you need is a digital oil company,” with that commitment “in its DNA.”

“Until you’re thinking that way, it’s hard to transform a set of legacy processes overnight,” he said.

Service Company Squeeze

A recent slowing of U.S. unconventional resource activity has dragged more uncertainty into the industry’s outlook. Major companies have been taking larger positions in unconventionals and those companies have the best chance at stability, Sanderson said

“The largest companies have seen the unconventionals as the short-cycle producers, which is a beautiful thing if you have a broad, diversified portfolio,” he said.

Most companies don’t have that stability, so a couple of important repercussions need to be considered, Sanderson noted.

“One, it makes it very difficult for the focused independent to be resilient through cycles,” he observed.

“The other knock-off impact of that is that the oilfield service (OFS) industries have a double challenge,” he said.

Service and supply companies are already suffering from the downturn in unconventionals activity, at the same time their investors and stockholders are looking for steady returns.

“On the OFS side, I think it’s a real conundrum because if they continue to get squeezed there will come a time when they will say, ‘Uncle,’” and cut back sharply, Sanderson said.

Then, “if the oil industry wants to light up an additional 300 rigs, who’s going to run them? Who’s going to test them? Who’s going to wireline them?” he asked.

Energy Transition

Another uncertainty for the industry is the potential effect of demands related to climate change and the current transition away from coal toward an expanded role for renewables. Will there be jolts from the energy transition?

“In the coming few years, not a whole lot,” Sanderson predicted.

While regulatory responses will be a requirement, “in the next few years I don’t think a lot is going to happen. The demand for oil doesn’t seem to be changing much,” he said.

In the longer term, the picture may be different.

“For the first time there’s a real clear view toward alternative fuels for transportation, which for most of my lifetime has been a pipe dream,” he noted.

Sanderson said during most of his life, scarcity of world hydrocarbon resources has been the dominant view.

“Now we’re in a period of abundance with virtually no fear that the resource will run out, but some fear that the resource will damage our planet,” he said.

Reasons for Optimism

At this point, plenty of noise in the oil industry is coming from international geopolitics, trade uncertainties and industry changes, including a grab-bag of acquisitions, write-offs and bankruptcies.

Sanderson doesn’t consider those distractions overly significant.

“The industry tries to look beyond them,” he said.

“I would say that most of those things resolve themselves in a couple of years, or at least become more clear in a couple of years,” he observed.

As one example, Sanderson cited the oil-output situation in Venezuela, which he said was once a source of significant uncertainty but now has been “baked into the cake” for the industry’s outlook.

Overall, Deloitte’s oil and gas consulting practice has remained optimistic about the possibility for efficiencies and better results for the oil and gas industry, especially in the United States.

“The reason we think so is that there are thousands of really smart people trying to get the EUR (estimated ultimate recovery) from unconventionals up,” Sanderson explained.

“That tiny couple of percentage points in EUR could have a huge impact on the industry,” he said.

In the global outlook for the world oil industry “the overall consensus seems to be bearish,” Sanderson noted, but he said there is still room for optimistic hope.

“Part of that is connected to petrochemicals, which are projected to grow,” he said.

And he noted the industry can look to several official projections for overall growth in oil and gas production and consumption into the 2040s – although there are many variables to ponder. In that regard, Sanderson doesn’t believe the forecast for the industry is getting any clearer.

“I think we are heading toward a future where there will be a lot more uncertainty going forward,” he said.