Four oil and gas sector leaders held a wide-ranging panel discussion of key market changes, a shifting regulatory and political climate, and new factors that could disrupt industry business models at the Houston Energy Breakfast on 22 September.
R.T. Dukes, research director at Wood Mackenzie, described the upstream oil industry today as “a tale of two markets,” a traditional market weighted toward offshore and deepwater development and the unconventional market centered in United States onshore development.
With the collapse in oil prices, projected industry capital expenditure (capex) for 2015–2020 has fallen by USD 2 billion. But while capex outside the US has declined by approximately 40%, US capex has increased by 30% to 40%, Dukes said.
Costs Coming Down Worldwide
“Costs are coming down across the world,” he said, “and there is a race to zero margins, even negative margins.” Before the downturn, the deepwater sector was poised to meet about one-third of the projected future global demand for oil. However, that share has now substantially declined with onshore production in the US making up the difference, Dukes noted.
With an aggregate development program of drilling possibly 1,000 wells per month, the US producers’ risk appetite for drilling a well is markedly different than that of traditional producers elsewhere, Dukes said.
US onshore well productivity gains have been remarkable. But historically, estimated well recoveries go down as plays mature and plateau. “You likely need another step change,” Dukes said. “You need consistent innovation on the competitive side.”
Changing Conditions, Challenges
Andrew Biar, president of Strategic Public Affairs, discussed the changing conditions and challenges on the regulatory and political front.
Regulation is costly and a burden to industry and taxpayers at all levels, he said, but the cost and burden depends on the size of the company. Large operators and big independents tend to accommodate regulations over time and often become averse to sudden regulatory change, while small and midsize companies are more opposed to regulations because they often can’t afford them.
A recent political development is the growth of opposition to certain oil industry activity by Republicans—a customary bastion of support—because of concern over property-rights issues, particularly among some conservatives, Biar said. This has led in some cases to an unexpected alliance of traditional environmentalists, evangelical Christian groups focused on environmental stewardship, and Tea Party Republicans emphasizing individual property rights.
He spoke of an ardent conservative Republican legislator who recently voted against a bill favorable to industry development activity because of strong opposition by his constituents who feared a loss of their property rights. Biar also noted the somewhat ironic case of a Republican governor in Maryland signing a bill banning hydraulic fracturing in the state.
A plan to build a small refinery in south Texas to process unconventional crude oil for potential export has met stiff local opposition, largely based on landowner concerns. And an increasingly active and engaged public opposition has arisen to pipeline development, including the Keystone XL, Dakota Access, and Palmetto projects.
Opposition ‘Here To Stay’
“Unfortunately, I think that opposition is here to stay,” Biar said. He stressed the importance of the industry supporting energy education at the elementary through high school levels and said that the industry must be strongly engaged in the public policy process, which is not necessarily the political process. Outreach to stakeholders and community engagement are particularly important, he said.
Regina Mayor, principal at KPMG and the firm’s National Sector Leader for Energy, Natural Resources, and Chemicals, said that through streamlining and standardization, operators are “totally rethinking how you develop your fields.” North America is the preferred location for new industry activity because it offers “available capacity that can quickly come on line,” she said.
Mayor cited large disruptive trends facing the industry, including
Shifting market demographics that are bringing the millennial generation into the prime age group
A wider workforce age distribution that runs from late teenage years and early 20s through workers in their 70s and beyond
Society’s increasing urbanization, with the baby-boom generation downsizing households and increasingly choosing urban retirement locations
Intelligent automation technology
Blockchain technology for digitally verifying and settling peer-to-peer financial transactions.
Urbanization and household downsizing hold implications for reduced power use and a move toward ride-sharing services and eventually autonomous vehicles that could reduce individual vehicle ownership.
Autonomous Vehicles
Nonetheless, she said autonomous vehicles could bring an increase in miles driven. With safe, reliable autonomous vehicle transportation for their children, parents might shift from driving their children around to taking separate vehicle trips while their children are at sports practices or lessons. The major question for the industry is whether future vehicles will be powered predominantly by fossil fuels or electricity.
Paul Geiger, senior vice president of corporate development at Southwestern Energy, said that the shale revolution has created an additional marketable natural gas resource amounting to 450 Tcf at a breakeven price of $3 per Mcf.
With a strong production and acreage position based primarily in Appalachia, Southwestern is well placed in terms of resource quality and low development cost. Whereas several years ago, Southwestern believed that a $4 per Mcf price environment was necessary for the company to thrive, Geiger said that continued technology innovations and cost reductions have improved well returns to the point where Southwestern can thrive at the current price level.
The company continues to focus on areas where it has “demonstrated competitive advantage,” he said. The key drivers of improved well returns have been benchmarking and innovation directed toward long-play disruptive technologies in completion and proppant science, completion modeling, and water management. Southwestern has been able to assemble large blocks that have allowed it to continually increase drilled lateral lengths.