In the second part of the blog post (click to view Part 1) we continue to look at the key trends emerged during the oil and gas (O&G) market downturn started in 2014. Three more trends are described below as they clearly define the current state of the industry.
1) Positive “shift to gas” outlook, supported by shale gas developments
Industry stakeholders and policy makers have been recently promoting the use of natural gas as it is more environmentally friendly than other fossil fuels. Indeed, according to BP’s “Energy Transition” scenario, natural gas grows at an annual average rate of 1.7%, increasing nearly 50% by 2040, overtaking coal as the second largest source of energy.
Economic growth, industrialization, population growth means power demand growth and rising electrification in Asia and Africa. Also, continued coal-to-gas substitution (especially in China) and the increasing global availability of natural gas thanks to LNG developments in North America, Australia and the Middle East, ensures growth of natural gas share in our energy mix.
Surge in LNG infrastructure and trade is making natural gas a more global commodity and is decreasing the gas price disparity in different regions. Asian and European consumers will benefit from expansion of US LNG exports to diversify their sources of imports and to renegotiate prices from existing sources. Cheap natural gas production in the US continues to grow in shale gas-rich basins or as a by-product of shale oil development. It is certainly a sector to watch in the short to mid-term.
It is worth adding that rise of natural gas production is also having a material impact upon petrochemical and chemicals sectors, both in the US and globally.
2) Change of landscape through mergers, acquisitions (M&A) and collaborations
The M&A deals and divestment choices for the past 3-5 years have reflected the adjustment to the perceived “new normal”. Deal-making started following the 2014 downturn as banks tightened lending and raising capital to grow operations and activities became more difficult. Indeed, upstream exploration was one of the main segments to feel the hit during 2015-17 period.
Decrease in barrel prices had other different implications for the industry too. Small North American Independents had to sell their assets, merge or file for bankruptcy, since they could not stay profitable at the low-level prices. Bigger local players and O&G Majors benefited from acquiring the released assets. Market downturn triggered consolidation among upstream E&P companies, which helped to increase the scale of operations, competitive advantage and led to higher returns.
Wave of divestments had also reached O&G Majors who had to optimize their portfolios at the time of the downturn. They mainly sold the less-profitable or more complex up- and midstream assets, which were bought by private equity firms or smaller operators.
Numerous collaborations and consolidations occurred among engineering and construction firms as well. They have joined forces through the years as means of survival as competition increased and operators pressured them to reduce costs. The recent deals taking place between equipment suppliers/engineers and constructors demonstrate the move towards vertical integration and technical efficiency. It is believed that such deals should increase cost savings through early engagement and provide end-users with “one stop shop” offerings.
According to Ernst & Young, 2014 was the strongest year for the oilfield services (OFS) M&A activity – aggregated deals value increased 242% year-on-year to $72.0 billion. Although markets are recovering, and in some cases growing again, many in the OFS segment still struggle for financial profitability, as operators continue to pressure service companies to keep costs low, preventing improvement of margins in OFS segment.
3) National Oil Companies (NOCs) on the rise while adapting strategies
Lower oil became a game changer for NOCs that for years relied on International Oil Companies (IOCs) as partners in developing national resources. As NOCs looked to IOCs for continued investment while IOCs were focusing on cutting costs, NOCs have more incentive to take the front seat themselves in their partnership with IOCs.
NOCs see the present low oil price environment as an opportunity to invest in foreign assets (upstream or downstream) as a way to expand their technological capabilities and geographical footprint. For example, Middle Eastern NOCs are investing significant amount of money in refining and petrochemical complexes in South East Asia (India, China, etc.) to secure their crude sales and market share when crude supply abundance is bringing about competition. Another way for NOCs to expand internationally is to acquire stakes in foreign companies. Recently announced Saudi Aramco’s intent to take a 20% stake in India’s Reliance Industries’ refining and petrochemicals business, could be one of the largest foreign investments in the country. The potential deal values at $75 billion.
Similarly, NOCs such as CNOOC or Qatar Petroleum are significantly investing in upstream assets overseas (Brazil, Africa, Guyana, etc.) in partnership with Majors to expand their technological know-how and access to the new and growing supply hubs.