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Time to be optimistic in oil and gas? PETEX discussion

Wednesday, June 26, 2019

A panel discussion was held at the PETEX event in London in November 'Time to be optimistic? Exploring the next 5 years of Oil and Gas', with speakers from Crystol Energy, Heriot Watt, Shearwater, Seacrest Capital, Barclays, Geological Society, Shell.

A panel discussion was held at the PETEX event in London in November 'Time to be optimistic? Exploring the next 5 years of Oil and Gas', with speakers from Crystol Energy, Heriot Watt, Shearwater, Seacrest Capital, Barclays, Geological Society and Shell.

Professor John Underhill, Heriot-Watt University said he thought there was a lot more optimism in PETEX in November 2018 than at the 2016 and 2014 events.

But he drew a comparison with geology in the early 70s and today. Then, 'geologists were treated as heroes, exploring for energy in the background of the IMF crisis and strikes,' he said.

Geologists often do not feel like heroes today, partly because of there is so much disdain in society for the fossil fuel industry. This issue also impacts the supply of talent into our industry. 'It is a challenge and not necessarily one to be optimistic about,' he said.

Geologists can be part of the solution to climate issues if they get involved in carbon capture and storage. 'We don't want to put CO2 in the wrong place,' he said.

The development of digital technology is also a 'reason to be cheerful' in oil and gas exploration, so long as it compliments the development of skillsets geoscientists need, rather than working against it. 'Good technical decisions have to be rooted in geoscience,' he said.

Carole Nakhle, CEO, Crystol Energy, chairing the event, observed that many university courses on oil and gas economics fail to attract enough students to run, while environmental courses 'are packed'.

Shearwater - new species post extinction

Irene Waage Basili, CEO of seismic company Shearwater Geoservices (which acquired WesternGeco in August 2018) said that the oil price crash 'was drastic, almost an extinction event,' with oil company exploration activity 'completely stopped for quite a few years.'

But like an extinction of animals, it will be followed by 'new species coming online and capturing new territory.' The new oil industry will be different to the last one.

Shearwater is one these new species, looking for ways to use the downturn to grow the company, she said.

The downturn of 2014 was different to other downturns. We had seen a big increase in the oil price on the back of China's growth, and also shale changing oil supply, and proving hard for the offshore sector to compete with. Also there had been a 'total lack of cost discipline in the entire value chain.'

Today, there are only a small number of companies in the seismic sector, with TGS and Spectrum doing multiclient surveys but not owning vessels, and WesternGeco, CGG, PGS with in-house fleets and in-house technology.

The asset light (non shipowning) companies may have been the most successful in getting through the downturn, she said. But this is not necessarily what oil companies want to see.

'Several companies in our space are moving from asset heavy to asset light. CGG gave signals that it was going in a similar direction,' she said. 'That gives great room for us, picking a different strategy, going for asset heavy, and trying to be complementary to these clients and former competitors.'

Seismic acquisition 'is a market we know and believe in,' she said. But, 'more specialisation focussing on cost is constantly what is required.'

Phil Loader

Phil Loader, strategic advisor, Seacrest Capital Group (which invested in Azinor and OKEA, among others), and a former EVP global exploration with Woodside Energy in Perth, emphasised that change brings new opportunities for companies to differentiate themselves.

'If you like an environment which fosters innovation and creativity, you are in the right industry,' he said.

The oil industry's critics haven't presented any alternative to fossil fuels over the short term, he said. Renewables may eventually provide equivalent energy to fossil fuels, but we need more oil and gas exploration to 'allow some time for renewables technology to catch up.'

One area where technology has brought big improvements over the past 15 years is in monetisation of stranded gas, as we see in Mozambique, he said. '15 years ago it was a gas province we didn't know what to do [with],' he said. Today, 'We can modularise LNG technology.'

Some companies are better than others in the support they offer for graduates or the culture to support exploration, he said. Supporting exploration means being able to support contrarian views, enabling people to gain experience, develop their intuition and continually learn.

The industry's focus on lower risk plays in recent years is probably to blame for the low rate of discoveries. 'The industry has shied away from basin opening, play opening wells. But a focus on lower risk plays will never deliver materiality,' he said.

But now, 'companies want to replenish what's in the cupboard. My hope is we'll see more courage.'

The best time to invest in a basin is when hydrocarbons are proven but the basin is underexplored. On that basis, 'Investors have got more choice than they've ever had, with many different types of organisations to invest in.'

For an investor, the full lifecycle value proposition of an unconventional well in North America is inferior to conventional exploration internationally, because companies ignore the amount of money invested in getting acreage, he said.

It can cost '$250m to $350m' just to find out if you are in the right place in an unconventional. 'If you have a dividend policy, unconventional doesn't deliver,' he said.

But if you have $300m available, that's good sum to spend in conventional projects, covering 3D seismic, conventional wells and some appraisal.'

Leadership can be more important than assets. 'If you've got average assets and superb leadership and board, you'll create value. Superb assets and average leadership will erode value.'

Lydia Rainforth, Barclays

Lydia Rainforth, managing Director, European Energy Equity Research, Barclays, said she expects 'AI to make the biggest and fastest difference to productivity' in the oil and gas industry.

Better use of digital technology, and letting it 'fundamentally change methods of working', is the way to make traditional oil and gas assets sustainable over the longer term, and compete with low carbon businesses, she said.

The oil industry could also look for ways to improve its 'productivity', which has fallen relative to the wider economy. 'Each dollar generates 70 per cent less production than 10 years ago,' she said. 'A mantra of capital discipline has been very much needed.'

However the downturn has brought in cost discipline, with companies planning projects to work at a $50-$60 oil price. If the oil price goes above that, then it generates excess cashflow which can go into reducing debt, increasing dividends or buying back shares.

Ms Rainforth's role includes advising pension funds on which oil companies to invest in, based on an assessment of their relative competitiveness.

Malcolm Brown, Geological Society of London

Malcolm Brown, a former president of the Geological Society of London (2016-2018) and former leader of exploration at BG Group, noted that oil and gas discoveries in 2016-2017 were the lowest in 7 decades.

On average, 40bn barrels of oil have been found every year since 1980. But there hasn't been 40bn barrels found in any year since 2010. That is a period which includes the discoveries in Mozambique, Tanzania, Senegal, Guyana and Zohr.

'Almost all companies are finding less than their resources,' he said. Also, almost half of discoveries are less than P80 predictions. This means that if accurate predictions were available, management probably would not have authorised the spending to develop them.

Also the oil industry may be less competitive now than is commonly believed. The middle range of companies (like BG) have now disappeared, and the oil majors do not all chase the same prospects. For example, 'Total drilled 26 gross wells in a period Chevron drilled 7.'

There are a smaller number of emerging plays, and 'no-one is playing frontiers,' he said.

On the climate issue, 'We have not told our story very well,' he said. Setting up the Oil and Gas Climate Initiative 'is a good thing to do, but done on the back foot of an issue.'

The industry needs to better manage fugitive emissions of gas (leaks) because of the criticism that they are so large gas is just as bad as coal for the environment.

The industry is not as good as learning from its experiences as it could be. Technology could be helpful in this, he said. And perhaps more learning could make the workplace more enjoyable.

Mr Brown observes that while he thoroughly enjoyed his work in exploration, he does not believe that people of a similar generation today enjoy their work so much.

'Let's get back to the fun stuff we call exploration and do it smarter and better,' he said.

Valery Chow, Shell

Valery Chow, Senior Energy Advisor within the Shell Scenarios Team, said that the industry has been through a 'perfect storm' over 2014 to 2017, with declining investment, a decline in new funds, and new discoveries taking a long time to commercialise. 'We have to go the 1950s to see numbers as low as these,' he said.

But on the positive side, we have seen the boom in unconventionals in the US, and demand passing 100m barrels of oil per day this year, with growth coming from mainly non-OECD' countries in China, India and SE Asia.

The fundamental demand for oil in passenger transport and shipping is not seeing any slowdown, he said. China's demand for LNG surged 45 per cent in a year, absorbing all the new LNG coming onto the market, he said.

Global energy demand dipped by 1.6 per cent in 2009 when the financial crash was at its peak, but grew by 1.7 per cent in every other year.

In order to keep temperature rise under 2 degrees, according to Mr Chow's estimates, we would need oil demand to get much weaker by 2025, with almost half new vehicles to be electric by 2030, and continuous growth for gas, replacing coal, and providing a back-up for renewables.

A big question for the industry is whether the 'systematic underinvestment in exploration' will lead to reductions in production and a rise in the oil price

After the crash 'the industry has emerged tougher and more resilient - and searching for a new path forward. I think there's some room for cautious optimism,' he said.

Thanking students

One audience member, an exploration geoscientist with a UK oil and gas company, said that in a recent talk he gave to Aberdeen oil and MSc students, 'I thanked them for having the courage.'

'Firstly they had made a lot of effort to do geology bachelor's degree, then they have paid for the MSc themselves. They need to be in the top 10 per cent of the company to get a good job.

Then, 'you go to a company full of old men, you can't get a mortgage, your work has no impact on decision making. The alternative is to work at KPMG and have a nice life.'

The much feared 'great crew change', when experienced oil and gas people leave, could be welcomed by the younger generation, if it gives them scope to take on roles with more decision making, he said.



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