"Oil and gas price volatility. Price uncertainty continues to challenge energy companies as they estimate their net incomes and affordability of capital project budgets. Several companies, including ExxonMobil, Shell and ConocoPhillips, referenced this uncertainty in their 2013 second-quarter results. Lower price realization is a challenge when many companies are still running “marker” gas or crude price in their budgeting exercises.
Longer-term project pipeline quality. With so many large developments and expansion programs scheduled to complete by 2017, the industry must now define the next generation of projects. Gas export terminals in the US, complex East African gas, ultra-deepwater and Arctic drilling, along with a new round of refinery upgrades to meet new fuel specifications—it’s hard to see these all as high-return projects. We expect many companies will return to mature sites and look for the missed oil, tapping improved recovery techniques, including advanced seismic sensing, digital oilfield applications and the next generation of drilling technology advances. The industry could in 2014 start to signal a move away from mega-projects, to large reactivation and infill programs upstream as well as selective expansions around advantaged sites in the downstream.
The planning challenge specific to each company’s circumstances and portfolio will vary, but most will have exploration, gas, projects and operational performance on their planning priorities lists.
Exploration focus. Exploration is difficult at the best of times, as the license round schedule, drilling success rates, and the costs and availability of rigs all introduce uncertainty. For larger players, materiality and maturation speed are constant concerns, which is why we have seen many companies now quoting resource addition annual performance in addition to proven (P1) reserve additions. To grow 100,000 barrels of oil equivalent (BOE) per day, producers need to consistently find an extra 35 million to 45 million BOE per year. For the supermajors and large NOCs to sustain production, finding 1 billion to 1.5 billion BOE a year is the challenge.
The priority exploration themes for 2014 seem to be the following:
The number of focus areas required by an oil company is largely a function of size. But with exploration budgets of $500 million per year for even the independents and as much as $5 billion per year or more for the supermajors, there seems to be no shortage of investment dollars targeting emerging trends and new opportunities.
Gas. Planning for one to five years in gas—once a stable, long-term part of the portfolio—has taken on a challenging degree of uncertainty. Unconventional gas in the US has caused major swings in market prices and the value of gas assets. The most recent of these include the write-downs by many companies that had built up big resource positions, such as Anadarko, BHP Billiton, Encana, Noble, Statoil, Shell and Total; cost escalation for mega offshore projects, as experienced by Chevron Australia; and large new discoveries in East Africa, India, Argentina, the eastern Mediterranean and Australia.
Gas remains a very strong part of the mix and will drive a large part of the volume growth for the international oil companies (IOCs) over the next decade. But project delivery is likely to be slow, with commercialization subject to greater gas-to-gas competition. The best projects will still yield solid returns and support growing demand. But it is more important than ever to hold “advantaged” assets to deliver strong results.
Major projects start up. Major conventional projects face two main performance challenges, in addition to meeting cost expectations, of course. First, will the project meet its start-up date? Second, will it perform to expectations? Recent history suggests that the larger the project, the more susceptible it is to slippage. Once up and running, there is a strong likelihood that the first six months will see lumpy performance rather than a smooth ramp-up, as the facility transfers from project to operations.
Unconventional projects are quite different in nature, more akin to a long-running manufacturing program that has a constantly moving work site. For planning effectiveness, the measure is how many wells can we complete and hook up, how quickly and at what unit cost. For the 2014 plan, it will be vital to know if these criteria are escalating, steady or declining.
Realistic operational delivery. The operational reliability of the oil and gas industry continues to be a major challenge and a huge opportunity to realize value. For example, in the North Sea the average oil production asset performs well below its theoretical potential and has a large backlog of maintenance work . From a planning perspective, it is critical to have a clear view of historical performance, as well as reasons to expect stronger or weaker future delivery and the extent to which planned programs and interventions will increase operational performance".
Source: Bain & Company
