While the current state of the market still leaves cost-containment initiatives a priority, executives nonetheless showed renewed confidence in an industry recovery. Those who responded pointed to expectations of rising prices, a return to increasing capital expenditures and headcount as drivers of their optimistic outlook.
“This recovery in many ways mimics the pattern of the recovery from the Great Recession,” said John England, vice chairman, Deloitte LLP and U.S. and Americas Oil and Gas Leader. “If last year was the year of hard decisions, 2017 will be the slow road back. Companies are generally optimistic that prices will rise to a more sustainable level next year; however, they understand that even if we see an uptick in price, the industry likely won’t fully recover until 2018 or beyond.”
Deloitte’s survey reveals that from upstream to downstream, most respondents expect to see an increase in capital expenditures next year. In fact, the upstream sector, which took the hardest hit in this downturn, is the most optimistic about a recovery, followed by the midstream sector. The study also reveals a number of trends in opinion that offer insight into the direction the industry may be headed: Most executives believe that per bbl is an important threshold for a revival in U.S. oil and gas exploration and production activity. Seventy-one percent of professionals believe it is possible for the 2016 average price per bbl to reach -60, or for prices to at least rise to that range by the end of the year (61%). Almost half of the respondents think that prices will continue to rise, reaching -80 by 2017 (44%) or by 2020 (46%). Nearly one-third of the respondents (28%) foresee crude oil prices returning to -100 for WTI and Brent by 2020.
Natural gas price outlook: Stable to mild optimism for 2017-2020. For 2017-2020, 70% of the respondents expect prices to range between .50-3.50 per MMBtu, with a third anticipating this price band in 2017. Survey respondents expect Asian natural gas prices to be much higher than Henry Hub to the end of 2016-2020, which creates opportunity for U.S. LNG exporters. Of professionals surveyed, 81% believe international prices will range from -10 per MMBtu. However, an increasingly optimistic view (29%) is for prices to be in the -15 per MMBtu range by 2017 to 2020.
X-factors could dampen optimism for recovery. When asked which policy or geopolitical issue would most affect their company, survey respondents cited OPEC production decision as having the most impact on the upstream sector, but U.S. tax and policy decisions are next, outranking several prominent international issues. OPEC’s ongoing influence on crude oil prices remains the most important concern for 45% of professionals. Next areas of greatest concern are changes in U.S. tax policy and regulation (38%) and environmental and local stakeholder issues (34%). While the survey did not break out specific regulations, professionals see a possibility of profound energy policy changes to be enacted, and for the scope and impact of those changes to depend on the outcome of the presidential elections in November 2016.
Upstream priorities: Responding to the challenges, shifting to a recovery mindset. The findings showed a shift in expectation about the impact of short- and long-term cost containment initiatives from 2016-2017. Long-term cost-containment initiatives, a hallmark of the oil and gas industry expansion before the downturn, are considered the most impactful, as shown by an increase from 42% of respondents to 50% for 2017. Short-term cost-reduction efforts are seen as less impactful in 2017 — a key indicator of an expectation of recovery. In addition, executives expect capital expenditures committed to exploration activities to rise in 2017 (42%) — more evidence for an optimistic outlook for the industry’s longer-term recovery. In 2017, 50% of respondents see better operating efficiencies and enhanced well productivity as the biggest opportunity for cost reductions. This is a shift away from head count, portfolio changes and activity reductions. Although more than half of the respondents believe 40% or more of cost reductions are short-term, while 64% see operating efficiency gains as the best path to sustainable cost reductions, followed by contract renegotiations. While 43% of respondents expect more personnel reductions in 2016; next year, only 31% believe there will be ongoing layoffs. In fact, 36% of the respondents expect hiring will restart in 2017. For 2016, 42% expect capital expenditure to continue declining; but, in 2017, the outlook changes as 43% of respondents anticipate capital expenditure to rise in 2017 — optimism for a recovery next year is returning.
The downturn moves to the midstream sector. “Contraction in the upstream sector has begun to wear on the midstream sector, once thought to be somewhat immune from commodity price volatility,” said Andrew Slaughter, managing director of the Deloitte Center for Energy Solutions, Deloitte Services LP. “However, the sector’s fee-based contracts are at risk of being renegotiated or challenged in bankruptcy court, given the financial stress of upstream producers. We already are seeing movement toward consolidation, and more could be on the way. Professionals also see infrastructure building both in the U.S. and in Mexico as the biggest area of midstream opportunity.”
Midstream finds its own set of challenges and its own opportunities. The midstream sector has many opportunities for profitable growth in the burgeoning U.S LNG export industry, and the U.S. Gulf Coast region is seen as the area that will present the most opportunity, according to 63% of respondents. Sixty-two percent expect a moderate level of consolidation in both 2016 and 2017 (59%), but when asked about whether the midstream sector would consolidate significantly in 2017, affirmative responses increased from 15% to 23%. However, midstream limited partnership (MLP) rollups into C-corporation structures were seen as unlikely (28%) or moderate (52%). Cost reduction (52%) and regulation (41%) are seen as the midstream sector’s biggest challenges. Optimism is most clearly seen in the results related to rising capital expenditures. For 2016, only 26% of the respondents saw a net increase in capital expenditures, but that cohort’s expectation rose to 41% for 2017, with 28% of that group citing a modest 10% uptick.
Regulatory challenges for downstream refining and marketing offset by export opportunity. Regulation (39%) and costs (35%) top the list of the biggest challenges facing this highly regulated, capital intensive segment. Despite regulatory challenges, the outlook for refined products exports next year is seen as positive, as U.S. crude oil exports have offered new competition. Capital expenditures will likely increase from 2016 to 2017, according to 33% of survey respondents, but by no more than 10% year over year. Slightly fewer (30%) expect a net capital expenditure reduction next year.
The return of optimistic sentiment indicates that the industry downturn may finally be over, and suggests low to modest industry growth over the next year, with a full recovery by the end of the decade. Slaughter concluded, “The midstream sector is looking to expand its crude oil capabilities and rebuild infrastructure, and the downstream sector is looking for more demand growth. As optimism returns, as it has, the list of opportunities should be given another look, for it shows the direction the industry will likely take in the years to come.”
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