Surviving is not enough. The Great Dislocation that began at the end of 2014 appears to have come to an end at the start of this summer 2017. The industry is North America has stabilized, if only on the basis of the trickle of layoffs across the board. As I predicted nearly a year ago, hiring by operators and field services companies is being hampered by the harsh reality that people are not flocking back in droves. Labour costs have started to swing upward. Cost and schedule pressures that, nine months ago, would have had zero impact on firms willing to bid on the work, are encountering the first glimmers of resistance from those same firms. For three years, supply chain partners grudgingly accepted any work for the sake of keeping the lights on. These days of owner monopsony are numbered. Cracks are appearing in the unsustainable cost structure that emerged during the Great Dislocation. The entire supply chain is nearing the point where it will have the leverage to refuse to merely survive. The industry is primed to go from demand to supply dominance.
Turn a different corner. This new reality is but one side of a cost coin. The other side of this coin is the semi-permanence of the pricing stagnation of oil, which has nothing to do with the industry’s supply chain and everything to do with a global glut of supply. Barring a catastrophic geo-political event in the Middle East (say, the partial bombing of a refinery), the price of oil will continue to hover around the $50 mark for the foreseeable future. China’s demand is not picking up. India’s emergence as a global oil consumer has yet to materialize. Independent producers, with no less than the United States, have upended OPEC’s decades-long hegemony. Simply put, the days of $100 oil, let alone $147, are unfathomable at this time. This is bad news for producers and oil majors: earnings and margins in an era of $50 oil will continue to struggle to survive themselves. Developing capital projects (capex and opex) remains an arduous task, as I discussed in my two previous posts. To these woes, one can add the excoriating challenge, for producers, of delivering shareholder returns from daily operations.
The ever-present king of inertia, the status quo, has already proved itself unsuited to the task. Tweaking things at the edges or relying on cost cutting have been exploited to their maximum. Whatever cost savings could be extracted, have been extracted. Yet, the fundamental challenge remains: pipelines and facilities are of an operational design borne of a different era that did not have to contend with these crippling pressures. The human-machine interaction was then, as now, front and centre to all operating scenarios. Once, that was affordable; now, it clashes with the new price paradigm. As a result, producers have no choice but to seek out new efficiencies and new operations, where they have never gone before.
The $40 moonshot. The surest strategy to get there rests in targeting a hypothetical barrel price of $40 and re-design the operational assets to make money at that price point. The many avocations suggested for capital projects in the era of $50 oil provide a sound foundation to undertake this endeavour. They are, however, only the starting point to a broader scheme that abandons the status quo, explores the potential of IoT, delves into the potency of new technology, and invest in the human potential. Making money at $40 a barrel is not only possible but realistic, but only if one accepts the new economics of oil and gas. Cost cutting won’t do it; tweaking things only waste time and money. The answer lies elsewhere, far beyond the horizon of the status quo: where no produce has gone before.