For some the focus is growing reserves, others on energy infrastructure to meet transport, storage, processing and soon exports needs—for everyone it is controlling rising costs of projects. Many feel margin squeeze and are focused on improving operating efficiencies across the value chain, harvesting value for CAPEX to improve competitive positioning and stay open to opportunities.
- Control Costs of Growing Reserves! Traditionally, the fastest way for oil and gas companies to grow reserves has been to invest capital in new projects—the bigger the better. When shallow water E&P growth didn’t produce the desired result super majors attention turned to more challenging but also more satisfying deepwater or ultra deepwater projects to achieve that reserve growth. For super major oil companies their very size makes growth at rates sufficient to satisfy investors a challenge. This focus on scale is one reason the super major were late to the onshore shale party because experience had taught them that it just was not economic or material for them to chase so many small opportunities when fewer, bigger bets better leveraged their assets, skills and size. Now the challenge they face in new offshore and deeper deepwater E&P is the growing costs associated with the projects. Managing costs has become job#1 for super majors as they grow reserves to protect their long term competitive positions.
- Rationalize Energy Infrastructure for the Market Future. Much of the integrated energy infrastructure in North America was built to bring oil and gas from the Gulf of Mexico onshore to consuming markets. Growth of shale and tight oil and gas onshore in North Dakota, Texas and elsewhere means North America now has inadequate pipeline capacity and infrastructure in the wrong places to serve the onshore need. This disequilibrium in the market created the WTI-Brent price spread and is a driving force behind CAPEX spending over the past few years to fix it. Oil & Gas Journal reports E&P spending was up 46 percent to $355 billion in 2013 from $243 billion in 2009. As E&P investment dollars flooded into North America, the midstream sector struggled to keep up with demands to move production from newly producing regions or to increase flows from currently producing regions.
- Optimize Performance across the Value Chain. With more diverse upstream supply and better positioned infrastructure, investment is shifting to the midstream and downstream value chain. We see this shift at work extracting efficiencies, applying new technology and improving margins. CAPEX spending according to the Oil & Gas Journal was flat year over year upstream in North America from $354.4 billion in 2012 vs $354.8 billion in 2013. Midstream CAPEX grew from $12.8 billion in 2012 to $46.4 billion in 2013 or 263 percent. Downstream CAPEX was up 11 percent in 2013 to $24.7 billion over 2012 and is up 60 percent from 2010 when it was just $15.5 billion. One reason M&A activity in the oil and gas industry may be down 29 percent over the past year is market participants are working the investments made to optimize their performance for enhanced valuations. At midyear 2013, total M&A deal value was just $79.9 billion, down from $113.2 billion year over year.
- Making the Next Move in the Global Competitive Positioning Game. Making sense of all the changes in market fundamentals including the Brent-WTI price spread, the changes in relative world regional production levels, the rise and fall of crude oil imports and the fear of being left behind as the global rules of competitive engagement change is pulling market participants to search for a new equilibrium in world markets full of constant change. The shale renaissance in North America is only one of the game changing factors driving markets. Across the energy value chain every player is considering its next move—and the one after that, and after that. Seeing opportunity and risk beyond the horizon is what the hard work of fundamental market analysis is all about. Playing ‘what if’ across alternative scenario views of those opportunities and risks is the job of every market participant.