BrazilBain cautions against profligacy as global oil & gas capex on the up
As oil prices begin to stabilise and capital spending in the sector returns, the global management consulting firm Bain & Company has warned of an incautious approach, with the fiercely competitive industry subject to disruption and uncertainty.
Despite oil prices recently hitting their highest peaks since the crisis, cracking the $70 per barrel mark in May from as low as $30 at the nadir, price forecasts from a cross-section of industry CEOs, country projections, and institutional market agencies compiled by global consulting firm Roland Berger predict only the moderate annual average uptick to $54 from $51 in 2017.
Furthermore, senior executives from some the world’s largest oil companies, including ConocoPhillips, Petrobras, and BP, are predicting only the moderate rises over the medium-term, with the longer-term potential that downward pressure from US supply will continue until the point of declining demand, with peak oil predicted by BP to occur somewhere between 2025 and 2035, and sufficient US reserves to cover the next the decade at current rates of production.
Against such a backdrop, and with capital expenditure currently rising in line with crude prices, the global strategy and management firm Bain & Company has warned international oil & gas operators that ‘complacency and a return to profligate habits could prove a serious mistake.’ This, perhaps, is an especially pertinent message for those in the Middle East, where the entire region has had to recently grapple with its historical overreliance on hydrocarbons during the period of plummeting prices.
Capital spending in the oil & gas sector is on the rebound following ongoing steady declines since 2013’s historic high of $250 billion between the major oil companies, dropping to a low of $118 billion in 2016 – effectively on par with the outlay figure from a decade previous. According to Bain, a number of integrated oil companies are this year expecting to increase their capex by 15% – naturally investing in pursuit of growth following the recent downturn. For this cycle however, the firm says, the landscape is a far different one from the past.
The authors of the report cite several factors for the shift in the playing field, technological disruption for one, along with rising regulatory complexity, increased sophistication from national players, and, the likelihood that prices between the $50 - $70 range will persist for at least some time due to productivity gains and the resilience of shale operators flattening the supply curve. Then, of course, there is the long-term challenge of tapering future demand.
Meanwhile, according to the firm’s research, the fall in prices has reduced the profit pool by more than 60% from 2012 to today – and amid this mix, the firm says, competition is fiercer than ever, with the remaining players strengthened by having weathered the recent storm. In order to gain a competitive edge, companies will need to focus on three particular areas; market differentiation, digital strategy, and boosting productivity while lowering costs.
The report states; “Because markets dictate the price of commodities, cost control is one of the few levers that oil and gas companies have over their margins. Too many executives lost sight of this fact in the decade before the price dropped… Through the rise and fall of the last price cycle, oil and gas companies were able to follow a ‘me too’ strategy. The profit pool was big, and all could play the same game: chase a project, come in at twice the budget—and still earn returns in nine months. That time, however, is over. A smaller profit pool, fierce competition and technology disruptions dictate a new approach if energy companies are to thrive.”
