Bain cautions against profligacy as global oil & gas capex on the up

28 May 2018

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.

Capital spending in oil & gas against global demand outlook

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.

Smaller global profit pool from lower oil prices

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.”


More news on

State participation required for Lebanon to capitalise on oil & gas potential

05 November 2018

Lebanon will need to take on an active operational role to realise the full potential of its fledging oil & gas industry a new report argues, including the development of local expertise.

“Lebanon has officially embarked on its oil & gas journey following the signature of the Exploration and Production Agreement (EPA), and declared its entry into the club of oil nations,” so begins a new report from international management consultancy Arthur D. Little, which asks the question: “With its limited national experience in managing an oil & gas (O&G) sector, what should Lebanon’s strategy be in the coming years to enable active and, most importantly, successful national participation in the O&G upstream sector?”

The Lebanese economy is only just getting back on track after years of mismanagement led to a significant debt crisis and the nation ultimately reaching out to the international community for support in attracting investment – culminating in a number of recent consulting contracts awarded to firms including KPMG among others. More recently, global management firm McKinsey delivered the government a 1,000 page five-year economic road-map, widely noted for its proposal that Lebanon capitalise on its marijuana crop through legalisation and export.

But rather than hashish oil, the real key to Lebanon’s rebound could rest with crude, with ambitious government estimates of 865 million barrels of oil located off-shore together with 96 trillion cubic feet of gas reserves – potentially worth somewhere in the ball-park of $300-$600 billion. While these figures may not stand up to commercial reality when drilling down, and there’s still a long way to go with many future unknowns, the question remains as to how the country can best capitalise on the potential liquid gold-mine and maximise its returns?The UK versus Norway's oil & gas revenues since 1971The answer, or the first and possibly simplest one according to A.D. Little, is active state involvement in operations (beyond its current legislative and regulatory participation) – a means, as demonstrated by Lebanon’s regional oil-producing nations, to “ensure maximum governance and control over national resources, as well as guarantee maximisation of rent from oil activities.” A.D. Little forwards the comparative example of the UK and Norway, the former with effectively no equity participation since 1986 and the latter an active participant in the sector.

As a study of divergent strategies, the comparison is a relatively straightforward one, with both Norway and the UK beginning off-shore exploration in the mid-1960s, discovering oil in ’69, and since then until last year producing almost identical quantities of hydrocarbon (~45 billion barrels of oil equivalent). Yet, according to the firm’s analysis, Norway has since 1971 generated over $1.4 trillion in revenues (in 2018 terms) courtesy of its state oil assets, whereas the UK, with its fully privatized sector, has seen tax returns of only $483 billion over the same period.Personnel requirements for Lebanese oil sectorWhile the case for active state participation in its resources sector may be strong then, this naturally leads to a more complex question for a country with limited oil & gas experience: how should Lebanon proceed in building an active state involvement in operations? The first strategic step, says the consulting firm, is to establish a clear sector governance framework in which to build, nurture and grow a commercial state oil entity. Beyond that, Lebanon will need to develop its home-grown technical expertise with a focus on quality education, and then manage the sector through disciplined, long-term strategic maneuvers, such as with respect to the entire value chain and potential for downstream capitalisation.

“The Lebanese oil sector journey, similar to that of many countries, is a long and perilous one, faced with tremendous challenges along each step of the road,” states the report in conclusion. “If the Lebanese state wishes to activate its operatorship role, a choice that would help maximise its oil rent, it will need to take strategic, bold and, most importantly, wise steps in the early years of the journey… The Lebanese authorities need to start acting fast and align over the objective of building a solid local sector.”