Dr Helge Hove Haldorsen, the 2015 president of SPE International, will give the opening speech at UTC. SPE is a valued UTC partner organization and we look forward to an inspirational contribution from Dr Haldorsen in Bergen in June. In addition to his SPE position, Helge Haldorsen is Director General, Statoil Mexico. He gave us his views on the outlook on our industry.
Asked if he sees the current low oil price situation as being “the new reality”, Dr Haldorsen said: “Predicting the forward oil price has proved impossible for all. No company today is willing to bet the house on a certain oil price assumption — and hedging is currently getting more difficult and more costly. The future looks very volatile, uncertain, complex and ambiguous, and many expect the E&P industry to continue its boom and bust behavior, with perhaps price cycles becoming more frequent and of shorter duration”.
“The bottom line is this,” he said, “There may not be a new normal stable oil price on the other side of this sub-50$/bbl period. The new normal may be an oil price mountain range from a valley of sub-50 to highs of 100+ $/bbl.” Haldorsen pointed out that the past four stable high price years, when oil prices remained between 100-110 $/bbl, had been quite unique in terms of the stability and the associated price level. Sadly they left the industry with cost levels that were too high, since we felt we could afford anything. He said that at the CERA week 2014 conference, there was a consensus that costs must come down across the board. He went on: Since you can’t just cost-cut your way to greatness, new technology and new business models are needed to create the new and improved E&P2.0 that we so desperately need to stay competitive at a lower oil price. The conclusion of CERA week 2014, Haldorsen said, was that ‘100 is the new 20’, which means that IOCs need [a price of] 100$/bbl to deliver an acceptable return on investment. And now the oil price is 50% below ‘the new 20’ and a warning light is blinking for the industry’s competitiveness and return on investment — unless we improve every element of what we do to restore E&P’s earnings per barrel, through cost-cutting and creative destruction, he warned.
IS THERE AN UPTURN IN SIGHT?
The best cure for a low oil price is a low oil price, Haldorsen said. The highest cost marginal producers are forced to cut back activity and spending dramatically to be able to service their debt (and pay dividend), with a lower cashflow. And everybody else with flexibility will stop, delay and cut back on activity as well, albeit to a lower extent. Then oil price hedges run out and production starts declining. After a delay, demand grows, geo political events are thrown into the mix and slowly the oil price climbs. Due to the lower activity level, the cost of everything should come down, field development economics should again improve, projects should have a positive NPV again and activity levels and production should grow.
WHAT ARE THE OPERATING PRESSURES?
Everyone must adjust their sails when the wind changes; stricter project and activity prioritization, cut-backs in CAPEX, cutbacks in exploration, delays of development projects, re-negotiation of contracts, reduced travel, reduced R&D levels, reduced training, reduced attendance at SPE meetings, staff reduction, reduced hiring of new graduates and reduced summer intern position offerings. He quickly added: “I must say that not attending SPE meetings is wrong. Where are all the good ideas for beating the low oil price? Where great people in the business meet and share experiences and ideas – at SPE meetings.”
IOCS AND SERVICE COMPANIES
Looking at the difficulties for operating companies and oil service sector companies, Haldorsen said, the key for these two critical species in the E&P ecosystem is to collaborate and co-evolve, to become better together. His recommendation for operating companies is that they should X-ray themselves to separate unnecessary costs from nice to do HQ activities and then focus on simplification, standardization and improving the supply chain. Then they should introduce incremental and radical improvements in everything they do, as frequently as possible. Their obsession should be with value creation and earnings per barrel, he said. Finally, since everything operators do they do in collaboration with suppliers, contractors and vendors, collaboration 2.0 with these business partners should be sought to eliminate wasteful processes, over-design, gold-plating, etc.. to achieve lower cost, improved deliveries and more value creation.
Asked what would be the best response to the current low oil price situation, Haldorsen said he believes the best companies navigate success in a disciplined manner and maintain a strong financial position to stay resilient. This means that they can handle an oil price downturn through increasingly stricter project and activity prioritization and delays-by-design. These will match the lower investment capacity resulting from their reduced cashflow. Delayed projects often are those with the highest break-evens and they are usually sent back to the drawing board for optimization and incremental and radical improvements, or the company may try to divest them.
Looking forward, Haldorsen identified deep-water oil production as meeting an increasing proportion of global oil demand. Brazil, West Africa, East Africa, the Gulf of Mexico (US and Mexico), Europe and the Arctic will ramp up. However, he noted that deep-water developments do however have a DNA that can be troublesome, in a low oil price scenario, if a company has all their eggs in this particular basket. The lead-time between discovery and first oil can be as much as 8-10 years. In deep water, you can invest $10 billion before the first drop of oil and income shows up on deck. Then he considered onshore oil, which he said was more flexible because a company can vary the number of rigs operating in response to fluctuating oil prices. If the new normal for oil prices is rapid ups and downs, companies may be drawn in the direction of assets with capex flexibility, rather than to assets with long lead times, he concluded.
Haldorsen agreed that as a result of the oil price situation a huge number of changes would be introduced to improve the industry’s cost base. “Incremental technology, business model, collaboration, improvements in everything we do in E&P. He continued: “Radical technology and business model improvements will be less frequent, but may include technology inflection points due to automated drilling, the internet of everything and big data, sub-sea factory, sub-sea compression, hydraulic fracturing without using water – possibly using CO2 instead — more unbelievable wells offshore, for example 10,000 ft long, fractured every 500 ft. We will be taking the un- in unconventional offshore.
Written by Eloise Logan