What are the causes of the increased confidence in the oil and gas sector?
Confidence is high is the oil and gas sector. Stocks are on track to show the best performance since 2011. Recently US crude oil hit a 3-year high. Production is up, 22% according to the SPDR, and areas of underperformance have been highlighted and addressed. This has resulted in the revival of $110 billion in oil and gas sector projects since early 2017.
At times of prosperity it is always important to reflect on why confidence has risen, and performance improved. It is especially important to consider improvements in the US in particular where the Texas oil fields have struggled to get enough oil to market and are being outperformed by other areas of the US marketplace.
Higher prices, higher demand
Alternative energy sources continue to struggle to fulfil its promise to the energy market. There is a growing realisation that there is still a high demand for oil and gas supplies, despite a consistent pressure exerted by environmental groups. The problems of the Texan oil fields are about fulfilling the necessary demand – and so the prices are cut drastically. Where there is higher performance capacity there are higher prices and greater success. Analysis would suggest that trends demonstrate there is a continued market for supplies and has pushed confidence to invest and develop infrastructure.
For the last 18 months there have been 17 deep-water projects approved, which had originally been placed on hold due to the crash in oil price. Therefore, it is not just a matter of demand driving investment but also an increase in the world oil price.
Oil is confident… but what about gas?
The level of investment in liquified natural gas is not at the same level of its oil counterparts. The number of approvals for projects have lagged. The reason for this delay is explained by the trend for gas prices to trail oil prices by about 6 months. Experts point to the increasingly carbon conscious world. However, if this is not impacting oil production – why is it causing gas to struggle? In truth, it is likely that most projects in planning will be approved before the end of the decade. Therefore, it is only a relative lack of confidence, in relation to oil, rather than a dire concern for gas sector professionals.
Price drops and savings
One of the major reasons for confidence maybe due to enforced rationalisation required by the gas and oil sector. When prices crashed companies had to look for ways to save money and make money work smarter. Wood, a group working out of Aberdeen and with contracts in the Asia Pacific, claim that they have made $20m of cost synergies, which will rise to $50m by the end of the year and $170m after three years.
There have also been notable drops in costs in decommissioning. A recently published UK study claims that the decommissioning bill for the UK continental shelf has decreased by £4 billion. The writers of the report claim this shows that the oil and gas sector have responded well to demands from the government to improve efficiency.
As always, there are a range of factors that have led to an increase in confidence in the oil and gas sector. The ability of the eco-energies to provide enough power to meet demand is under scrutiny. Therefore, the oil and gas companies are benefiting from an increase in demand and from this an increase in price. At the same time money-saving initiatives are bearing fruit and encouraging further investment and therefore a further sense of forward momentum. Once investment projects are approved then the confidence in the sector is self-nourishing and therefore promises to continue into the future.
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