Industry confidence globally has increased much faster than the oil price, as two-thirds of senior professionals globally plan to maintain or increase capital spending in 2018. 36% expect to increase investment in R&D and innovation – the highest level recorded in four years.
In the Middle East and North Africa (MENA), optimism has recovered to levels above global expectations. Efficiency remains a priority, however, as more than half (51%) of professionals in the region forecast increased cost control, according to DNV GL’s eighth global oil and gas industry outlook report.
After three years of stringent cost cutting, workforce redundancies and an overhaul of business models, a fresh sense of optimism has emerged across the global oil and gas industry.
In the Middle East and North Africa (MENA), renewed confidence is significantly higher than global expectations. In particular, 80% compared to 66% globally, are feeling positive about the prospects for their organisation in the year ahead, compared to last year’s figures of 49% and 43% respectively.
According to research by sector technical advisors DNV GL, business leaders expect a step change in the industry’s capex, opex, headcount and R&D spending levels. Though the report signifies pronounced positivity for 2018, tough lessons learned from the downturn are still very firmly front of mind.
Upbeat intentions
The study – Confidence and Control: the outlook for the oil and gas industry in 2018 – reports a surge in respondents’ confidence about their own organisations’ prospects for reaching revenue and profit targets in the year ahead. Rising confidence is also evident regionally. Europe has the most improved outlook for the oil and gas sector (up from 25% last year to 64%), with Latin America at 77% (46% in 2017) and Asia Pacific at 57% (30% in 2017), while the trend is less distinct in North America (up from 49% to 57%).
“The outlook for the oil and gas industry in MENA is one of confidence and control,” says Ben Oudman, DNV GL – Oil & Gas’ newly appointed regional manager for Continental Europe, Eurasia, Middle East, India and Africa.
He foresees huge potential for mid and downstream activities in the Middle East, adding: “Though the oil price is lower, it is at an acceptable level to run a profitable business, if spending is managed effectively and efficiently.”
In DNV GL’s recent Energy Transition Outlook report, the company forecast that conventional onshore oil will continue to provide the major and most stable share of oil production and will still account for more than 50% of the global figure by 2050. By this time, more than half of conventional oil production will come from the MENA region.
Oudman continues: “Our model assumes that regional supply increases are driven by large-scale, low-cost oil resources, especially in MENA, as producers respond to growing abundance by asserting competitive advantage. Our model forecasts that the region that will require the greatest capex and opex for conventional onshore production to meet predicted demand is MENA. This underlines the importance of the region in the future.”
Green shoots
In 2017, there were early signs in the Middle East of an increasing appetite for investment. Saudi Aramco, for example, approved plans to spend US$20bn building the world’s largest petrochemicals plant (and the first in Saudi Arabia).
Confidence and Control details how a significant proportion of the industry intends to increase investment – not only in its core business, but also in diversification opportunities, R&D, and digitalisation.
In an interview for the DNV GL research, Maria Moræus Hanssen, newly appointed CEO and chairman of the management board of DEA Deutsche Erdoel AG (DEA), an international exploration and production (E&P) company based in Hamburg, Germany, stated that “a combination of two things have brought confidence back to the industry”. She said: “The first, of course, is oil and gas prices. Short-term prices seem to drive a lot of sentiment about longer-term perspectives for the industry – it’s always been like that. And second, costs have come down, both running costs and investment costs.”
While the industry starts to raise its head and look beyond the consequences of the downturn, efficiency will remain a central priority to all decision-making, as half of professionals globally (50%) and in MENA (51%), forecast increased cost control. Amidst concerns of uneconomic oil and gas prices, the focus on tightening the purse strings in MENA has risen from 43% last year while it has remained relatively unchanged globally (51%).
Since the fall in oil price in 2014, increased scrutiny on spending and improved efficiencies appear to be shifting the mindset from one of expansion to margin control. The drive towards a leaner, smarter and more sustainable sector is raising expectations, not for a return to historical highs, but for success in an environment where the oil price is widely expected to stay lower for much longer.
Close to two-thirds globally (62%) believe that these are permanent changes, mirroring opinion from last year’s survey (63%). This may suggest that the industry is going through a sustainable period of change.
Nearly three quarters (73%) of senior industry professionals globally and in MENA say their organisation was somewhat or highly successful in achieving cost efficiency targets in 2017. Strict discipline is expected to remain.
Many industry leaders have shared this view in the report, including Thore Kristiansen, chief operating officer E&P, and executive director at Galp. “It seems to be that we are perhaps beyond the bottom of this cycle and that we are slowly heading up. But we are preparing for lower-for-longer prices. We do not believe that we will go up towards the past highs, but that we will stay at the levels around where we are currently for many years to come.”
While an uneconomic oil price is cited as the greatest barrier to growth in MENA for the year ahead, it has fallen significantly as a key concern from 66% in 2017 to 42%. Likewise, challenges relating to increased operating costs and a weak global economy are all expected to subside in the coming year.
Rejuvenating innovation
Anxiety around geographical instability in key markets, lack of investment in innovation, and a shortage of skills has escalated as a concern from last year in the MENA region and is on par with global opinion.
This may explain why more than a third (36%) of senior sector players expect to increase spending on R&D and innovation in 2018: the highest level recorded in four years. The shift in focus is higher and more pronounced in MENA than any other regions, up from 11% in 2017 to 42%. This suggests an imminent turnaround after three years of cuts and freezes.
Digitalisation (37%) and cyber security (36%) will form the principal areas of global R&D investment focus over the next 12 months.
“Industry leaders and technical experts questioned in our survey cite R&D as the main area for increased spending,” adds Oudman. “This is an area which has suffered the most in the past three years, so it is very encouraging to see a positive turnaround to allow those companies to realize improved profits and performance.”
Intentions to maintain or increase headcount in 2018 are also relatively strong in MENA and globally and have risen significantly since last year. Nearly two-thirds (62%) of global respondents – 66% in MENA – expect their organisation to sustain or strengthen the workforce: a substantial rise from 43% both globally and in MENA in 2017.
Capex and opex up
More than eight out of ten respondents questioned globally (84%) stated that they expect their business to increase capital expenditure in 2018, and are doing so following successful cost-cutting in 2017. This is the first increase in that measure in three years and a considerable jump from the 39% that intended the same for 2017. Capex increases are expected in all regions – particularly in MENA, where 38% expect an increase in 2018, compared to half that figure (17%) in 2017.
The areas of the industry most likely to increase capex are oil refining and gas processing, integrated companies, and E&P companies.
Eirik Wærness, senior vice president and chief economist at Statoil, states: “The ability of the industry to reduce costs and prepare for something that is different from the past – particularly what we got used to between 2011 and 2014 – is, in itself, a reason for some confidence.”
More than half (58%) of respondents globally expect to maintain or increase operating expenditure in 2018, up 17 percentage points from 41% last year. Notably, a higher proportion of industry leaders and technical experts in MENA (65%) have this intention, up 22 percentage points from 43% in 2017.
A more properous long haul
DNV GL’s latest industry outlook report shows that many companies in the oil and gas industry continue to expect significant challenges ahead. The difference for 2018 is that they appear to be better prepared for them.
“The need to manage technical, societal and business risk is more urgent than ever,” states Ben Oudman. “Intentions to increase capital and innovation spending in 2018 come alongside a clear signal that oil and gas industry costs will not return to pre-2014 norms. The need to invest in R&D is urgent for some parts of the sector and our research shows that industry leaders plainly see the need to maintain a tight control over costs to support the leaner, smarter projects and operations that will be necessary to maintain margins in the years ahead.”
