Brad Baker reflects on the state of the oil and gas industry, and what may lie ahead in 2019.
Over the past 12 months, the oil and gas industry has been undergoing intense realignment. Rather than continue to endure the often-fraught cyclical highs and lows, we have seen it gradually evolve into a nimbler, more innovative sector with plenty of upside potential. This transition, its hoped, will continue into 2019 and beyond.
We have already seen the rate of redundancies slow, though more are expected in the service sector in the year ahead. The oil price index too has remained relatively flat, with an average of around US$65 bbl in 2018. Operators are also starting to hold back on capital spending to allow new technologies and ideas into the market through the service industry. In addition, we have seen supply closely shadow demand and this is expected to normalise in 2019. Despite the occasional macro-political hiccup, this has allowed for relative stability within the market.
However, like the temperature, over the past three months we have seen a dramatic plunge in the oil price index. So much so, it has left many asking if the industry has suffered from a slight touch of winter flu, or, as others perceive, the start of a life-threatening illness.
A return to stability?
First, let’s get a little perspective. Without citing a lot of charts, energy reports and analysts that are way smarter than I am, it is generally accepted there is well over 150 years of known reserves left at current demand. While this means no ‘peak oil’ in this or your great grandchildren’s lifetime, experts predict fossil fuels will provide at least half of the world’s energy needs up to 2050. This will take at least US$300-400 billion of annual investment in the upstream industry to replace the accelerated decline curves and recover those reserves to keep up with that supply. No need to panic. Right?
Supply in 2018 has again been strong but as we look ahead to the new year, there is an excess to demand that is becoming a little worrisome. This is further compounded by a fluctuating global economy and uncertain political landscape. A simple fact is that we are a more stable industry when supply and demand track closely together and all producers in the industry practice and promote oil diplomacy.
We have seen the industry easily replace the feared lost barrels from Venezuela, Libya, Iran and others, which has been primarily led by an astonishing rise in output from the US unconventional market. No matter how painful the journey, one thing for sure is that supply will eventually march in step with demand.
The current transportation bottlenecks in the Permian will cool off supply and, if the rest of the world does not over produce, this should allow some stability after a sloppy and noisy first quarter in 2019. However, as the blockage eases, the latter half of 2019 could be a bit bumpy for the drilling and production sector in the North American market. The North Sea must therefore, figure out how to operate more economically. The UK sector must continue its shift to rely on independent producers and the local service sector to bring more innovative and economical solutions to the fore.
I believe the Norwegian sector, although expensive to operate in, will push through with a stable year in 2019. However, like all regions, it should strive to create an environment that allows the service sector to innovate rather than constantly come up against price pressures that create the opposite behaviour. Russia, primarily driven by the Caspian, the Middle East and Far East, should be active, and these regions will have a consistent 2019. That, as always, is dependent on the impact of any major macro-political interference. The region’s ability to practice supply restraint will be critical.
From recovery to rejuvenation
I believe the industry has learned how to be nimbler, more efficient and most importantly, how to react rationally to global supply and demand worries. We should expect a more disciplined approach in 2019 as we deal with these headwinds. OPEC and Russia have already signalled a move to stabilise supply over the next 12 months.
Although global oil and gas regions have different, and sometimes competing, drivers and political realities, one thing is constant; they all have ambitions to optimise the reservoir recovery factor. This relates to the percentage of recovered hydrocarbon of the oil initially in place (OOIP).
Opportunities should arise for the operator community to again fuel innovation breakthroughs via the oilfield service sector. Over the past ten years, the focus has been on maximising recovery factors for the most efficient dollar spent. Currently, reservoir recovery factors still hover from 5% to 35% on average.
If supply and demand is held in check and we do have more than 150 years of known reserves, why is reservoir recovery even a concern? As fields mature and all the ‘easy oil’ is accessed, we need to replace much sharper reserve declines to keep supply online. This will have to be driven by accelerating technology advances towards better recovery factors and more efficient wells. Such expertise almost always comes from the oilfield service sector but this demands headroom and investment from the operating community to turn innovation into meaningful action in 2019.
A new breed of mid-tier upstream service companies, coupled with willing operators, can create innovation around maximising reservoir recovery factors. This is what must happen to ensure energy efficiency, a buffer to geopolitical supply and demand cycles, and security for the globe.
The industry as a whole must continue to support and encourage that focus as it is one of the single most important factors that will allow us to provide affordable, abundant energy to the developing planet well into the projected shift to alternatives in the centuries ahead.
Read the article online at: https://www.oilfieldtechnology.com/special-reports/17122018/tendeka-revitalising-reservoir-recovery-factors-in-2019/