The global oil market is so different today as compared to what it was three years ago that it’s borderline unrecognizable. These changes are being hammered out in a battle between petrostate producers on the one side pushing for a rebalancing of supply and demand by cutting their own output, and a group of upstarts on the other, led by U.S. shale companies, that want to fight to bring the costs of production down permanently from their previously high ($100+ per barrel) levels. No one is more qualified to put this in its proper context than the famed oil historian Daniel Yergin, and in a recent piece for theWSJ he traces what he calls a “cost recalibration” that’s affecting producers not only in America’s shale formations, but outside of the United States as well. He writes for the WSJ:
This cost recalibration is happening everywhere, as a new analysis by IHS Markit shows. Canada’s oil sands have always been among the highest-cost, yet some new projects can produce near $50 a barrel. In Russia, costs have come down more than 50%. Even deep waters offshore can now produce at less than $50. In March the CEO of the Norwegian company Statoil told the CERAWeek conference that owing to a wholesale redesign, a project in the North Sea that had originally required $75 a barrel to be economical now needs just $27 a barrel. […]
famed oil historian Daniel Yergin
As oil producers get back to business all over the world, some of the big cost savings will be given back, which will support rebalancing—so oil prices will rise. But the entire business has been recalibrated to a lower price level. An industry that had become accustomed a few years ago to $100 oil now regards that as an aberration that will not recur absent an international crisis or a major disruption. The lessons about costs since the price collapse are not going to go away. They are too powerful to forget, and too painful.
From Yergin’s expert point of view, the days of $100 oil are behind us, barring some unforeseen catastrophe. That is a major shift not only for the oil market, but also for how we think of energy in the 21st century. While not entirely diminished, fears of scarcity are being replaced by concerns over downstream bottlenecks and how best to handle this newfound abundance of hydrocarbons. These are, as they say, good problems to have.
There’s another thought here: one of the big drivers in the falling costs of oil production is the use of information technology at all levels of the production process—from looking for likely places to drill to the design of rigs and all through the pumping and refining process. These enhanced efficiencies are likely to continue as the full impact of IT is only beginning to be felt.
It’s hard to exaggerate just how striking this is. The oil industry is more than 150 years old, and oil ‘should’ be getting more expensive to find and to pump, not less. The most obvious oil fields should have been found first, and the most promising wells dug long ago. We should now be living in a world of diminishing returns, with more and more money chasing less and less oil. It was this prospect that led so many doom and gloom thinkers in the 20th century to agonize over ideas like “peak oil”.
All that may happen some day, but apparently not soon. The information revolution is so powerful that it can reverse what would otherwise be the natural tendency of the oil market.
But this points to two even bigger stories. One is that the same forces that are making oil and gas so much cheaper and easier to find and extract will also be affecting other commodities. We can expect mining to become more efficient as well, and in fact there’s already evidence of that happening.
And there’s more. One of the big mysteries of the information revolution is the question of productivity. We keep using all this tech that clearly lets us do more with less, but instead of galloping higher, productivity levels have stagnated. What’s going on?
It’s possible that the productivity increases are appearing as lower prices rather than as higher incomes. If the price of oil falls from $100 per barrel to $50 per barrel due to increasingly cheap and efficient methods of production, then everybody in the industry is more productive in terms of barrels of oil per hour of work, but since the oil price has gone down, that productivity increase won’t be captured by statistical methods that calculate productivity in terms of money.
And that is just part of the larger story: that the extraordinarily deep and sustained collapse in the price of information is disguising the enormous increase in the productivity of everyone who works with the defining product of our time. Journalists, to take one (for the staff here at TAI) depressing example, are producing much more “information” than ever before. Armed with the internet, the TAIwriters can cover a range of subjects with a wealth of detail on a daily basis in a way that a much larger staff simply could not have matched 20 years ago.
On the other hand, the very explosion in the productivity of writers generally has meant a rapid collapse in advertising revenue. Measured in units of information processed and produced, the TAIstaff is much more productive than past generations of journalists; but the very abundance of supply caused by the productivity of the sector leads to a crash in values that, again, makes the productivity revolution invisible to methods of measurement that look solely to revenue per work hour.
At the same time, the collapse in the cost of information helps disguise the enormous increase in living standards for most people. Anybody connected to the internet and using a smartphone today devours quantities of information today that medium sized companies could not produce in the 1970s. The African villager with a solar powered smartphone has more access to more information than Louis XIV in the halls of Versailles.
But since the cost of this product is falling so quickly, the rise in living standards we are living through isn’t measured.
Just as the industrial revolution forced economists and businesses to find new ways to measure output, the information revolution is likely to lead to revolutions in the way we measure economic performance in the 21st century.
As a mix of traditional heavyweights and start-ups fight to keep Norway’s offshore industry afloat, collectively they assess Swedbank’s chief economist, Harald Andreassen, isn’t “too hopeful” about the long-term prospects for the oil price, but then again, “I’m less certain of this than I’ve ever been as an economist,” he told a floating production conference in Oslo. After two-and-half years of oil-price collapse followed by layoffs in the thousands; stacked oil rigs and order freezes for offshore shipping, price insecurity itself is a partial expression of confidence.
Beneath some palpable yet halting movements toward recovery in 2017, there’s 2016’s rigorous cost-cutting by, among others, Statoil and its subsea supply chain. Lower oilfield cost estimates have been proclaimed (and engineered), and this has fed assertions that pricy technology and extra engineering drove costs until operators backed out of “decision gate.” Andreassen says he doesn’t blame the technology companies. “It was the (oil) demand destruction when oil prices were high” that gutted the oil price and stacked rigs. After seeing companies operate “in debt hell” with inflation pinching, Andreassen now sees “the comeback from hell.”
“If you’ve survived this far, then you’ll come back next year.” He then offered a long-term, ballpark “balance price” for oil at about $60.
That’s twice what oil was in January 2016 and enough for just about everyone. Rystad Energy partner, Lars Eirik Nikolaison, said that when he headed up the number-crunching firm’s New York office (until very recently), he heard the repeated refrain that shale’s $35 breakeven oil price so outpaced deep-water oil and gas, that people kept saying, “Will offshore even be part of the future mix?”
Deepwater’s assumed breakeven of $65 made Norwegians ask, “Have we been priced out of the equation?” Nikolaison says he’s had to tell people that up until 2016, “Shale producers had only been drilling their best wells and spreads,” and that has been shale’s early price advantage. “We’re seeing that the shale costs base increases over the next few years,” although, “As (the industry) recovers, prices will inflate.” Mergers between “SURFS and SPSs” — or subsea service companies and subsea vendors —have eliminated “PLEMS and PLETS,” those costly pipeline end points. Nikolaison has seen that the deepwater costs-curve was down 15% between third-quarter 2016 and Q1 2017. (North Sea rim) offshore projects are now competitive at about $57 oil. At that price, “There are lots of breakeven tiebacks in the North Sea.”
Near Oslo, a handful of offshore start-ups entered the fray just as the still-painful downturn was at its gloomiest. Part of an incubating program called Techmakers, these start-ups are being carefully watched by operators Statoil and Lundin as well as supplier-contractors Aker, Kongsberg, TechnipFMC and Aramco Energy Ventures.
New rig entity Borr Drilling — formed by Tor Olav Troim, a former business associate of ship and rig mogul, billionaire John Fredriksen — is extra bullish on Onshore. Borr will pay $1.35 billion to buy Transocean’s 15 jack-up rigs, including associated debt, five newbuilds and their drilling order book. The new company will own 17 rigs. Earlier in 2016, Borr agreed to buy two Hercules Offshore jack-ups.
The Petoro document that confirms there’s been lots of drilling off Norway lately also adds that much of it has been and will be from oil platforms. Fixed installations are fine for newbie Well Genetics’ DNA-based tracer technology to help oil companies better track reservoirs for increased oil recovery and lower costs. Many oil companies have already reportedly signed with Well Genetics. Many are also cheering the use Big Data monitoring to save cash. After so much automation and “smart fields” digitization, conditions are right for condition-based riser monitoring: enter Vinterfjord, the start-up baby an industry veteran.
Riser installations and maintenance are set to continue apace in Norway, with pipelines — what risers connect to — the only type of investment that did not dip in 2017 over the previous year. Overall, the industry surveys of Statistics Norway put oilfield investments for 2017 at $21.8 billion, 13 percent less than in 2016 on cancelled exploration wells but less a dip than expected. The numbers are seldom weighted against the boomtime 70 percent hike in investments off Norway between 2010 to 2014. Still, spending fell off 27 percent between 2014 and 2016 and we’re on course for 13 percent less in 2017.
Massive Spend
The big dip between 2015 and now was mostly operator cost-cutting. Today, Statoil’s travelling presenters report the average breakeven oil price for its projects has dropped from $70 to below $30, helped by the roughly $20 oil-price breakeven made possible by economies of scale at the giant Johan Sverdrup field, where the first subsea infrastructure, a water-injection template, has just been installed, the first of many. Supplier fortunes are expected to rise in capital-intensive Norway on coming investments in the arctic floating producer, Johan Castberg; the heavily subsea Snorre Expansion project; another gas train at the arctic Snøhvit field and the Troll Phase 3, Part 1 of subsea frames and pipelines.
To help an operator like Statoil gain full oversight of all those projects, new outfit Avito Loops has an integrated cloud solution that lays it all out in plain, detailed view: projects, portfolios, campaigns, business.
Avito shows “your current state” and “your desired state” … A bit like Google Maps, it says, by showing where you are and where you need to go. For aging installations in mature areas, Western Norway newbie, Connector Subsea Solutions, has developed a technique to remotely do pipe repairs in deep water, and contracts with BP and Shell are already bringing in some earnings. While clamping a repair on a horizontal pipe is hard enough, Connector, or CSS, has managed to get its tool to remove the coatings of and then repair a vertical pipe, or riser.
“We’re bullish on offshore,” affirms Rystad’s Nikolaison, emphasizing that, “That’s different than “Goldman. Deepwater, he notes, will see the benefits of the supply chain’s efficiency work to date. There’ll be a rising number of investment decisions by year-end 2017 and rig rates will rise.
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