The last year has seen significant transformations for the global oil and gas industry, and we are expecting 2019 to herald even more transformative changes. The oil and gas industry has weathered the crash in oil prices since 2014/15 thanks to a variety of factors including improved break-even points, the utilisation of technology to reduce production costs, and the continued growth in global demand for energy.
2019 looks set to be an even more positive year than last, but what are the key oil and gas industry trends to watch?
U.S. shale versus OPEC
For decades OPEC has been the determining factor in oil prices. As the swing producer, and largest source of conventional petroleum reserves, the nations of OPEC could adjust production to balance the market in case of abrupt supply or demand changes.
The arrival of the U.S. shale industry has added an interesting new dynamic to this situation.
Whilst OPEC is still able to withdraw millions of barrels from the market within only a few months, U.S. shale offers a medium-term oil supply balancing mechanism which is able to respond quickly to changes in supply and demand and thus offer a counterbalance to OPEC.
As one industry commentator puts it, “It is clear that U.S. shale oil production is the most responsive free market oil to changes in oil prices”.
Production from the U.S. shale industry continues to grow too. According to the U.S. Energy Information Administration (EIA) in December 2014 U.S. shale oil production stood at 5.23m barrels per day. By December 2018 this production figure had risen to over 8m barrels per day (to put this into context, estimated global daily demand for oil was 99.3 million barrels in 2018).
Last year also saw the majors rushing to either get back into, or grow their presence in, shale. BP, ExxonMobil and Chevron are amongst those that are rushing into the shale industry. For example, Chevron has announced plans to invest $3.6 billion in the Permian and $1.6 billion in other shale and tight oil plays throughout 2019.
As a caveat however, it’s important to note that U.S. shale oil production is expected to plateau in the 9-10m barrels per day range in the early 2020s. Other industry analysts have also pointed out the extremely high depletion rates associated with shale production, especially in comparison to conventional sources. If depletion rates continue to be as high throughout 2019, then this will have a negative impact upon the contribution of U.S. shale to the overall net growth of U.S. supply.
Energy consultant Art Berman has also pointed out the difficulty that many U.S. shale producers are experiencing in making their operations profitable. As he recently stated, “U.S. tight oil lost money in the 3rd quarter of 2018. Capital expenses have exceeded cash from operations in almost every quarter for the last decade”. Indeed, as a report from PWC highlights, “U.S. tight oil operators are under mounting pressure from investors to shift from an all-out production growth model to more profitable operations”.
Whilst it seems highly unlikely that the U.S. shale industry will be able to break OPEC’s dominance over global oil prices, it has reinvigorated the US energy industry and has become an important consideration when it comes to the geopolitics of oil prices. It’s certainly an industry to watch during 2019.
The growth of natural gas production
Cast your eyes over BP’s recent Global Energy Outlook 2018 and you’ll see an interesting point emerge; that global demand for natural gas is expected to grow strongly and overtake coal as the second largest source of energy.
Increasing levels of industrialisation and power demand in Asia and Africa, continued coal-to-gas switching (especially in China) and the increasing availability of low-cost supplies from North America, Australia and the Middle East, mean natural gas is set to have a positive 2019.
A major source of growth for the natural gas market in 2019 is expected to come from exports. In 2017, the U.S. became a net exporter of natural gas and over the next decade will surpass every other nation to become the world’s largest natural gas producer.
The growth in natural gas production is also having a material impact upon the petrochemical and chemicals sector, both in the United States and elsewhere. The significant ethane surpluses being generated from the Marcellus and Permian Basins (amongst others) is producing large volumes of low-cost feedstock for refineries and plants across the U.S. Gulf Coast region. 2018 saw new developments being sanctioned and foreign companies eyeing facilities in the U.S. thanks to the abundance of low-cost natural gas. Expect this trend to continue through 2019.
Growing natural gas production will also lead to growth in LNG projects, which brings us onto our next trend to watch in 2019…
Liquefied Natural Gas (LNG) as an export commodity
There are several very large LNG projects expected to receive FID in 2019. The U.S. and Canada have several large-scale projects that are either in the process of being commissioned or in the early stages of operation such as the $40 billion Canada LNG project, the $10 billion Jordan Cove LNG project in Oregon, and the $30 billion Driftwood LNG project in Louisiana. Thanks to these projects and others, U.S. LNG export capacity is set to double by the end of 2019.
Elsewhere in the world, Africa has two LNG projects worth watching in 2019 including the $20 billion Mozambique LNG project, and the Fortuna LNG project situated offshore Equatorial Guinea. Russia is also securing its future as a gas-exporting giant with the development of the massive $25.5 billion Arctic LNG 2 project which is situated close to the currently operational Yamal LNG project.
Whilst most of the LNG projects outlined above encompass land-based terminals, 2019 is also expected to see the emergence of other types of LNG projects such as floating storage and regasification (FSRU) facilities and Floating Liquefied Natural Gas (FLNG) operations.
This growth in LNG supply is matched by growing demand- especially amongst the emerging markets of Asia. Consider the following- total Asia-Pacific LNG demand is set to grow a further 60percent to reach 337 mmtpa by 2030. Compare this to the fact that the rest of the global market is only 75 mmtpa currently.
Demand is also increasing from so-called second tier markets; those with intermittent or limited year-round demand. It’s markets such as these that will most likely utilise FRSU facilities to the fullest extent. An analysis of the LNG market by Deloitte also points out that LNG growth in 2019 will also come from an increase in short-haul trading within regions such as the Middle East, Southeast Asia, and the Caribbean.
With all this activity throughout 2019, the LNG market will surely be a strong source of engineering and technical jobs across the world.
Deepwater Exploration & Production makes a comeback
After years of limited deepwater exploration and production activity, 2019 is likely to see a resurgence for this part of the global oil and gas industry.
Just prior to the oil price crash in 2014, oil majors were investing over $300 billion into deepwater projects. Since then, investment in these projects has collapsed, reaching a low of $155 billion last year. However, a more optimistic view of the future has returned to the industry, and investment in deepwater projects is set to climb again. Rystad Energy estimate that from 2019 through to 2022 investments will break the $230 billion per year mark.
The relative recovery in oil prices, improved break-even prices and the opening up of new leases offshore the Gulf of Mexico, West Africa and other global locations have once again made capital-intensive deepwater projects an attractive proposition to the majors. In the immediate future we’ll see projects such as Mad Dog Phase 2, ACG, Tortue and Bonga Southwest grow in prominence.
On the production side, global deepwater production remained strong even through the downturn. Total production has been increasing since 2013, with Rystad Energy estimating a continuation in this growth until a peak in 2020. Much of this strong production performance is due to projects that were sanctioned before the price collapse, coming online during the downturn.
A key trend to note within the wider trend of renewed deepwater exploration and production activity, is that projects have become cheaper, simpler and often smaller than those sanctioned pre-crash. In addition, projects are making more use of existing infrastructure, renegotiating terms with contractors and using new technologies to drive efficiencies and improve production volumes and rates.
With U.S. shale production expected to plateau in the early 2020s, deepwater offshore projects will become more viable still, as supply struggles to meet demand. It’s a situation neatly summed up by Patrick Schorn, a senior executive at Schlumberger: “Looking at the longer-term supply-demand, there is a certain amount of (deepwater) assets that will have to be developed. We are going to go back… to deepwater activity”.