December 2015 /// Vol 236 No. 12

Industry leaders outlook 2016

There is nothing like a good crisis!

The oil and gas industry faces yet another crisis. Employees fear losing their jobs, the future is insecure, and we struggle to keep up morale.

Svein Tollefsen, Statoil ASA

The oil and gas industry faces yet another crisis. Employees fear losing their jobs, the future is insecure, and we struggle to keep up morale. But don’t despair, because, as with other crises, our industry also will survive this time, and we will come out of it with strength and determination to succeed. This is when we carve out the steps to consolidate our business and strengthen our platform to create value, all while entering a new, demanding future. We need to step up to the challenge and deliver!

The industry’s self-amplifying and unpredictable volatility has demonstrated its true nature once again. During the last year, more than 25,000 jobs vanished in Norway, alone, and another 10,000 are forecast to be lost next year. Unemployment rates are escalating, the daily headlines about new mass layoffs in the local newspapers keep on coming, and the growing problem is already being addressed on national political levels.

So why is this happening now? To be precise, it really started to evolve, back on the aftermath of the previous financial crisis, when our industry saw historically high cost levels. It subsequently accelerated, fueled by the dramatic drop in oil price over the last couple of years.

Previously, operating companies, as well as their investors, focused heavily on long-term reserves and value growth over short-term and steady income. New development projects sanctioned at near US$100/bbl, break-even, were not uncommon. But at that point, many people were scared off, and investor focus shifted toward steady, secure returns on investments instead (dividends). Hence, operating companies changed from an asset- and volume-driven strategy to one focusing more on short-term value creation with reduced CAPEX, OPEX and risk.

Suddenly, it was not the net present value that dominated decision-making in the boardrooms, but rather break-even cost and capital constraints. This, in turn, sparked a shift from (costly) optimal technical solutions toward leaner fixes, inevitably reducing costs. Many new projects at high break-even cost and risk are being postponed, or even scrapped. Thus, the operators—and particularly the service industry at large, feeding on assignments from operating companies—now experience a major drop in activity levels, resulting in frequent manpower reductions and layoffs. This bears the signs of an inevitable market correction, which had to come—we simply could not continue the breakneck pace.

So, to solve the problem, the industry cries out, yet again, for a need to cut costs and improve performance, to work better and smarter. You may have heard it all before, but there is actually something about this time that makes it a bit different. There is a growing realization that we cannot continue on the same course forever; it simply will not be sustainable in the long run.

The time has come to look ahead, to turn a time of crisis, and grasp the business opportunities that are contained in the solutions for worldwide, sustainable energy supplies into the future. As the current Statoil CEO once wisely put it, “We are a part of the problem, therefore we must be a part of the solution.” In this context, the current crisis is really no more than a small, but tough and necessary step toward the future. It is about having two thoughts in our mind at the same time.

Statoil recently introduced its new long-term vision, which is built on three vital elements for success: 1) Staying competitive at all times; 2) Transforming the oil and gas industry; and 3) Providing energy for a low-carbon future.

Oil and gas, more than many other comparable industry segments, operate in cycles, with frequent, large amplitude peaks and valleys continuing to replace each other in more-or-less consistent patterns. Hence, to stay competitive at all times, a strict and permanent capital discipline, in both recessionary and boom times, is fundamental for success. Simultaneously, it will still be important to invest in, breed, and harvest from, new business opportunities, but more selectively than before, prioritizing early and steady cash flow over higher-risk or capital-intensive projects. This could cause us to lose some attractive opportunities, particularly when we have more capital to spend, essentially accepting not to maximize production or profits at all times.

Is this a sacrifice we are prepared to make? If so, it represents a fundamental change in mindset and attitude for sure. It is a bold step with a long-term vision, transforming our industry into something more solid and predictable.

In response to the low-carbon future scenario, Statoil has established a new business area for New Energy Solutions, which will work to establish a fully profitable business for worldwide, sustainable energy supplies. This will capitalize on the technology competence and experience that the company has accumulated during decades of offshore development and production operations. This business area will expand over time, gradually replacing the profitable, carbon-based energy sources, as they run out.

Eventually, our industry will face even-higher emission fees and stricter rules and regulations that reduce profitability, recoverable reserves and production lifetimes, and a response will be required. Therefore, energy solutions for the next generations are born now. wo-box_blue.gif

The Authors ///

Svein Tollefsen holds an M.Eng. honors degree in petroleum engineering from the Royal School of Mines at Imperial College of Science Technology and Medicine in London. Mr. Tollefsen is a reservoir technology manager with Statoil ASA, and has previous experience in a wide range of reservoir and production engineering-related disciplines. Over the past decade, he has held numerous management positions with Statoil in many different countries.

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