April 2016 /// Vol 237 No. 4)
Tailwinds and headwinds through 2020
While most 2016 industry forecasts are focused on short-term issues, such as plummeting oil and gas prices, large staff reductions and capital spending reductions, there are reasons to be optimistic when taking a more long-term view. Yes, this year is shaping up to be a very difficult one for the oil and gas industry. However, most executives have a positive outlook on the longer-term prospects for their companies and their industry segments. When you consider their expectations for the potential opportunities (tailwinds) and challenges (headwinds) through 2020, you can better understand their optimism.
In the recently conducted Oil & Gas Executive Outlook 2016, Reinsvold & Associates surveyed more than 250 senior executives from various sectors of the oil and gas industry to determine the trends, issues and challenges for 2016, as well as the next five years. These industry leaders gave us their expectations for company performance, industry segment performance and the macro business environment.
In the short term, this year is expected to be a repeat of the chaos that we saw in 2015. About 25% of the executives expect their industry segment to perform better in 2016, but 41% expect their segments to perform worse. Considering their respective industry segments, most of the executives anticipate capital spending and overall employment levels to be lower in 2016. Also, more than 78% of the executives feel that 2016 will be a year of increased M&A activity, something that never really materialized in 2015.
When considering their outlook through 2020, the majority of the executives have a very positive view of both their industry segment and their company’s performance. About 83% believe their industry segments will perform better over the next five years, as well as their own companies.
Beyond just asking the survey participants about company and segment performance, we asked them to weigh in on the most important drivers of tailwinds and headwinds for their segments over the next five years.
Major tailwinds. The top two drivers of long-term opportunity identified are macro-economic in nature: improving oil and gas prices, and global economic recovery. The next three most important opportunity drivers, in order of importance are: 1) new technology developments expected over the next five years; 2) lower costs; and 3) the increasing use of natural gas.
Digging deeper into the new technology opportunity, a follow-up question was asked to further explore which technology areas might have the most merit. The top most impactful technology development areas cited are: 1) improvements in hydraulic fracturing and completions; 2) increasing use of big data, the digital oil field or the Internet of Things; 3) improvements in drilling tools and systems; 4) improvements in EOR/remediation; 5) improvements in subsea systems; and 6) improved water management technologies. The first one, improvements in hydraulic fracturing and completions, garnered 35% of the responses.
Of those executives that see lower costs as a significant long-term tailwind, the supporting trends cited are: 1) improved operating efficiency; 2) reduced costs for purchased equipment and/or services; and 3) improved technology. When discussing the longer-term tailwind of increased use of natural gas over the coming years, the top supporting factor is the increased use of gas in power generation. LNG exports from the U.S. were cited as another factor leading to increased natural gas consumption.
Major headwinds. In addition to the long-term drivers of opportunity listed above, we asked the same group of executives about the long-term challenges, or headwinds, that their industry segments will face. Like the tailwind drivers of opportunity, the top two responses for headwinds are macro-economic: 1) global oversupply of oil and natural gas production; and 2) unfavorable prices for oil and/or natural gas. It is interesting to see that a top headwind and a top tailwind both mention prices. However, on the plus side, almost twice as many executives cited the positive driver of improving oil and gas prices (64%), as cited the negative driver of unfavorable prices for oil and/or natural gas (35%). One way to interpret this is to say that prices have more upside than downside, based on today’s prices, but how fast they will rise, and to what level, is still a concern shared by many executives.
The third-most significant headwind cited by the executives is increasing government regulation, restrictions and taxes. Further detail on the top government challenges revealed that the top concerns are: 1) increased restrictions by the EPA; 2) overall regulatory uncertainty; and 3) local bans on hydraulic fracturing. Over 36% of the executives cited increased restrictions by the EPA as the top issue.
The fourth major headwind identified is potential talent shortages through 2020. The top two talent sub-issues identified are: 1) retirement of key personnel (The Great Crew Change); and 2) industry attractiveness to new entrants (which was ranked sixth in last year’s study). Other long-term talent issues (in rank order) include lack of future leadership talent, lack of technical talent (ranked second in last year’s study), and employee retention.
In short, the longer-term outlook is very strong, with significant drivers of opportunity (tailwinds). While there are still significant short- and long-term challenges ahead, successful leaders will continue to focus on longer-term value creation, anticipating and acting upon the headwinds and tailwinds that will come their way. As the majority of the business leaders in our study are optimistic about the next five years, so am I.