Upstream uncertainty tempers otherwise upbeat outlook, Deloitte survey says

10/30/2018

HOUSTON -- Oil, gas and chemicals executives see higher oil and natural gas prices on the horizon, but new findings from Deloitte’s “2018 Oil, Gas and Chemicals Executive” survey reveals that the industry has varying expectations for what the anticipated price recovery will bring.

In contrast to last year’s survey, optimism appears to be growing in the return of a more favorable business environment. The rise in commodity prices, along with a stronger economic context, has spurred confidence – but the benefits of a further price recovery are not anticipated to be homogenous for the industry, the survey notes. Segments less impacted by the downturn, including downstream and chemicals, have reportedly been able to continue to invest for growth and could realize advantages more quickly, while upstream and midstream noted they must first finish working through their recovery strategies.

“The industry seems much better off than a year ago,” said John England, partner, oil, gas and chemicals, Deloitte & Touche LLP. “Positive sentiments have emerged from all sectors, but the real bright spot is in the downstream and chemical sectors. Most upstream executives surveyed see better days ahead, but are managing more with caution as they work through growing pipeline constraints, mounting geopolitical tensions and rising oil prices that could also push up costs. With growth and recovery top of mind, digital technologies could become critically important for productivity and profitability and should serve as a lever to help mitigate rising costs brought about by rising oil prices.”

Key survey findings include:

  • A majority (72%) of respondents expect West Texas Intermediate (WTI) crude to average $70 or more per barrel in 2020. Even more bullish and in sharp contrast to last year’s findings, 41% of the respondents expect WTI prices to average $80 or more per barrel in 2020, up from only 5% from the prior year.
  • Notably, 2020 could be the year the lid is lifted on prices for Henry Hub natural gas. More than half (54%) expect Henry Hub natural gas will average $3.50 or more per million British thermal units (MMbtu) with a majority of those (35%) expecting $4 or more per MMbtu.
  • More than half of executives surveyed from each of the four sectors – upstream, midstream, downstream and chemicals – expect to increase capital expenditures in the coming year. Downstream and chemicals sectors see the highest confidence in capital spend with 64% and 67% of those respondents respectively, expecting an increase in capital.
  • For upstream companies, digital solutions are now seen equally impactful at improving cost structures as increasing well productivity.

Upstream: Sentiment split while sector works through its recovery

Mixed messages are showing up in the survey upstream 2018 – 2019 priority list, evidence that the sector is split between focusing on growth, maintaining the status quo and streamlining the business. Regardless of strategy, the shared challenge is to manage short-to-medium term costs and efficiencies, if indeed, commodity prices and activity levels rise.

  • About half of respondents expect spend, rig deployment or headcount to rise.
  • Maintaining or increasing production is the top priority (39%), followed by reducing or streamlining general and administrative costs (30%), making divestitures (29%) and reducing capital expenditures (29%).
  • Most respondents (62%) believe 20% to 60% of realized cost reductions are short-term or cyclical.

“Despite the price recovery, surveyed upstream executives seem to have been so battered by the downturn that they are a bit skittish about embracing a positive outlook,” explained Andrew Slaughter, executive director, Deloitte Center for Energy Solutions, Deloitte Services LP. “Companies have come a long way in streamlining operations and repositioning portfolios, but they still have much more to do to recover. Added risks are uncertainty around the economy, trade and rising interest rates, which have a greater impact on upstream more than other sectors.”

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