DNV GL sees oil and gas investment rising

Ben Oudman, DNV GL - Oil & Gas regional manager for Continental Europe, Middle East, East Africa and India, speaks to Pipeline Magazine’s Nadia Saleem about key findings in its ninth global oil and gas industry outlook report

DNV GL, the technical advisor to the oil and gas industry, in February released the results of a survey which said that the majority of oil and gas professionals are expecting investments to rise this year as more projects are sanctioned to meet energy demand.

It surveyed 791 senior professionals from firms with annual revenue ranging from $500 million or less to those earning $5 billion and more.

• 70 per cent of respondents planned to maintain or increase capital spending in 2019, nearly double of the 39 per cent in 2017
• Digitalisation comfortably leads R&D priorities for the oil and gas industry in 2019, with 60 per cent of respondents expecting their organisation to increase spending in this area
• Top three priorities within the industry’s digitalisation agenda all relate to data sharing, integration, and access cloud-based applications, data platforms and data sharing between organisations
• MENA respondents also showed optimism about the oil and gas sector growth for this year, with 83 per cent optimistic for the year, compared to 63 per cent last year

Do you think the optimism and seeming resilience of the industry is matched by growing energy demand?

In the long-run, renewables will start to eat into the market share to pressure oil and gas. We see, in our energy outlook, that oil demand will peak in the 2020s and gas in the 2030s but we’re still good for the 2050s.

There are questions about demand but most operators see a substantial share in the medium to short- term in oil and gas – more so for gas than oil for the longer term. There is also more optimism due to more Final Investment Decisions (FIDs) happening more readily now than they were perhaps two years ago.

The survey showed that some of the cost cutting during the period of low oil price, may be returning to the industry. Can the industry afford to de-prioritise stringent cost-measures?

Cost cutting on the part of oil and gas companies has made them much more resilient to oil price fluctuations. As long as oil inventories are around the five-year average, they can have a healthy business, which has been evident by the recent financial results of the major companies.

So, healthy oil prices at five-year average and the cost cutting measures taken by the operators, means they have a very healthy business outlook.

Going forward, there will be more pressure on the supply chain as more FIDs take place. Because of all the cost cutting and downsizing that happened in the supply chain, they will face more pressure to deliver, which can also result in prices going back up.

The question is whether we will go through the peak cycle again whereby, heightened demand will drive up the cost or whether the oil and gas operators can maintain their rigid cost controls, despite their desire to move forward and do more investments.

That’s going to test the resilience on the operators and oil and gas majors side as well as the supply chain side- whether they are going to give their growth share or not.

If the supply chain does not see its margins increase, we will see further consolidation in the supply chain as a consequence.

What role will requirements of In-Country-Value play on supply chain margins in countries like the UAE and Saudi Arabia?

Middle East is heavily reliant on imports of hardware in order to boost the investments they are making. This is somewhat compounded now by the In-Country-Value (ICV) measures that are being taken.

However, for the long term it makes sense because the reliance on imports to make their industry profitable, creates inflationary pressure. If the Middle East wants to maintain a market leadership position and maintain the low lifting cost that is driving their market dominance, then making sure they are not too heavily reliant on imports, can bring more value into the country. This is not only to boost the economy but also to help them become more self-reliant and more competitive, which is a logical step on the part of UAE and Saudi Arabia.

However, if you have the leading position, then the first place to increase prices is the Middle East – it’s that simple. Especially because each of the Middle East countries are stepping up investment decisions, supply chain delivery into the Middle East will try to make use of that by increasing their margins, which we have seen evaporate during the last year or two of the downturn.

In Saudi Arabia, what’s your outlook for new upstream projects? How do you think this will be affected by OPEC-production limits?

Saudi Arabia and OPEC as a whole has to make sure that the oil price stays around the five-year average. Saudi Arabia has been taking the majority of the obligatory restriction measures to keep it at that level. However, I still believe there is room for Saudi investments to continue, even if it’s not at the level they might have wanted.

They are the biggest operator to have an impact but they need the price to be at a particular level - at around $60 per barrel, to maintain their project margins. They might have a delay but I don’t think they will stop at a certain level of investment decisions.

How will this impact the downstream sector?

Part of the ICV discussion is how they can get more value out of oil and gas. So boosting the downstream sector is a natural consequence of that by making more by-product of refining. I would say the focus on having a bigger downstream sector in the Middle East will continue.

With increasing investment plans, what does this mean for jobs in the Middle East?

Middle East is one of the first places where people talk about expertise shortage and lack of sufficient expertise to make those investments happen. With the downturn, some expats have returned to their home countries and it’s very hard to lure them back to the oil and gas industry so quickly.

Shortage of expertise globally is acting as a driver for some of the inflationary pressures.

One of the questions on our minds is can operators get their hands on the expertise required without having to fork out too much cash for it?

A possible solution, one which we will have to wait and see how it plays out, is digitalisation for the oil and gas industry to keep a handle on cost. Automation could play a role – by requiring less people and maybe less expertise, while also addressing the objective of getting more output.