Oil & Gas in 2016: The 3 Energy Trends to Watch

Daniel Walsh Energy • Business • 5 minute read

The new year has begun, and with it, an opportunity to think about where the oil and gas industry is today and where it is heading in 2016.

A few months ago we covered some of the lessons the oil and gas industry learned in 2015. One of the takeaways was the sharp fall in commodity prices, the result of a global supply glut and an economic downturn. This perfect storm of economic conditions forced companies to become increasingly lean, changed the geopolitical landscape, and resulted in the development of increasingly sophisticated tools for maximizing efficiency.

It is likely that many of these trends will continue through 2016, with three big stories to keep an eye on in the coming year.

Investing in Efficiency

2015 saw a 20% drop in capital investments by oil companies – the largest in 30 years. This decline is likely to continue into 2016. We’ll likely see short-term cost-cutting measures give way to structural changes as producers fight to remain competitive.

Although many such changes will involve cancelling or scaling back projects, some will be the result of new investments aimed at increasing efficiency.

Modularization - the development of a fleet of standardized, mobile, and versatile equipment units - is one area where research and development is going to lead to lower prices. A recent study of modularization found that most companies could achieve cost savings of up to 15%.

Of course, one of the most important investments companies can make is in hiring and retaining the best available human resources. In addition to reducing mistakes and maximizing worker efficiency, investing in a strong employee pool will ensure companies are well positioned to grow when prices eventually rise.

The takeaway here is that, despite the upfront costs, making smart investments will be the key to staying lean.

Megaprojects: Here to Stay?

As commodity prices fall, low-margin projects are the first to be scrapped, downsized, or delayed. At particular risk in 2016 are so-called “megaprojects” – projects that require more than $1 billion in capital investment. These projects, which access non-traditional resources using complex technology, accounted for around 40% of the capital expenditures of the world’s largest oil companies in 2014.

Megaprojects are exciting because they represent the cutting edge of oil and gas technology. Unfortunately, glamor doesn’t usually equal good business. In 2016, it’s likely that many of these projects – which include arctic exploration, deepwater exploration, and the construction of floating liquid natural gas (LNG) facilities – will be downsized or put on hold.

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One area where the cutbacks in capital expenditures are likely to be particularly pronounced is in the LNG market. LNG megaprojects include the construction of natural gas terminals and specialized ships capable of handling the volatile substance. At the start of 2014, LNG looked like a promising growth market. Since that time, however, prices have fallen from $20/ MMBtu to $7.20 / MMBtu in December. Given the continued fall in natural gas prices and weak demand in Asia, we should expect to see the least profitable LNG projects scrapped this coming year.

Shifting Geopolitics

On the geopolitical front, 2016 is likely to see a continued rise of production in North America, especially in light of recent international events.

In Mexico, the government recently voted to open up the oil market, allowing private companies to compete with Pemex, Mexico’s national oil company. Chevron, Exxon, and BHP Billiton have already expressed interest in Mexico, and its likely production will increase over the next few years.

In the US, Congress has moved closer to eliminating the oil export ban, which would allow producers to sell unrefined petroleum to foreign countries. Since US production costs from unconventional plays are quite low, this would likely lead to a fall in global prices while increasing overall production in the US.

As a result of these two major policy changes and the political desirability of energy independence, trade within the boundaries of North America is likely to increase. Since demand is less than production in North America, we should also see increasing exports outside of North America. Ultimately, North America may come to replace OPEC as the dominant force in the international market.

If you’re interested in a more in-depth assessment of what we should expect for 2016, I recommend this report, published by Deloitte.

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