More of the same…?

There are two reasons why the world has lost confidence in forecasts. First: the record is awful. Remember the predictions of oil at $200 a barrel or the view that nuclear energy would be so cheap that no one would bother to meter its use?

The second reason is that events, especially around technology, are moving so rapidly that it is difficult to keep up with what is happening already, never mind what could come next. Artificial intelligence, energy storage and, at a very different level, the spread of religious fundamentalism are all potential game changers in the energy market. Yet predictions of how and when their influence will be felt are no more than guesses.

Nick Butler

Professor and chair of the Kings Policy Institute at Kings College London

GS oil price 18 June 19.JPG

Goldman Sachs, 18 June, 2018

In our Lower 48 business we co-developed a pad optimisation mathematical model with a Silicon valley start-up. This is the first time it has been applied in the Oil and Gas industry. When initially deployed on 180 wells and five pads, it reduced emissions by 74%, increased production by 20%, and reduced costs by 22%.

Lamar Mackay, BP Upstream CEO


The graph at the top is the IEA’s forecast for the oil price in 2019. I don’t get caught up on forecasts because for obvious statistical reasons they have a low probability of being correct, but they interesting in that they reflect the current “dominant logic” or investment narrative.

Brent crude averaged $54 per barrel in 2017 so obviously a near 30% price increase is good news for the beleagured offshore industry. But I am struggling to see a breakout here which isn’t just more of the same where a little incremental revenue gets added each year? At the moment volume also appears to be increasing more than value in the offshore industry (i..e companies are doing more for less).

There is optimism in the jack-up market though… investors are throwing money at jack-up companies that are promising not to return money in dividends (or indeed any form of capital repayment) and build market share in a highly fragmented industry. I struggle to see how these companies can in effect be adding capital to an industry when the majority of their customers are trying to reduce capital intensity? It is an odd dynamic where they are buying jack-ups for 30% less than cost despite the fact that in the old days utilisation used to be between 90-100% and now it is accepted it is much lower. A jack-up with only 8 months work is worth more than 30% less than one with 12 months work given the high fixed costs and the same day rate… and yet day rates are still under pressure and still the deliveries keep coming.

More later when I have more time but I think this is becoming an irrational market if demand stays at these sorts of levels. The ability of E&P companies to force time risk back to asset owners marks a fundamentally different industry in terms of structural profitability potential to one that existed in the past. I get scrapping reduces net units in the market but with the fleet utilisation of around 50% there is a lot to go and the option costs of these companies without significant work is very high in cash terms…

Anyway these forecasts are important in that about now E&P companies are starting to set budgets for 2019 plans. Based on the sort of forecasts you can expect only a marginal increase in spending and in offshore that isn’t what a lot of business plans want or need.

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