DNV GL: Uncertainty Over Oil and Gas Pricing to Be More Prevalent in 2014

Amid a positive outlook for the industry in 2014, senior oil and gas professionals have forecast tighter monitoring of capital expenditure (capex) this year, according to new research published by DNV GL. While nine in 10 (88%) respondents to the research are confident about the sector, concerns over rising operational costs, a shortage of skilled professionals and competition from international rivals are causing professionals to focus spending on the projects that will provide the greatest return on investment.

According to the report, the proportion of companies planning to increase investment in new projects has declined by 18 percentage points over the past three years, from a high of 63% in 2012 to just 45% in 2014. For the first time since 2011 and the aftermath of Macondo, overall confidence in the oil and gas sector has fallen – albeit only by one percentage point – signalling a shift in sentiment.

The findings come from a new research report, Challenging Climates: The outlook for the oil and gas industry in 2014, which was undertaken on behalf of DNV GL. The research provides a snapshot of industry sentiment about the year ahead and is based on a survey of more than 430 senior oil and gas professionals and in-depth interviews with more than 20 industry executives.

Key findings include:

• Despite some signs of caution, the overall outlook for 2014 is confident among industry professionals: around nine in 10 (88%) are optimistic about the outlook for 2014
• Respondents expect to keep a closer watch on costs: six in 10 (62%) intend to pressure suppliers to curb cost increases next year, especially across Asia
• Uncertainty over oil and gas prices will be more prevalent in 2014: nearly one in four (23%) of industry professionals thinks oil and gas prices will weaken this year, while 36% remain unsure.

Elisabeth Tørstad, CEO of DNV GL – Oil & Gas, says: “Oil and gas industry projects are becoming increasingly complex as the industry continues to operate in more challenging environments. The cost of exploration and production is rising, the industry’s pool of skilled professionals is decreasing and companies are feeling greater pressure on their overheads. This is all leading to great focus and a degree of ‘belt tightening’ across the industry with a view to keeping a tighter rein on capital expenditure. Although confidence is still high, for the first time since 2011 and the aftermath of Macondo, overall confidence in the oil and gas sector has fallen marginally, signalling a slight shift in sentiment.

“We’re also starting to see signs of greater consolidation across the oil and gas industry supply chain. Our research gives clear signs that pressure will be put on suppliers to become more innovative, to reduce costs and to show value in 2014 by providing access to scarce, in-demand skills and by demonstrating real quality in the products and services they deliver.”

Greater consolidation

In response to rising costs, operators will seek to rely on larger supply chain partners which are more capable of providing a consistent global service, according to the report. About one in five (22%) survey respondents says that their company will increase its work with larger partners, compared with just 6% in 2012.

Furthermore, more than a third (37%) of operators say that their companies intend to acquire partners with the specialist knowledge and skills they need as they move into tougher exploration and production sites, with almost half (49%) saying they will need to increase alliances with others to share knowledge in order to cope with more challenging environments.

In turn, DNV GL’s research affirms that operators will focus on controlling risks and costs by seeking greater standardisation in their procurement approaches. This gives rise to greater interest in oil companies centralising, standardising and streamlining their supply chain to avoid costs in creating new solutions.

Future investment

The report also reveals that the US, Brazil and Australia are the top investment destinations for 2014, with larger operators seeking to expand into challenging new environments such as deepwater sites in East Africa and the Arctic.

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