The character of Chuck Noland, played by Tom Hanks, says near the end of the film Cast Away, “…because tomorrow the sun will rise. Who knows what the tide could bring?” He makes this observation after having survived on a desert island for four years before being rescued and returned to civilization. If you’re a top executive in an oil and gas company, more than likely you’re feeling the same way right about now — optimistic but extremely cautious.
Much of the oil and gas industry has survived an especially tough few years with weak demand and low prices. It has been difficult to make strategic decisions and plan for the future. Only now is the sector beginning to emerge from its upheaval. If there is hope on the horizon, we must, like Noland in Cast Away, remain mindful of the risk.
For instance, although prices appear to be recovering — Brent crude was up around 90 percent in 2016 to just over US$50 per barrel — they are still well below $115 per barrel, the post-recession high-water mark reached in March 2011. As a result, even as companies begin to view new investments in resource development as more attractive, the upstream oil and gas sector must move gingerly. Continuing price improvements will probably be slow, and supply may be constrained by the cutbacks in reserve development projects over the last few years.
The oil price collapse, which began in June 2014, triggered a wave of cost reduction among upstream businesses. Global oil and gas companies slashed capital expenditures by about 40 percent between 2014 and 2016. As part of this cost-cutting campaign, some 400,000 workers were let go, and major projects that did not meet profitability criteria were either canceled or deferred. These steps, combined with efficiency improvements, are beginning to bear fruit for the industry. A growing number of projects can break even at oil prices in the high $20s. One good example is Statoil’s Johan Sverdrup field in the North Sea, where the break-even price of development costs has been reduced to around $25 per barrel. That would have been unthinkable a few years ago.
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