2017 outlook on oil and gas
My take: John England
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2017 outlook on oil and gas | My take: John England
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We entered 2016 in a state of uncertainty. The sustained low prices
of 2015 had not resulted in the collapse of the industry that many
expected; and, as I noted in this publication last year, 2015 was a year
underscored more by what did not happen (massive bankruptcies
and widespread mergers & acquisitions (M&A)) than what did.
So, we started 2016 with the sense that other shoe may drop; and,
very quickly, it did. We saw West Texas Intermediate fall to $26 per
barrel in February 2016,1
which led to a survival mindset from many
industry players and continued reductions in capex and headcount.
In April, reserve base loan redeterminations yielded dramatic
declines in borrowing bases and a rash of bankruptcies and debt
restructurings.
The air of pessimism began to lift around June as the impact of falling
US production helped narrow the supply-demand gap and cause
prices to strengthen. At the same time, the cost reduction strategies
implemented across the industry, especially by US unconventional
producers, began to take hold. The result has been a more rangebound
price between $40 and $502
and a reducing cost structure
that, while not leading to substantial profits, seemed to offer a path
to survival.
The US natural gas sector continued to be resilient in 2016 with US
Lower 48 production declining by only just over 1 billion cubic feet
per day,3
despite continued low prices; with the historic emergence
of the US as an LNG exporter; and the equally historic rise of natural
gas as a power generation fuel, overtaking coal as the leading source
of electric generation for the first time on an annual basis.
Oilfield services continued to have a difficult year as upstream
capital spending remained under extreme pressure. Several largescale
consolidations were announced in this challenging business
environment and layoffs continued. However, the US rig count began
to recover as early as June. By the end of October, over 150 rigs had
been put back to work, compared to the end of May 2016.
The midstream segment largely stayed in a holding pattern
in 2016 as upstream retrenchment reduced the need for new
pipeline investment. Again, this created an environment in which
consolidation was a logical response from some of the major players
in this space. Equity values for midstream players suffered with the
rest of the industry, especially after a bankruptcy court terminated
a long-haul pipeline contract, thus setting off concerns about more
widespread contract abrogation or renegotiation.
In the downstream sector, refiners went into 2016 concerned
about the potential impact on their business of newly authorized
crude oil exports, both on throughputs and margins. Thus far
these concerns have, to a large extent, proved unfounded, with an
increase in domestic demand and exports offsetting weaker crack
spreads. Refined products exports have continued to rise alongside
the upturn in crude oil exports associated with the opening of
new markets, while refinery utilization has been running at over 90
percent and US refined products demand looks set to increase for
a fifth year in a row.4
All-in-all, while not as strong as 2015, this still
looks like a fairly good year for downstream.
As we enter the end of 2016, a sense of cautious optimism has
crept into the industry. We saw the beginning of an increase in M&A
and acquisitions and divestitures activity, OPEC finally announcing
production cuts of 1.2 million barrels per day in 2017,5
and rig counts
growing, albeit slowly, once again. There is a sense that better times
are ahead. However, let’s first take a look at the long-term impact of
this downturn.
As we enter the final stages of 2016,
it is a good time to reflect on another
interesting year for the oil and gas
industry, the legacy of this historic oil
price downturn, and what the future
may hold for 2017.
A brief review of 2016
2017 outlook on oil and gas | My take: John England
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Capital allocation
The survival mentality I mentioned earlier
seems to have also resulted in a mindset
shift toward shorter-cycle projects.
$620 billion of projects through 2020
are estimated to have been deferred or
canceled as a result of the downturn,6
and the appetite for long-term, complex
major capital projects has waned, despite
a few notable exceptions. Although this
shift is probably not surprising, given the
beating the industry has taken over the
last few years, the growth of short-cycle
unconventional projects makes for a
different investing landscape than in
previous cycles. While this trend certainly
seems to lower the risk of individual
companies in the industry, it may pose some
broader questions regarding energy supply
and security. Where will supply come from in
2020 and beyond? Are there enough shortcycle
projects to fill the supply gap?
Long-term impacts of
the downturn
The impact of the extended oil price downturn, which
we have experienced since June 2014, will likely have
long-term effects on the industry in a number of areas,
including capital allocation and people.
Will the capital markets support the long
time horizons acquired to develop more
complex projects? As a rule, I believe in
the efficiency of markets to drive capital
to the right places, but I think it’s essential
we do not lose sight of the important
roles different players have in our energy
ecosystem. We will likely need the long-term
perspective that international oil companies
have always brought to this industry, in
addition to the nimble, short-cycle players
and the more pure-play exploration
companies, to meet the supply needs of the
future.
People
Prior to June 2014, one of the common
challenges facing the industry was talent.
Would the industry find the skilled workforce
needed to fulfill the potential of shale
revolution as well as the growth in deep
water and related mainstream projects? In
the wake of massive layoffs, these concerns
seem very distant. However, the question
for the industry is: Will the people come
back to the industry when the recovery
begins in force?
As the shale revolution took off in the
United States, our industry initially largely
struggled to draw people with the critical
disciplines needed. Over time, the success
of the industry, coupled with university
partnerships, resulted in more talented,
young people pursuing careers in oil and
gas. However, the downturn and resulting
layoffs across the industry threaten to
damage the industry’s brand as a career
destination. This seems to make it more
imperative than ever that oil and gas
companies be innovative in their approach
to talent acquisition, development, and
deployment. As a large number of senior
employees head toward retirement,
companies should find ways to transfer this
wealth of knowledge to the next generation
of employees. When thinking about
potential constraints on the recovery of the
industry, we should view people as equally, if
not more, critical to capital.
2017 outlook on oil and gas | My take: John England
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Outlook for 2017
Overall, there are reasons to be positive and reasons to not be positive
(I prefer this to “negative”) that largely offset each other. Thus, my view
that we are on a slow path to recovery.
Positives
•• Supply and demand imbalances seem to be tightening.
•• Most outlooks call for supply and demand equilibrium by early 2017.
•• OPEC has announced production cuts.
•• Global and US oil demand continues to show moderate but steady
growth.
•• More US LNG export capacity is expected to hit the market.
•• Oil companies have learned how to operate in a lower price
environment, returning to a healthier focus on capital and operating
cost discipline.
Not so positives
•• Iran could actually bring more production on line.
•• US production could begin to ramp back up following the rig count
upturn.
•• Massive crude oil and refined product inventories have been built
up during this downturn that may take time to go down even when
demand exceeds supply.
•• Confidence in big capital projects will likely take more time to reestablish,
in deepwater plays and the oil sands for example.
While I called 2016 the “year of tough
decisions,” I’d characterize 2017 as “the
slow road back.” Supply and demand
balances are still slow to return to a
sustained equilibrium, although the OPEC
decision to cut production should help
accelerate the drawdown of global oil
inventories, even if OPEC countries do not
completely deliver on their announced
production cuts. This should be supportive
of crude oil prices as we go into 2017, but
it remains to be seen how quickly and
to what extent US shale oil drillers might
respond by resuming more active drilling
programs.
2017 outlook on oil and gas | My take: John England
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Additionally, big picture issues often cloud the longer term of the
industry. Climate change concerns, the rise of the electric vehicle, selfdriving
vehicles, and ride sharing (see Deloitte paper on the Future
of Mobility) make historical estimates of perpetual demand growth
seem less likely than they once did. Some large oil companies are even
predicting peak demand within the next 20 years.
When faced with a number of offsetting factors, I like to go back to the simple
things I know:
1. The world needs a significant amount of energy.
2. Although renewables are growing rapidly (and most think that is a good thing), fossil
fuels should be very important to the energy mix for a long time (note my very specific
prediction here).
3. Low cost suppliers can be fine for a very long time.
4. Long-term thinking and investment horizons will likely be needed; we just don’t know how
long is long. 20 years? 40 years? 100 years?
I know one more thing. The oil and gas industry is incredibly resilient and has some of the
brightest, most innovative people I have ever met. This is clearly what leads to my overall
optimism about the industry for 2017 and beyond.
Endnotes
1
U.S. Energy Information Administration (EIA), “Cushing, OK WTI spot price FOB,” http://www.eia.gov/
dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=D, accessed November 18, 2016.
2
Ibid.
3
EIA, “Short-term energy outlook (Table 5a: US natural gas supply, consumption, and inventories),”
November 8, 2016, http://www.eia.gov/beta/steo/#?v=15, accessed November 18, 2016.
4
EIA, “Weekly US percent utilization of refinery operable capacity,” http://www.eia.gov/dnav/pet/hist/
LeafHandler.ashx?n=PET&s=WPULEUS3&f=W, and “Short-term energy outlook (Table 4a: US petroleum
and other liquids supply, consumption, and inventories), http://www.eia.gov/forecasts/steo/
tables/?tableNumber=9#, accessed November 18, 2016.
5
Nayla Razzouk, Angelina Rascouet, and Golnar Motevalli, "OPEC Confounds Skeptics, Agrees to
First Oil Cuts in 8 Years," Bloomberg, November 30, 2016, https://www.bloomberg.com/news/articles/2016-11-30/opec-said-to-agree-oil-production-cuts-as-saudis-soften-on-iran,
accessed December
9, 2016.
6
Near-term upstream investment slashed by US$370 billion since oil price fall, Wood Mackenzie,
May 2016, p. 1, https://www.woodmac.com/reports/upstream-oil-and-gas-near-term-upstream-investment-slashed-by-us370-billion-since-oil-price-fall-38758308,
accessed November 18, 2016.
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John England
Vice Chairman, US Energy & Resources Leader
and US and Americas Oil & Gas Leader
Deloitte LLP
jengland@deloitte.com
+1 713 982 2556
@JohnWEngland
John serves as the Vice Chairman, US Energy &
Resources Leader and US and Americas Oil &
Gas Leader for Deloitte LLP. John works closely
with our oil and gas clients to bring the deep
capabilities of the firm to solve problems and
enhance value. John brings a unique mix of
commercial, risk management, operational and
financial knowledge and the experience of 26
years serving in the industry. He holds a BBA in
accounting from Stephen F. Austin University
and is a CPA in the state of Texas.
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