In the near future, the recent oil price gains — which are due to a rebalancing of supply and demand fundamentals, partly accelerated by OPEC’s recent decision to cut production — are expected to remain in place. That expectation is behind a number of positive industry forecasts: According to Barclays’s latest E&P Spending Survey, oil and gas industry capital expenditures are expected to increase by as much as 7 percent in 2017. In addition, global rig counts, particularly in the U.S., have been on the rise since the middle of 2016, according to Baker Hughes. Moreover, we are seeing the green shoots of a recovery in M&A as companies have pursued asset deals in recent months.
It’s possible that we might see a spike in oil prices sometime in the next five to 10 years — if, because of the hiatus of investment in major projects since 2014, the industry finds it difficult to meet increasing demand. The resulting uncertainty would no doubt be welcomed by traders, who have largely avoided the oil market during its price plunge. An uptick in trading activity could in itself drive up oil prices significantly in the three- to five-year time frame. Oil and gas companies will need to ensure that their business models are prepared to manage and benefit from this volatility.
As oil prices recover, can international oil companies (IOCs) hold on to the benefits of cost reduction? Some cost escalation is inevitable. For example, oil-field services (OFS) companies will likely start taking back price concessions they gave IOCs when the market collapsed. This could add as much as 15 percent to the price of producing a barrel of oil, which in turn would allow OFS company operations to get back to break-even levels.
But upstream companies will have to be diligent about containing other expenditure increases, particularly in the supply chain and resource development arenas. That may prove difficult, because the wave of worker layoffs eliminated significant experience, knowledge, and skills. The loss of these capabilities could push development project costs up substantially if they are not carefully monitored. Smart IOCs will embrace new digital initiatives as a means of offsetting expense escalation and furthering the cost and efficiency improvements they have already achieved.