Stronachs Logo

I recently attended an introductory lecture by an economics lecturer from the University of Edinburgh who sagely remarked, ‘I can predict that oil and gas prices will go up and down but I cannot tell you when or by how much’. Very helpful. There are a number of traders and economists who have given predictions on the oil and gas price to the end of 2017. They vary from $35 up to $80 with the median around $60 for Brent crude by the end of 2017 (The Times, 28th December, 2016). Mitsui Bussan Commodities Ltd. gave a Q4 2017 offer price of $58.85 per barrel (on 29th December, 2016). Given the general failure to predict the oil price slump of 2014-2016, I would not place investment decisions for the future in the hands of economists. The fundamentals for investment may be more important at the moment than guessing a forward price.

At the recent ADIPEC 2016 hosted in Abu Dhabi, the joke at one or two stands about Aberdeen was ‘Aberdoom, The Temple of Gloom’. ADIPEC is one of the largest oil and gas conferences in the world, in November 2016 having around 95,000 delegates.  Some of the top speakers on oil and gas in the world attended and what happens there is important as a scene setter for the world oil and gas industry. Aberdeen had a reference in one of the leading panel sessions on day one on the World Outlook on oil and gas.  Bob Dudley, Chief Executive Officer of BP commiserated with the oil cities and countries really feeling it at the moment – Aberdeen, Nigeria and Venezuela (sorry Nigeria and Venezuela but you got lumped with us).  Aberdeen in winter is always doom and gloom; the cold weather and the dark nights have set in and we need some sunshine.  The sunshine into our Aberdoom in fact came partly from the speakers in some of the panel sessions but also from the Scottish stand.

Given the position of the UK economy at the end of 2016, an outsider may believe that the Temple of Gloom is actually the UK and not Aberdeen. The 2016 current account balance for Britain was minus USD $146.9 billion, representing 5.7% of GDP, the worst out of 41 developed countries (The Economist, 24th December, 2016).  

So where is the sunshine in the Temple of Gloom? Firstly, for the benefit of both Aberdeen, as an oil and gas city, and the rest of the United Kingdom, it would seem that the UK needs to invest in the oil and gas industry to earn US Dollars to reduce our public debt denominated in Sterling.  Secondly, in order to help reduce the UK current account deficit, we need to earn US Dollars overseas through one of our best kept secrets, the export of goods and services in the worldwide subsea industry of which we have in the region of 45% of the world total.  So why are the fundamentals important?

Let me start with a consensus view from some of the main panel speakers at ADIPEC.  Energy demand has increased year on year by 2% and will do so through to 2035 and possibly 2050.  There will be a further 2 billion human inhabitants on this planet between now and then with growing middle classes and especially increasing demand in the East.  A lot of that demand will have to be supplied from increased production of gas and oil balanced with carbon offsets, low coal production and an increased supply of renewables.  The key message is that world economy cannot simply transition out of oil and gas for a long time, it will take several generations. Nuclear power may be another option but the issue of nuclear waste has never really been solved.  Nuclear fusion is a distant vision.  Looking at the world globally today, one billion people have no access to electricity.  Large parts of the world’s population cannot be denied the increased living standards that can come through oil and gas production. To mitigate against the effects of carbon on the climate, the oil and gas industry is putting its thinking cap on and looking at clean fuel options, not just carbon sequestration.

While at ADIPEC, It was noticeable that the Gulf Region has been affected as much as Aberdeen by this downturn.  There has only been one Final Investment Decision (FID) in two years in the whole of the Gulf Region (Kuwait). Sometimes it’s the speakers outside the panel sessions in selected audiences that have key insights.  In one such meeting a New York trader came in to discuss CAPEX.  There has been about a 45% reduction in capital expenditure in the oil and gas industry worldwide in the past two years.  While production had increased worldwide and there have been substantial savings in OPEX, ‘lower for longer’ will not last forever.  It would seem that we have hit the bottom and the upward curve is beginning. While we still have to get through a very bleak 2017 the prognosis for 2018 is good.  The key is not the current spot price for oil or gas or the forward curve but in fact the number of new FID’s that will be reported towards the end of next year (or the lack of them.) The other key fundamental is that the reserves replacement ratio which may be much worse that is being reported to the market. What counts is what oil and gas companies price benchmark return for new investments. 

One of the great revolutions that is quietly taking place at the moment is the adoption of new technology to improve production efficiency.  A lot of small and innovative companies are coming up with revolutionary ways to increase production from our existing oilfields and to look at new ways of production.  Some of the themes at ADIPEC were on big data, cybercrime, security and a change to simple working practices.  

And the Sunshine

Tucked away in Hall 1 were two very interesting and uplifting shows going on.  In the Scottish stand, there were 60 small/medium sized businesses from Scotland selling services and goods, most with brand new exciting and revolutionary technology.  The Scottish stand won the best stand award in the whole of ADIPEC.  For four days next to the Scottish stand, there was also a very good display of Bedouin life with music and a live falcon; they should have won something as well.

There was a discussion on the human side of the downturn but much more revealing was trying to identify what the upturn would look like. The major service companies were describing a number of new techniques to deploy fewer workers more efficiently including multi-tasking, cross training and maximum utilisation of human resources to do the same jobs with much fewer people.  The real question was what would happen in 2018 assuming we move out of this recession.  The answer seemed to be that more young people would be needed and there would be a heavier dependence on multi-skilling. We have heard that before.

The people on the Scottish stand at the back of Hall 1 ended the show knowing that they were part of the future and part of a brand new wave of technology companies that would help support the next upswing in the global oil and gas industry.  They also knew that the threat of ‘peak oil’ and a lack of future in this industry was partly a myth and that the industry and others would tackle those problems in due course.

The issue of ‘localisation’ seems to be ever more important in order to concurrently run with globalisation rather than compete against it.  In ‘The Sellout’ by Paul Beatty (The Man Booker Prize, 2016), the author deals with the issue of enhancing social and educational performance in a gang torn district of Los Angeles called Dickens.  While the book focuses on race and segregation, to my mind the big issue is the erosion of local communities and ‘delocalisation’.  The district of Dickens in LA gets erased by the government authorities but the by the end of the book (through local efforts) it has been formally recognised again.  ‘Localisation’ is as important as globalisation.

In Aberdeen we face few of the problems of Dickens; around £2 billion will be spent on infrastructure over the next few years in one of the worlds most northerly and vibrant cities.  Compared to areas like Dickens, we are lucky enough to have good housing, social services and education and to benefit from localisation as well as being at the centre of a global industry.  Economic growth in Aberdeen and the UK will depend on entrepreneurs and small businesses to create local employment, wealth and opportunities.  It is often local people and companies that get communities out of a slump. That is the key to localisation.  Aberdeen and the North East of Scotland has always been too small to survive within itself – it has always had to generate expertise within the City and surrounding area and then trade those ideas globally whether it be fisheries, granite, food, drink or oil and gas i.e. its services and products.

So Mr Dudley, if you cannot make it to Aberdeen, Nigeria or Venezuela in your busy schedule in 2017 why not next year visit the Scottish stand at ADIPEC 2017 to see what your future looks like. You will get a good welcome and plenty to think about.

If you have any queries in relation to the above please get in touch with a member of the Stronachs Upstream Oil & Gas Team.

Ewan Neilson, Partner

 

Chambers UK 2106

Contact Info

ABERDEEN OFFICE
28 Albyn Place, Aberdeen AB10 1YL
Tel: +44 1224 845845

 

INVERNESS OFFICE
Camas House, Pavilion 3, Fairways
Business Park, Inverness IV2 6AA
Tel: + 44 1463 713225

The Legal 500 logo