Reorganizing for a new era

first_imgThe Industry Contribution is a new section in which the oil and gas industry companies share their project endeavors or analyses. This article was produced by DNV GL and does not necessarily reflect the view of No member of the editorial team took part in creation of this article. Please contact us at [email protected] for inquiries. 1, World Energy Outlook 2016:,,, Key World Energy Statistics:, A tricky time for oil producers:, A tricky time for oil producers:, OPEC Deal May Lead to Increased Oil and Gas M&A:, 2017 A Year of Transition for Oil:, We’ll See More Oil and Gas M&A This Year:, Oil and Gas M&A Seen Accelerating: By DNV GLOil and gas companies are actively seeking to rebalance business portfolios and reorganize for the future, according to DNV GL research on the outlook for the industry this year. There is greater debate than ever – and more uncertainty – about when oil demand will peak. The International Energy Agency (IEA) suggests 20401 and OPEC says 2029,2 while some believe it will be earlier, even as soon as 2021.3Beyond cyclical patterns, there are signs that recent years could be the beginning of a new reality for oil and gas companies. Much of the industry is now focused not just on surviving the low prices, but also on reorganizing for a new era. The key consideration though, is how rapidly we are moving into that new era.“There are definitely some deflationary trends in the energy industry that are new, such as renewables and shales,” says Maarten Wetselaar, director for integrated gas and new energies at Shell in an interview for the DNV GL’s study, “but these are limited in the effect they can have in the near-term.” He cites the fact that renewables are restricted to applications that can be electrified, with electricity currently providing only 18% of the world’s energy.4 “While we see growth in electrification, it won’t happen overnight. And the deflationary impact of shales, while significant, is also limited, given the size of overall oil and gas production,” he says.Focus on diversificationOne of the most striking findings of DNV GL’s research, is that half (49%) of senior oil and gas professionals surveyed on the outlook for 2017 say their organization is likely to diversify into (or invest more in) opportunities outside of oil and gas .“Diversification is definitely something that every player in the industry is looking at,” says Eirik Wærness, senior vice president and chief economist at Statoil in an interview for DNV GL. “Whether it is to diversify across the value chain or into other energy sources, companies are trying to make future cash flow less dependent on variations in the oil and gas price.”Manufacturers report the strongest intentions in this regard, with 61% likely to invest outside oil and gas. Meanwhile, 57% of midstream companies are gearing up to cross industry boundaries. Even among primarily upstream companies – which arguably have the least transferrable capabilities – 40% are likely to invest or diversify away from oil and gas in 2017. These high numbers signal a major shift in long-term strategies in the industry.The rise of renewables Investing in renewable energy sources is an obvious choice for many companies. Particularly as prices have fallen to the extent where, in most cases, subsidies are no longer necessary for these energy sources to be profitable.4 In our survey, 26% of respondents expect their renewable energy investment to increase in 2017, and 41% say that their organization has a good understanding of how to assess investments in renewable technologies.“Companies across the spectrum are redesigning themselves as energy companies – not just as oil and gas companies,” says Christoph Frei, secretary general and CEO of the World Energy Council in an interview for DNV GL’s research. “Many have started talking about their ‘energy blend’ – increasing the importance of renewables and electricity.”Norwegian manufacturer Nel, for example, is to build and install up to seven hydrogen-making plants to H2V Product, a subsidiary of France’s Samfi-Invest, an independent family-owned investment house. These power-to-gas units will inject hydrogen into France’s public gas grid as a substitute for natural gas. It is a way of storing surplus power and will help over years to decarbonize France’s gas supply.5Total’s 2016 investments in solar power and batteries reflect this widespread trend of operators and national oil companies increasingly directing funds into renewables.6 In the short term, however, it is difficult to see renewables becoming a significant source of revenue for oil and gas companies. As DNV GL’s Graham Bennett says, “We need to recognize that we’re talking about small investments relative to a typical oil and gas project and the overall capex portfolio of the oil and gas operators.”The renewables trend is complicated by uncertainty around peak demand. When should an oil and gas company plant the seeds of a new renewables business if they want it to bear fruit at the right time? “Companies need to maintain a certain level of investment in renewables,” says Ye Hua Huang, deputy director-general at the China National Offshore Oil Cooperation(CNOOC) Bohai Oilfield Bureau in an interview for the DNV GL report. “If you don’t, you lose the existing market and you lose the chance to be a major player in the future.”With the energy mix expected to become more diverse in the next few decades, DNV GL continue to invest in solutions and research to support technology development and integration of hydrocarbons and renewable energy sources to support future energy transitions. Currently DNV GL is leading a joint industry project (JIP) working on processes to enable the addition of hydrogen to natural gas. The project, named HYREADY, will enable the industry to ‘be ready for hydrogen’ by developing practical processes and procedures for the introduction of hydrogen to existing grids.  A DNV GL-led JIP on wind-powered water injection solutions to maximize oil recovery is also underway and currently in its second phase undergoing extensive physical lab testing.Challenges and opportunities in consolidationCompanies are also looking at mergers and acquisitions (M&A) as a way of reorganizing for the future, according to DNV GL’s research. Shell’s USD54bn acquisition of BG Group was a prominent example of this, reflecting the company’s expectation that growth prospects in gas are better than in oil, as well as its strategy of increasing the scope of its downstream business.7One-third of our survey respondents (33%) expect their organizations to increase M&A activity in 2017 – a considerable jump from 2016’s already significant 23%. Overall, 78% expect increased industry consolidation in the year ahead, which is a continuation of the trend from 2016, when 72% expected the same.Analysts from Credit Suisse,8 Wood Mackenzie9 and Goldman Sachs10 have also suggested that 2017 could see a significant increase in M&A activity in the industry. “Because there is such a pressure on margins, there will be continual opportunities for companies with strong balance sheets to look for opportunities,” says Thore E Kristiansen, chief operating officer (E&P) and executive director at Portuguese integrated energy company Galp Energia, in an interview for the research. “I see this trend continuing in 2017 – possibly with greater urgency because buyer and seller expectations are getting closer.”DNV GL is seeing increasing demand for its global technical, commercial and financial due diligence services as oil and gas industry consolidation continues.“Scrutiny of capital and operating expenditures and liabilities is intensifying as expectations rise that mergers and acquisitions in the oil and gas sector will accelerate” says Viken Chinien,head of due diligence at DNV GL in London, interviewed for the industry magazine PERSPECTIVES.“You need to know precisely what is being sold, its condition, and the commercial, technical and environmental risks involved and analysis can help reduce risk, increase value, and lower transaction costs.”Successful M&A will depend on greater consensus around valuations. The past few years have played havoc with people’s confidence in what assets are worth and how to calculate future earnings.11 “It is difficult to negotiate deals that depend on future oil prices,” says Eirik Wærness, “when nobody knows what the price is going to be, or how long the downturn will last.”last_img

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