March 2018

Energy Issues

Down the Hall
William J. Pike / World Oil

One might, with justification, be skeptical of the recent projections of a recovery in the industry. Indeed, there are some signs—if you walk through the door, down the hall, out onto the street and look to the horizon, you can just make them out. Are those signs real? They could be, especially if you follow the glaring fundamentals of supply, demand and pricing. Get past those fundamentals, however, and there are some issues in the background that may alter these projections. They include continuing rounds of mergers and acquisitions, with consequent layoffs of personnel that may leave companies somewhat crippled, in terms to their ability to respond to a burgeoning market, and the forecast, dramatic rise in the sale and use of electric vehicles worldwide that is predicted to push petroleum-based fuel demand into the tank by 2040.

An M&A upswing. The industry has been slow, but stable, in its response to shifting economic fundamentals. Adjustments for the recent price downturn continue, although the price is ticking upward. Primary among these continuing corrective responses are business mergers/acquisitions and personnel layoffs. 

A recent report by the Deloitte Center for Energy Solutions (Oil & Gas Mergers and Acquisitions Report–Midyear 2017, Overcoming the headwinds) notes that the first half of 2017 saw approximately $137 billion in mergers and acquisitions within the oil and gas industry, up from $87 billion in the first half of 2016. These figures include the upstream, services, midstream and downstream sectors. Three significant trends marked these activities: “asset-based deals aimed to refocus and reinforce portfolio positions to form a stronger platform from which to prosper in the expected O&G market recovery; realignment of holdings in the Canadian oil sands; and, transactions aimed to secure improved access to downstream refined product markets for major national oil companies.” 

Much of the upstream M&A activity was focused on developing and producing fields. These included a $5.6 billion acquisition of the Bass family’s holdings in the Permian basin by ExxonMobil, and the January merger of Technip and FMC to create one of the world’s largest service companies. Doug Pferdehirt, CEO of TechnipFMC, echoed the reason that mergers make sense in the current environment, saying; "With our merger complete, TechnipFMC is uniquely positioned to unlock possibilities for our clients to transform their project economics.”

Activity during the second half of 2017 fell dramatically, and the year finished at a total M&A expenditure of $158 billion, still the strongest since 2014. The combination of upstream companies continues in 2018. In late February, Schlumberger announced plans to form a joint venture with the UK’s Subsea 7, to enhance its presence in the offshore engineering and construction sectors.

The long suffering offshore drilling industry was, and continues to be, particularly susceptible to M&A activity. In the fall of 2017, Ensco acquired Atwood Oceanics for $850 million. In January, Transocean completed its acquisition of Norway’s Songa Offshore for an estimated $1.1 billion. In February, Norwegian Borr Drilling announced the pending acquisition of Houston-based Paragon for 232.5 million.

These business combinations generally are accompanied by significant layoffs of personnel. A case in point is the TechnipFMC merger. The combined company announced in mid-February that it had laid off some 7,000 personnel since the merger closed in early 2017.

A longer-term threat to industry health. M&A activity, and resultant layoffs, are one of several underlying drivers of oil and gas economics often masked by oil prices. Another is the increasing availability of alternative energy options. The most threatening of these is the upward-spiraling market for hybrid and electric cars. In 2016, petroleum products provided about 92% of the total energy that the U.S. transportation sector used. Biofuels contributed around 5% of the total energy consumed by the transportation sector, and natural gas supplied about 3%. Or, to put it another way, demand for gasoline and diesel fuels accounts for about 70% of U.S. demand for crude oil. But that is about to change.

According to a recent Houston Chronicle article (A surge in electric vehicles, Feb. 25, 2017), “General Motors, the largest American car manufacturer, says it will have at least 20 electric models on the market by 2015, while European automakers Daimler and BMW forecast that 15% to 25% of their sales will come from electric models by then . . . In China, the government wants one in every five cars sold in the world’s largest auto market to be electric in less than a decade. India’s government aims to have only electric cars sold in the country after 2030. France and the United Kingdom, meanwhile, say they will ban petroleum-fueled cars by 2040.” 

Electric cars are plagued by limited travel distances on a charge and still-developing battery technology, but efforts such as Ford’s plan to spend $11 billion on electric car research through 2022 should solve many of the problems that restrict sales of electric vehicles currently. That is surely part of the reason that IHS Markit estimates that, at the current growth rate, electric car sales will make up 38% of new car sales worldwide by 2040, according to the Houston Chronicle.

The economic fundamentals for oil and gas may remain fairly firm in the short term. In the longer term, however, continued pressure to protect the environment with petroleum fuel alternatives, combined with a major industry restructuring that could limit response capabilities to significant price upticks, could (or more precisely, will) negatively impact the industry. Fortunately, the industry is aware of this. wo-box_blue.gif

About the Authors
William J. Pike
World Oil
William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.
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