Commentary, 5/6 2012

Published Jun 8, 2012
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What Next?

When it comes to economic uncertainty, we’re still not out of the woods. What was, five years ago, an incredibly bullish market now seems mired in doubt. After the so-called “Credit Crunch” followed by the ongoing “Euro Crisis”, it’s easy to ask, “What next?”

What’s unnerving is that the last five years hasn’t followed what we’ve come to think of as the typical cycle we became used to during the later half of the twentieth century. The recovery has not been as strong or as stable as hoped for – and this uncertainty has furthered caution.

The instability of oil prices has fuelled caution in our industry. This is not surprising considering that the peak price of about $140 per barrel dropped by $100 during the final months of 2008. And while prices have again moved upward, political volatility in oil-rich regions has been a primary cause. But so far this year we’ve seen oil price fluctuate more calmly, giving a hint of stability.

Although increasing unconventional gas supplies give hope to meeting energy demands, prices have been pushed prices lower.

One thing is certain – the demand for energy will only increase. And the promise of increased demand works as a kind of guarantee that oil and gas industry activities will grow as well.

A good example – as we report in this edition – is the strengthening rig market.

An increase in North Sea exploration over the last few years has paid off well. Last year’s discoveries are the stuff of legends – the Johan Sverdrup discovery (the largest on the Norwegian Continental Shelf since the mid 1980s) is now estimated to contain gross of between 1.7 and 3.3 billion barrels of recoverable oil. And discoveries these have done much to raise expectations for even more significant finds in coming years.

This, in turn, has led to something of a bidding war in which E&P companies are securing rigs for this year and next, which has led also to higher day rates. And with the promise of rig demand, more newer, highly specialised rigs have been ordered.

And even the smaller recent (and some not so recent) discoveries are paying off as well.

Technological advances have given hope for profitability from fields that were once considered too marginal to develop. Statoil’s Fast Track programme is doing much to increase recovery on the Norwegian Continental Shelf, exploiting existing infrastructure and making use of proven, off-the-shelf technologies. So far, this has proven to be a cost-effective method to bring more oil to market.

So why worry when there’s so much to be done on the NCS?

Another sure sign of improvement in activity – beyond the monetary investments that have been growing year over year – is when the industry begins to worry about the supply of engineers in the future. Education to maintain a competent workforce is certainly a type of investment that demonstrates confidence in the future.

So prices appear more stable, activity is up and production is slated to remain relatively constant through the end of the decade. It’s obvious that we can’t throw caution to the wind and return to the heady days of 2007, when it felt like $140 oil would only go higher, we certainly shouldn’t let fear of the unknown rule the day.

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