Deloitte survey: Upstream uncertainty tempers otherwise upbeat outlook for oil, gas and chemicals sectors
Oil, gas and chemicals executives see higher oil and natural gas prices on the horizon, but new findings from Deloitte’s “2018 Oil, Gas and Chemicals Executive” survey reveals that the industry has varying expectations for what the anticipated price recovery will bring.
In contrast to last year’s survey, optimism appears to be growing in the return of a more favorable business environment. The rise in commodity prices, along with a stronger economic context, has spurred confidence – but the benefits of a further price recovery are not anticipated to be homogenous for the industry, the survey notes. Segments less impacted by the downturn, including downstream and chemicals, have reportedly been able to continue to invest for growth and could realize advantages more quickly, while upstream and midstream noted they must first finish working through their recovery strategies.
“The industry seems much better off than a year ago,” John England, Partner, Oil, Gas and Chemicals, Deloitte & Touche LLP, said. “Positive sentiments have emerged from all sectors, but the real bright spot is in the downstream and chemical sectors. Most upstream executives surveyed see better days ahead, but are managing more with caution as they work through growing pipeline constraints, mounting geopolitical tensions and rising oil prices that could also push up costs. With growth and recovery top of mind, digital technologies could become critically important for productivity and profitability and should serve as a lever to help mitigate rising costs brought about by rising oil prices.”
Key survey findings include:
- A majority (72%) of respondents expect West Texas Intermediate (WTI) crude to average $70 or more per bbl in 2020. Even more bullish and in sharp contrast to last year’s findings, 41% of the respondents expect WTI prices to average $80 or more per bbl in 2020, up from only 5% from the prior year.
- Notably, 2020 could be the year the lid is lifted on prices for Henry Hub natural gas. More than half (54%) expect Henry Hub natural gas will average $3.50 or more per million British thermal units (mmbtu) with a majority of those (3%) expecting $4 or more per mmbtu.
- More than half of executives surveyed from each of the four sectors – upstream, midstream, downstream and chemicals – expect to increase capital expenditures in the coming year. Downstream and chemicals sectors see the highest confidence in capital spend with 6% and 67% of those respondents respectively, expecting an increase in capital.
- For upstream companies, digital solutions are now seen equally impactful at improving cost structures as increasing well productivity.
Upstream: Sentiment split while sector works through its recovery
Mixed messages are showing up in the survey upstream 2018 – 2019 priority list, evidence that the sector is split between focusing on growth, maintaining the status quo and streamlining the business. Regardless of strategy, the shared challenge is to manage short-to-medium term costs and efficiencies, if indeed, commodity prices and activity levels rise.
- About half of respondents expect spend, rig deployment or headcount to rise.
- Maintaining or increasing production is the top priority (39%), followed by reducing or streamlining general and administrative costs (30%), making divestitures (29%) and reducing capital expenditures (29%).
- Most respondents (62%) believe 20 to 60% of realized cost reductions are short-term or cyclical.
“Despite the price recovery, surveyed upstream executives seem to have been so battered by the downturn that they are a bit skittish about embracing a positive outlook,” Andrew Slaughter, Executive Director, Deloitte Center for Energy Solutions, Deloitte Services LP, said. “Companies have come a long way in streamlining operations and repositioning portfolios, but they still have much more to do to recover. Added risks are uncertainty around the economy, trade and rising interest rates, which have a greater impact on upstream more than other sectors.”
Midstream: Massive expansion underway
Of all the oil and gas sub-sectors surveyed, capital spending and investment outlook has turned the most positive for midstream companies this year. The high optimism is a reflection of the recovery in prices, projected consolidation, and rising export profile of the US.
- Most 2018 respondents (71%) expect flat to higher capex growth for midstream, up from 3% in 2017.
- The Gulf Coast region, led by rising production in the Permian, is seen as a key opportunity by most (62%) respondents.
- Controlling costs and enhancing operations remain key growth factors for executives. However, the biggest midstream challenges were seen as costs (40%), operational issues (39%) and environmental issues (37%).
Downstream: Slow and steady wins the race
Most downstream companies surveyed have a positive outlook with modest growth and increasing margins, exports and capital expenditures.
- Refiners expect a strong 2019 with average expected margins of $15.39, up from 2017’s $13.20/bbl.
- Downstream players seem split on what challenges they face. The biggest challenges noted by respondents were environmental issues (38%), costs (34%) and permitting issues (31%).
- Only a small portion (28%) of respondents noted fuel specification or biofuel mandates as a challenge.
Chemicals: A “must watch” sector for growth and digital in 2019
The sector expects to experience strong growth with its focus on innovation and digital to address challenges, and sees itself as the sector with the most potential for consolidation. Interestingly, some executive opinion of those surveyed seems counter to key indicators:
- More than half (56%) of the respondents expect the US to be the fastest growing region – yet, China remains the fastest growing chemical producing region globally.
- Six out of 10 respondents expect M&A activity to increase by 2019, while sector valuations are near all-time highs.
- Nearly all (85%) think that the sector is moderately to highly digitally mature, despite the fact that the sector lags other industries on digital maturity.
“Downstream and chemicals are arguably the most compelling sectors right now,” Duane Dickson, Vice Chairman and US Oil, Gas and Chemicals Leader, Deloitte LLP, said. “We are witnessing the rise of US downstream and chemicals dominance and the steps companies continue to take to innovate, digitize and streamline their processes is bolstering that position as these sectors make their presence known on the world stage.”
Digital: Still early innings, but the potential is vast
While two-thirds of surveyed executives characterized the digital maturity of the overall industry as relatively moderate, sectors are defining viable applications and near-term ROI.
- Operational efficiency and productivity were ranked as the top benefits of deploying digital by oil and gas, as well as chemical executives.
- Almost half of oil and gas (44%) and chemicals (49%) executives see artificial intelligence, machine learning, and advanced analytics as the technology having the largest impact on the industry, due to their early ROI and proven role in achieving specific business objectives.
- Almost half of oil and gas (41%) and chemicals (49%) executives listed energy storage and efficiency as technologies having a significant impact on the industry.
- Wearables, blockchain and digital twins were ranked as having the least impact on the industry right now.