The period from 2008 to 2018 has been the most disruptive decade in the history of the oil and gas industry. During this time, oil prices went on a roller coaster ride touching $145.85 and gliding back to $32, the production cycle stumbled, many upstream projects were deferred, commodity supercycle sustained and the industry gradually entered the period of digitization and automation. Both the major production catastrophe, that of 2008 and 2018, occurred in this course and jeopardized the overall ecosystem of the industry. All this had a dramatic effect on the oil and gas production trends and to a great extent outlined the future course of actions.
At present, the industry is recovering from the phase of stagnant production and trying to avoid future supply fluctuations or crisis. New discoveries, ramping up of US shale and recovery of the existing reserves are escalating the production statistics leading to some stability in demand and supply cycle. The rejuvenation of production by the upstream companies will in turn help to improve the midstream and downstream sectors’ business conditions. With oil and gas production trends reflecting an upward movement, the industry is hopeful of a strong market, voluntary capital discipline and enhanced efficiencies.
However, for a better understanding of the future oil and gas production trends, it is important to reflect upon the crisis in the past which shaped the present of the industry. Knowing in detail one of the biggest downturns of the industry, the crisis of 2008, will help us elucidate on all the aspects of the present.
The Downturn Of 2008
The then existing tension in eastern Turkey and the fragile condition of US dollars resulted in the increase of the price of US light crude to $90.02 per barrel on October 19, 2007. Later, in March 2008, OPEC slammed the US for the economic ‘mismanagement’ which was leading to baffling oil price rise. The producer cartel blamed the then US President, Mr Bush and his administration for putting pressure to increase output. At that time, prices surged above $110. Further, Asian trade informed that “the Brent North Sea crude contract for August delivery rose to $US145.01 a barrel”. And after this, the prices started to decline drastically and sank down to $32 in December 2008.
So, the year 2008 witnessed oil prices soaring as high as $145 only to be followed by a massive collapse. The oil and gas production trends were fluctuating tremendously also because of the ongoing recession in the world.
What led to the production gap?
There were some major events that occurred in the period of 2005-2008 like the hurricanes in the Gulf of Mexico in September 2005, mishaps of Nigeria (2006-08) and the discord of Iraq, but the production managed to stay stable all this time. So, this crisis was not because of the reduction in supply or robust demand majorly, rather it was due to the inability of the industry to increase production between 2005 and 2007.
The world oil market operates on the laws of supply and demand, and market fundamentals have a dominant influence on price. That being said, the very primitive of any oil and gas field is that with time the pressure decreases which in turn results in the reduced daily output. Thus, in order to keep up with global demand, new discoveries should be the regular thing for the upstream companies. And, the industry during that period failed to move on to the new producing areas which kept on increasing the production gap. Whilst, producer cartel, OPEC responded to the upcoming crisis by boosting its production but depleted resources due to restrained field investments all these years led the gap sneak in between global demand and non-OPEC supply. This had a very serious impact on the global market, which of course is known by all, and it also crippled the industry from within. For example, Indonesia dropped out of OPEC in 2008 and became an oil importer. Saudi Arabia, the most important oil exporter suffered from production decline and for 2007, its production was about 850,000 barrels a day lower than it had been for 2005.
The then seemed ‘insignificant’ events of the bigger picture
The increased volatility in the oil and gas production trends of that phase was the result of seemingly small events. The world’s production went through some major upheavals which culminated in contributing to the Great Recession of 2008. During that period, Venezuela got involved in a legal battle with ExxonMobil over the nationalization of the company’s properties there and decided to halt its oil sales to the energy major. Iraqi oil fields’ production was in the recovery phase due to the wartime damage, and then the destruction of its two main oil export pipelines by the insurgents in late March led to a loss of about 300,000 barrels per day from Iraqi exports.
Later in April, Exxon was forced to shut in production of 780,000 barrels per day from three fields due to the strike of Nigerian union workers. All these and many other periodic shocks resulted in the production decline.
Oil and gas production trends during the Great Recession of 2008
In December 2005, the production of crude oil was recorded to be 74,243 mbpd after which the downturn started. After this, it became almost impossible for the industry to exceed this number for two years. In December 2007, the production rose above the previous high and managed to stay there till July 2008 after which the prices soared high. Later, in August that year, the production fell flat by more than one million barrels and did not surmount 75 mbpd until two years later.
In the era where the world was suffering from inflation, crude demands were increasingly robust and the world was dealing with the poor economy, oil and gas production trends failing to keep up was the last thing expected by the industry. Everything was in mayhem and the oil and gas industry was wounded from the mistakes of the past. But the years to come had in store better plans of recovery and sustainability for the industry.
Bitter sweet journey of the future ahead
On September 15, 2008, Lehman Brothers filed for the bankruptcy protection which is also the all-time largest bankruptcy filing. The economies all around the world started to collapse. The economies all around the world spluttered to freeze. This was when OPEC decided to take its usual step to curb the production gap, it cut the production output by 16% for eight months straight. As a result, stability in the global prices was restored. Further consequences also involved production drop by 1.5% and 1.2% respectively, before gaining stability from 2008 to 2010.
It was after the downturn of 2008 that the drilling of shale was initiated and the US introduced the combination of hydraulic fracturing and horizontal drilling. This led to a significant increase in US oil and gas production and reduced its dependence on oil imports from overseas. Moreover, it helped the US and the industry, on the whole, to recover from the 2008 turmoil. Oil consumption and production gained equilibrium to a great extent by 2010, with consumption surpassing production by just 0.1 MMBOPD. And by 2011, the industry was in a much better condition also because of the increase in the exploration activities globally.
When the industry stumbled in 2014
Fast forward five years to 2014, the industry hit the rock bottom yet again. On the Thanksgiving of 2014, when the prices were at a peak, OPEC changed its policy. The producer cartel drew out its support from oil prices. And this incident marked the beginning of the turmoil of 2014. It was the Thanksgiving of 2014 when OPEC changed its policy and drew out its support from oil prices. This marked the beginning of this recent cycle and the prices were at a peak.
Due to these and many other reasons, this time the recovery of the market would take twice the time compared to the earlier crisis. It was November 26, 2014, when the prices crashed, and later in June 2016 WTI rose above $50 per barrel. Which is 567 days of recovery compared to 294 days of recovery for the 2008 market crash.
The industry had already experienced hardships in the past. And because of this, now every industrial entity moved in a calculative manner. OPEC, unlike the last time, decided to go for production enhancement. Saudi Arabia was in no mood to bear the burden of the production cut. And this attributed to the production rise of OPEC challenging the survival of U.S. shale producers. The next event to follow was lifting of sanctions from Iran which instantly added more volume to the already existing OPEC production. During the period from November 2013 to June 2016, OPEC increased its production more than 5.5 MMBOPD, from 27.3 MMBOPD to 32.9 MMBOPD and the oil and gas production trends were channelled towards the substantial boost in the future.
However, global oil consumption rose approximately by 1.5% during this period as oil prices looked for support near $50 per barrel. The weaker market and lower prices made the companies focus more on producing efficiently from their core assets. This left the companies with no choice but to enhance drilling efficiencies by using various technologies and advanced tools. From then on, the upstream companies started making way for the development and new technologies to keep up with the times ahead.
What the future looks like for the oil and gas industry?
The industry has always found its way back after every crisis. But in the times to come, its intrinsic volatility will be a major problem for the oil and gas production trends. In recent years, new investments in the upstream projects and development of new technologies to enhance production volume have brought stability in the ecosystem to a large extent.
The producer cartel, OPEC along with non-OPEC members decided to cut supply by 1.8 million barrels/day (bbls/d) through 2018 in order to rebalance supply and demand. The oil and gas production trends were supported by this move and the market gained strong grounds of stability over a period of time. Moreover, driven by the North American market, the oil and gas rig activity levels are set to rise and the big projects are being approved.
Exploration stats are improving for the first time after the global recession. BP has gone ahead with Mad Dog in the Gulf of Mexico, and Shell puts a stamp on investing in the Penguins field redevelopment which is its first new staffed installation in the northern North Sea in almost 30 years. These are the signs of a renaissance which has kept the oil and gas production trends shockproof for the times to come.
But the picture of the other side is a bit distressing. According to the PwC reports, in 2017 only 3.5 billion barrels of liquids (crude, condensate, and natural gas liquids) were discovered which can fulfil only 10% of the global demand. This is majorly attributed to the problem in investment in the exploration sector. Because of two challenges, supply and investment, the market of oil and gas is currently what the IEA terms a “two-speed oil market”.
The reports from IEA predicts a supply crunch in the near future and this is an alarming situation for the industry. The one thing which we need to understand is that though the supply glut has ended, its aftermath will continue to persist for a long period of time. And thus, for the times to come, the companies will have to focus on improving capital expenditure and efficiencies in order to boost production.
“The world needs to find an additional 2.5 million bbls/d of new production each year, just for conventional output to remain flat.”
– IEA World Energy Outlook 2017.
The oil and gas trends are parasitical and are feeding upon the ongoing US sanctions on Iran, OPEC led supply cuts and the geopolitical tensions around the world. With the industry entering into the new era of digitization and automation, we require optimized and integrated operations in order to boost production. This being said, the oil and gas industry has come a long way since the last outrage of 2014 and has put its strong foot forward to reclaim more than what was lost. This old industry has grown resilient with time and demands development at a pace like never before.