Comments: Looking Ahead (May 2011)

Abstract

Editor's column Top executives from an operator, service company, drilling contractor, and financial services firm spoke recently in Houston about the short- and mid-term outlook for the oil and gas industry. They agreed that the industry is undergoing significant changes as it transitions to new market structures amid increased advanced technology demand. Oil and natural gas prices should continue their current trend, with oil prices rising and gas prices under pressure from ample supply, said Marshall Adkins, director of energy research and managing director of equity research at Raymond James & Associates. He spoke at the Decision Strategies’ industry forum, a widely attended occasional gathering in Houston. Several factors will continue to contribute to higher oil prices over the next five years, he said, such as Middle East instability, a leveling off of non-OPEC production growth, the impact of the US Gulf of Mexico drilling moratorium, rising demand in China, and questions about the extent of OPEC’s production capacity. The shale boom in the US is weighing on gas prices and, despite those low prices, the economics of gas drilling remain solid, Adkins said. US well productivity is up five to 10 times over the past several years, as advanced technology in shale formations has led to efficiencies. The US gas supply is projected to rise 7.5% this year and another 6% in 2012. Robert Parker, executive chairman of Parker Drilling, agreed that the drilling moratorium in the US Gulf of Mexico along with the emergence of shale production has greatly altered the short-term supply outlook, and contributed to the divergence in oil and natural gas prices. A real wild card in any future global supply/demand outlook is the growing political instability in some of the larger producing countries, he said. Notable will be how the US shale boom translates to other countries—infrastructure hurdles may limit production in some countries and shale oil production may eventually prove more prolific than shale gas. China and Argentina have strong shale potential and, in the Middle East, Saudi Arabia is a good bet. Over the next several years, service companies, international oil companies (IOCs), and national oil companies (NOCs) will continue to adapt to a changing industry landscape. Several market forces are combining to change expectations for service companies, said Chad Deaton, chairman and chief executive officer of Baker Hughes. Growing hydrocarbon demand, the increasing importance of NOCs, the need for advancements in technology, and the increased importance of deepwater production and in maximizing recovery factors have broadened the scope for the service sector in operations projects. “The oil and gas industry is one place where technology really drives economics,” he said.