Capital Discipline Research Articles

The spear of capital and the shield of labor: Chinese model of emotional labor in domestic work

The theory of emotional labor, originating from the institutional background of the Western social and cultural system, is committed to criticizing the emotional management and emotional alienation of service workers under capital discipline. This paper introduces the construction of social relations with acquaintances typical in Chinese rural society into the analytical framework. It presents a Chinese model of automatized emotional labor, different from the model of commercialized emotional labor, by analyzing the emotional model acquisition in the professional development process of domestic workers and the mechanisms of formation, maintenance, and reproduction of the model in the labor process. In the new model, consumers (customers) and workers are equal and mutually beneficial interactive subjects, and emotional labor is no longer the spear of capital but instead becomes a shield for workers against challenges in the labor process. Therefore, this paper puts forward a theoretical reflection on consumers–workers under the model of commercialized emotional labor.

BANK REGULATION AND STABILITY: LESSON LEARNED FROM THE INDONESIAN BANKING SECTOR

This study aims to investigate the impact of bank regulations on bank stability. This study holds crucial significance in Indonesia’s long regulation journey within a bank-based economy to maintain stability in various business cycles, including the Asian financial crisis. Additionally, although the capitalization of the Indonesian banking sector is the highest among the G-20 countries, the capitalization of these more than 100 banks varies widely and is concentrated among large banks. Thus, it is necessary to implement the capital requirement policy meticulously. This study examines the impact of bank regulations in terms of capital requirement and bank capitalization on bank stability using a sample of Indonesian commercial banks and employs a dynamic panel regression. We expect to improve from the previous study by using the research period from 2001 to 2019 that captures different business cycles, analyzing three of Indonesia’s bank regulations, and providing further analysis by incorporating the role of bank market power and size in the relationship between bank capital and bank stability. The results show that capital discipline implemented in the capital requirements significantly supports bank stability. Furthermore, the findings show that low-to-middle capitalization banks are associated with weak bank stability in terms of solvency. However, low-capitalized banks tend to be more prudent in granting credit, so exposure to credit risk is low. Moreover, this study reveals that market power and size strengthen the impact of capital on bank stability. However, such an influence should be accompanied by intense supervision to avoid credit risk exposure.

Social capital and capital allocation efficiency

AbstractBased on the social norms and structural theories of social capital, this study examines the relationship between community social capital and the firms’ capital allocation efficiency. We hypothesize and find that the community social capital of a firm's headquarter area has a negative and statistically significant impact on its capital allocation inefficiency, which is robust to alternative proxies for community social capital and capital allocation inefficiency, propensity score matching and instrumental variable regressions. In addition, we find that the effect of community social capital is more pronounced for firms with poor internal ethical culture and weak network connections to outside executives and directors, implying that community social capital becomes important in these situations. This finding links prior social norms and networks literature to capital allocation studies in that the norms and networks components of community social capital discipline self‐interested managers’ behavior and reduce information asymmetry‐two channels of capital allocation efficiency. Overall, community social capital works as a compensatory monitoring and information transfer mechanism and improves the firms’ capital allocation efficiency.

Surgical Coiled Tubing Stimulations: Step Changes in Effectiveness, Efficiency, and Characterization of Waterflooding Interventions

Summary An innovative coiled tubing (CT) real-time flow measurement tool was introduced in Ecuador to reformulate the stimulation workflow in water injectors, which comprised evaluation and treatment. This new technology enabled an integrated, single-run workflow instead—initial injectivity measurements, diagnostics, treatment, post-stimulation injectivity measurements, and final diagnostics. This novel, rigless approach reduced equipment footprint, operational time, and cost, and it improved production as compared with the conventional approach, despite accrued capital discipline constraints. Conventionally, operators rely on workover rigs and multiple product lines to diagnose, stimulate, and evaluate injector wells. Several challenges and inefficiencies were addressed by deploying the CT real-time flow measurement tool. Each intervention was designed to be completed with a single CT run and without the need for a workover rig, thus saving cost and time. Tailored diversion methods substituted the need for drillpipe to set mechanical packers. Prestimulation injection logging test (ILT) results obtained with that innovative tool, coupled with real-time control of depth and high-pressure jetting during execution, enabled effective placement of the stimulation treatment. Ultimately, post-treatment ILTs confirmed treatment effectiveness and final wellbore downhole conditions. Introduction of the CT real-time downhole flow measurement tool allowed operational objectives to be met in a single run, without additional interventions, with or without a workover rig on site. When workover rigs were present, this improved workflow saved an average of 15% operational time. In cases without a workover rig, 105 hours of rig time were saved (without considering rig mobilization time). Four case studies are presented. The first two cases demonstrate how acquisition of ILTs throughout the intervention enabled optimization of fluid placement and introduction of diverter methods. The third case covers a scenario where there was an initially low injectivity and highlights the challenges and lessons associated with recovering injectivity. The fourth case presents challenges unique to flowmeter measurements in heavy-oil environments. In each case, effectiveness of the optimized treatment was measured by two metrics: improvements in net injectivity and uniformity of injection profile, both of which drive the effectiveness of secondary recovery in connected producer wells. On average, wells intervened with this approach featured an improvement in injectivity of 301% (compared with 226% conventionally) and in their injection profile homogeneity by 13%. As a result, the productivity in connected wells improved by as much as 74% and an average of 39% (compared with 14% conventionally). This innovative workflow is a step change over conventional approaches to rejuvenate waterflooding. It combines the capabilities of delivering treatments via CT and the power of real-time downhole flow measurements to break the paradigm of multiline, multirun operations to remediate and stimulate injector wells. This yields logistically leaner operations, which are less costly, and it enables breakthroughs in secondary recovery through data-enriched interventions in times of budget pressure, not only in Ecuador, but also across the globe.

As Oil Transitions to “Energy,” OFS Firms Revisit Priorities and Positions

As the oilfield service sector emerges from a downturn and into a post-COVID-19 world, the companies that comprise it are repositioning them-selves along with their product and service portfolios to demonstrate their ability to sustainably support both new energy solutions and legacy oil and gas customers. This will mean charting new paths through a rapidly changing energy sector and protecting core competencies while entering new markets full of both opportunity and uncertainty. That is already happening among the sector’s heavyweights. While they still have large legacy businesses focused on hydrocarbons, some are adopting broader energy services business models to reflect the move toward cleaner fuels and renewables. And some are diversifying into new industries altogether, where they can leverage their assets’ competencies to expand their revenue base and potentially broaden their appeal to investors. Capital Discipline and Patience Sriram Srinivasan, Halliburton’s company’s senior vice president, global technology, said his company is pursuing a long-term journey of looking for solutions to control emissions across the entire upstream operations spread. “It’s no longer just about deciding where or when to turn pumps on and off or change a gear in the engine powering the pumps in a hydraulic fracturing spread to get improved downhole outcomes. It’s also about embedding energy considerations for emissions reduction across the board,” he said. “We have always designed for performance, cost, serviceability, and operability. Now we’ve added emissions sustainability.” He used artificial lift as an example. “Electrical submersible pumps (ESPs) are big consumers of electricity. Anything you can do to improve the energy efficiency of ESPs goes a long way toward reducing carbon footprint.” Most ESPs today are powered by electric induction motors. Halliburton is now looking at permanent magnet motors and associated electronic drives to maximize the efficiency of the motors, and thus, the pumps. The pump design can also be made more efficient by optimizing the design of the impeller blades. “Another challenge,” he continued, “is that when sand gets into the pumps, it degrades efficiency, so the pump becomes less efficient the longer it stays in the well. We need changes in coatings to prevent sand from agglomerating on the blades. How do you get a cheap coating that will protect from sand?” Srinivasan also pointed out that energy efficiency can be improved and carbon footprint reduced by spending less time drilling the same kinds of wells, noting that standardization, digitalization, and automation are key enablers. “The industry is still heavily manual, many people are involved, and there is still way too much paper,” he said, adding that there is huge potential for efficiency improvements and also real urgency around achieving efficiency in every aspect of the drilling operation.

SPE Technical Directors’ Outlook - The Industry’s Transformation in 2020 and What It Means for the Future

For an industry in which terms like “first ever,” “unparalleled,” “unprecedented,” and “novel” are often over-used to the point of losing their meaning, 2020 hit hard with the true meaning of those words as the COVID-19 pandemic exploded onto the world and disrupted almost everything about life as we knew it. The oil and gas industry, which had begun showing signs of recovery from a generational downturn, was hit particularly hard. Jobs were lost, companies shuttered, and supply chains upended. But the same combination of audacity and ingenuity that has driven the industry for over a century took hold quickly. Oil and gas people love - and need - to network, share ideas, transfer and apply technology, and gather intelligence. So, when in-person conferences, workshops, and tradeshows were suddenly canceled or indefinitely postponed, entities such as the Society of Petroleum Engineers scrambled to use digital technology to take those events online and make them virtual. While not a perfect replacement, virtual online events offer some unique advantages, as SPE technical directors pointed out in their annual roundup. Digitalization, long a controversial topic among many in the upstream sector, is now being called essential by the directors across the six SPE technical disciplines they lead. Automation is mentioned frequently in the directors’ comments as a growing contributor to efficiency and risk reduction. Capital discipline, balance sheet management, and cash flow are seen as crucial, as are collaboration (both internal and external) and value - ranging from core values to value-driven data, to provable, value-based outcomes. Agility and the ability to comply with environmental, social, and governance (ESG) criteria have taken on new importance. So has work - how and where we do it, and how we balance it with other aspects of life. Knowledge dissemination is considered more important than ever. Uncertainty continues to characterize the upstream sector, even more so than before the pandemic, but at least one thing is certain: The work of the industry, and the way in which people who comprise it work, is forever changed. The SPE technical disciplines and the directors who lead them are as follows. Completions - Terry Palisch, CARBO Ceramics Data Science and Engineering Analytics - Silviu Livescu, Baker Hughes Drilling - David Reid, NOV HSE and Sustainability - Annamaria Petrone, Eni Production and Facilities - Robert Pearson, Glynn Resources Reservoir - Erdal Ozkan, Colorado School of Mines Here, they reflect on a truly unprecedented year and share their outlooks for their disciplines going forward.

Keys to Better Water Management: Seeking Sustainability Amid the Chaos

Here we go again. A series of unexpected circumstances have intersected to drive oil markets down, causing myriad challenges for operators and service companies alike. A virus pandemic erupts, shutting down global economies and thus the demand for oil. Ongoing disagreements between OPEC, Saudi Arabia, and Russia on a response strategy and increased production sees global crude prices drop to the $20 range, something we have not seen in decades. Compounding the crisis in North America is the market influence over the past few years, which drove operators to focus on cash flow and profitability over production and capital discipline with limited access to equity and additional debt. Operators will need to work closely with service providers to once again make step changes in optimizing value, improving efficiency, and eliminating downtime and wasted resources. The New Normal Speculation as to the duration of this crisis is just that: speculation. The macro forces fueling it, the COVID-19 pandemic, and the price war between OPEC and Russia are beyond our control. In terms of business, it is wiser and more prudent to focus on what we can control. Even before the recent events, most operators and service providers had already been revising their strategies, shifting from production growth to profit growth, in response to dwindling investment. We can expect that trend to intensify. There will be an increased emphasis on making operations more efficient and leaner with fewer resources and less susceptible to incidents and interruptions that lead to downtime. Further, investors are continuing to prioritize ESG factors (environment, social, and governance) alongside profitability. The room for error and cost overruns just got a lot smaller. It is a well-worn cliché but perfectly apt right now: When life gives you lemons, make lemonade. As challenging as the current market climate is, it nonetheless presents us with opportunities to adopt more sustainable and more efficient solutions; among them is better water management. Given the ratio of produced water to oil—up to 10 bbl for every 1 bbl of oil—development of unconventional assets has required increasing the focus on water management operations. To hydraulically fracture a single well requires millions of gallons of water, water that is frequently sourced elsewhere and transported to the fracturing site via truck. Hydraulic fracturing produces millions of barrels of water from the reservoir in addition to the oil. The produced water, along with any recovered frac water (flowback), contains sands, salts, and metals that make it challenging to reuse directly in fracturing or otherwise. The more sustainable and more efficient solution is to recycle the flowback and produced water. It entails desanding, filtering, and treating the flowback and produced waters, blending it to applicable specifications, safely storing it, and finally transferring the recycled water to the wellsite for use as a fracturing fluid. A comprehensive, integrated, and automated closed-loop water management system can render flowback and produced water into a suitable base fluid for fracturing. Such a system not only brings more sustainability, accuracy, and efficiency to water management, it is cost-effective, especially now amid this volatile market.

Valero energy corporation case study

Aim: The study’s aim is to deeply investigate Valero Energy Corporation’s operations. Established in 1980, Valero Energy Corporation (Valero) is currently one of the biggest petroleum refiners in the oil and gas industry both in the United States and internationally. Headquartered in San Antonio, Texas, Valero owns 15 petroleum refineries and 14 ethanol plants.Method: Valero Energy Corporation’s operations were closely examined using a case-analysis technique.Findings: The current study results depict that Valero Energy Corporation faces challenges in the industry’s midstream and downstream sector and emphasizes external factors such as weather and geopolitical influences. The prices of crude oil are stabilizing but uncertainty in the market and the slowdown of economic growth internationally will remain a challenge for Valero Energy Corporation in the short-term future. Companies in the oil and gas sector will continue to enforce capital discipline as a long-term strategy to prepare them for the economic uncertainty ahead and unsteady industry conditions. Valero’s strategic acquisitions and divestitures have helped the company through tough times in the past, but is Valero’s mix of assets appropriate today?Implications/Novel Contribution: Valero Energy Corporation Case Study is suitable for undergraduate and graduates business students to apply critical thinking, qualitative and quantitative analyses, and decision making. The case study features Valero Energy Corporation its quest for relevance and above-average returns.

Making upstream infrastructure collaboration happen

Major upstream and midstream developments are required in Australia to sustainably address the east coast gas price challenge and enable a new wave of liquefied natural gas (LNG) projects in Western Australia (WA) and the Northern Territory. Until now, each project in the WA offshore and Queensland coal seam gas systems has had its own midstream infrastructure, which is suboptimal for costs. Major players, including Chevron and Woodside, have expressed interest in a more optimal, shared ownership model, similar to others around the world. In the US Gulf of Mexico, pipeline owners established master limited partnerships to take advantage of tax benefits and to share cost with institutional investors. In Norway, high infrastructure costs led to government-mandated shared ownership. The momentum for change in Australia is gathering and includes increasing investor pressure on capital discipline for upstream companies, strong competition for final investment decisions across global LNG projects, stakeholder expectations to minimise the environmental footprint of energy projects, a strong appetite of infrastructure and pension funds for energy infrastructure assets and pipeline companies looking to expand their portfolios to realise synergies in view of increasing regulatory scrutiny and margin restrictions. This paper describes international benchmarks, identifies blockers and proposes action steps that will enable this crucial industry development.

Comments: Shale Enters a New Phase

Editor's column US crude oil production will reach a record level of 12.29 million B/D in 2019, increasing faster than expected both this year and in 2020, according to the latest US Energy Information Administration (EIA) forecast. Output will rise to 13.29 million B/D next year. Similarly, the International Energy Agency predicted last month that US shale oil production will continue to reshape world energy markets, with the US accounting for 85% of the increase in global oil production to 2030. US output will rise to 19 million B/D over the next decade, wresting additional market share from OPEC producers and Russia, according to the agency’s annual World Energy Outlook. But while shale will continue to affect global markets, some believe this predicted rate of growth may be optimistic. There are already signs that producers are curtailing spending and production in the major shale basins as they are under increasing pressure to focus more on capital discipline and returns rather than production growth. In contrast to the EIA and IEA, consultancy IHS Markit sees much slower growth in US shale next year, just a 440,000 B/D increase, with output flat in 2021. “Going from nearly 2 million B/D annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” said Raoul LeBlanc, IHS Markit vice president for North American unconventionals. “This is a dramatic shift after several years where annual growth of more than 1 million B/D was the norm.” IHS Markit predicts prices for West Texas Intermediate (WTI) crude to hover in the $50/bbl range and that capital spending will drop by 10% this year, 12% in 2021, and 8% in 2022, from $102 billion in 2019 to $83 billion in 2022. Prices need to be about $65/bbl for producers to be able to both increase production significantly while also satisfying shareholder expectations, it said. In the meantime, producers are focusing more on completing wells than drilling new ones, which is a more economical way of boosting output. There were 7,740 drilled but uncompleted wells in the seven major US shale regions at the end of September, according to the EIA, compared with 8,800 in January. After years of producing all out, pushing US oil and natural gas production to record levels, shale producers are pulling back. Although output has skyrocketed, particularly in places such as the Permian Basin, financial results have not. Mergers and bankruptcy filings are common, and investors have become reluctant to lend capital. Natural gas companies in particular are hurting, and they are promising more capital discipline and lower production going forward. During third-quarter earnings calls, Chesapeake Energy, EQT, Callon Petroleum, Cimarex, and Diamondback Energy all signaled flat to lower spending and production. Chesapeake’s CEO had to re assure investors of the company’s financial health a week after the company said in a third-quarter earnings filing that it had “substantial doubt” of its ability to continue as a going concern. “I don’t think OPEC has to worry that much more about US•shale growth long term,” Pioneer Natural Resources Scott Sheffield told investors last month.

Comments: Cautious Pessimism

Editor's column After the oil price downturn, operators placed renewed emphasis on spending discipline, in drilling, project costs, and balance sheets. For some, that was a different metric: return to shareholders over production growth. During and after the prolonged decline in oil prices, which bottomed in 2016, larger operators did become more technologically proficient, increasing the efficiency of existing wells and learning to live with lower oil prices. With anticipation that $40-60/bbl oil might be the norm for years to come, they had no choice. But this was easier for larger companies than smaller independents ramping up shale output in places like the Permian Basin. This has put many independents in a tough spot. Bankruptcies are on the rise, and the future of unconventional production in the US, while spectacular, has some un answered questions going forward. The number of shale operators filing for Chapter 11 bankruptcy protection continues to grow, the latest being Sanchez Energy and Halcón Resources, both of which filed for protection in mid-August. From the beginning of 2015 to May 2019, 172 North American operators filed for bankruptcy. Many of the bankruptcies occurred in 2015–2016, but there were more in 2018 than 2017. “After years of high growth, the US unconventionals sector has yet to deliver cash flow or returns to investors across the full cycle. To achieve profitability, shale producers will need to transform their organizations and shift their strategic focus from growth to value creation,” consulting firm McKinsey said in a statement last month. During recent earnings calls, many independents in the unconventional sector sounded a note of pessimism about the current state of the business. US shale operators need to tap the brakes on production growth and focus even more on capital discipline in an oversupplied market, Continental Resources CEO Harold Hamm said at a recent industry conference. “Capital discipline is more important now than at any time I’ve seen it. We can oversupply the market, and we have,” Hamm said. In August, the International Energy Agency reported that demand growth for oil had hit its lowest level in more than a decade, going back to the recession of 2008. The demand slowdown was driven by fears of another global recession and the ongoing trade dispute between the US and China, which has hurt several industrial and manufacturing sectors. Oil prices have fallen steadily this year, about 20% since April. In a separate report, consultancy Rystad Energy said the oil market was going from “gloomy to gloomier” and questioned whether OPEC and the other major producers that have been reigning in supply since the oil crash could do much more at this point. But there are bright spots in other parts of the industry. “High-impact” exploration drilling activity increased significantly in the first half of 2019 with 51 exploration wells completed, compared with just 36 in the same period last year, according to Westwood Global Energy Group. Sixteen large discoveries have been made so far this year, with the largest discoveries all being gas at Dinkov (14 Tcf) and Nyarmeyskoye (4.3 Tcf) in the Kara Sea offshore Russia, and Glaucus (4.5 Tcf) in the Eastern Mediterranean offshore Cyprus. The largest oil discoveries were Yellowtail and Tilapia offshore Guyana, according to Westwood. It expects that another 35–40 high-impact exploration wells will be completed by the end of 2019, resulting in more than 85 for the year, a 35% increase from 2018.

Can Higher Capital Discipline Bank Risk: Evidence from a Meta-Analysis

Capital regulation has been among the most important tools for regulators to maintain the credibility and stability of the financial systems. However, the question whether higher capital induce banks to take lower risk remains unanswered. This paper examines the effect of capital on bank risk employing a meta-analysis approach, which considers a wide range of empirical papers from 1990 to 2018. We found that the negative effect of bank capital on bank risk, which implies the discipline role of bank capital, is more likely to be reported. However, the reported results are suffered from the publication bias due to the preference for significant estimates and favored results. Our study also shows that the differences in the previous studies’ conclusions are primarily caused by the differences in the study design, particularly the risk and capital measurements; the model specification such as the concern for the dynamic of bank risk behaviors, the endogeneity of the capital and unobserved time fixed effects; along with and the sample characteristics such as the sample size, and whether banks are bank holding companies or located in high-income countries.

Comments: In Search of Profitability

Editor's column With the shale industry still awash in red ink, and oil prices falling, it may take more consolidation to try to bring some financial stability to the sector. The financing strategy of the shale sector has always differed from onshore conventional oil business models. The small and medium-sized independents that have dominated shale have operated with much higher levels of debt and, since the beginning of the unconventional rise, have operated with negative free cash flow. Although production has skyrocketed, profitability has not, and Wall Street investors have grown tired of financing a largely unprofitable piece of the oil and gas business. The International Energy Agency (IEA) predicted last year that the shale industry would finally achieve positive free cash flow this year as oil prices rebounded and new pipelines relieved bottlenecks that had depressed prices. But the sharp downturn in oil prices in the fourth quarter and the recent decline to near $50/bbl (WTI) has not helped. When the shale boom was taking off between 2010 and 2014, high oil prices led to huge financial backing. Investment quadruped during that period, according to the IEA, as oil production increased from 0.44 million B/D to 3.6 million B/D, the fastest oil growth since the advent of Saudi Arabia’s giant oil fields in the 1960s. When oil prices tanked beginning in 2014, shale firms, along with the rest of the industry, switched to sharply cutting costs and trying to instill capital discipline. It was too much for some. More than a hundred shale firms filed for bankruptcy during 2015–16. Banks became more reluctant to lend money, even after oil prices began to recover, leading to a wave of lending from private equity firms. Production from the sector continued to defy odds, but profitability was still not in sight. BP’s most recent bellwether Statistical Review of World Energy, released in June, noted that US oil and gas production growth accelerated in 2018 at another record pace. The production growth “exceeded any other country’s annual increase in our 50-year history” of publishing the review, said BP Chief Economist Dale Spencer. “Indeed, the US achieved a unique double-first last year, recording the single largest-ever annual increase by any country in both oil and gas production. In case there was any doubt, the US shale revolution is alive and kicking,” he said. Since 2012, US oil production, including natural gas liquids, has grown by more than 7 million B/D, “broadly equivalent to Saudi Arabia’s crude oil exports, an astonishing increase which has trans-formed both the structure of the US economy and global market dynamics,” he added. But how long this revolution can continue without solid economic footing is unclear. One trend under way is consolidation. Two years ago, many independents began selling off assets so they could continue drilling. Today, many are pursuing assets sales, drilling partnerships, and other alternative financing strategies, according to an article in The Wall Street Journal. A new wave of company consolidations and buyouts by larger firms may have started. Chevron attempted to buy Anadarko and its sizable presence in the Permian Basin but was beat out by Occidental. Although Shell and other majors have indicated that, while interested, current selling prices for some companies appear too steep, the Anadarko deal could be the first of many that attempts to bring some stability to the shale sector and increases the presence of larger, more diversified firms.

E&P Notes (April 2019)

E&P Notes (April 2019)

Better project delivery: Australia's value opportunity

Has the industry seen the light on project delivery? Numerous signs of improved execution through the downturn in Australia and across the globe suggest oil and gas companies are finally getting it right after a lengthy period of dismal performance. Even before prices went to US$100 per barrel and beyond, the oil and gas industry had a poor track record of delivering major projects. However, higher prices exacerbated the situation, encouraging poor capital discipline and overconfidence in undertaking large-scale, highly complex projects that overstretched the supply chain. The results were delays, cost overruns and billions of dollars in value destroyed. Over the past decade the average project was delivered 6 months late, with costs up 14% compared with the forecast at final investment decision. The top 15 cost blowouts were a cumulative US$80 billion over budget. Much of that was in Australia. But lessons have been learned. Without the safety net of higher prices, the successful execution of capital projects has become of crucial importance to the industry. There is now evidence of post-downturn projects being delivered on time and on budget; in Australasia, recent examples include Greater Western Flank Phase 2 and the Bayu-Undan infill drilling campaign. But do these successes mean execution has really improved? It can be argued these are relatively simple brownfield, subsea developments. When we enter the next investment cycle with bigger projects (Scarborough, Browse and Barossa), will we see the same old mistakes repeated again?

Comments: The Inevitable Price Cycle

Editor's column Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman met in mid-June on the sidelines of a World Cup game in Moscow to discuss oil prices and diplomacy ahead of the recent OPEC meeting. It was the latest effort to wrest control of oil prices that began with the historic Vienna production cuts in 2016 that rescued the oil market, and the most recent in a long line of attempts to control the oil price cycle. The production cuts worked. The OPEC members and several largest producers, including Russia and Mexico, agreed in late 2016 to curb oil production by 1.8 million B/D to reduce the supply glut that had sent prices plummeting and caused massive layoffs throughout the industry. Compliance was not only good, but better than expected. Some countries cut supply even more than they agreed, and Venezuelan output dropped sharply because of that country’s economic crisis, which brought the market back in balance. The production cuts totaled almost 2.5 million B/D, according to the International Energy Agency (IEA). The extent of the cuts has led some, including the IEA, to fear that the market could soon be in short supply, sending prices sharply higher, and continuing the cycle of sharp shocks to the market. To them, oil prices in the $60–70 bbl range would be ideal, encouraging new production to replace declining reserves without disrupting demand growth. The oil market has tightened quickly, which should lead to output increases from major producers this year and next. Common phrases in the industry this year are “cautious optimism” about prices and “capital discipline.” But oil price cyclicality appears inevitable. The long-term nature of the business that requires years to develop new production, along with reliance on lagging indicators and the relative price inelasticity of consumption, underlies the difficulty of balancing supply and demand. Since 2014, rebalancing the oil market has meant cutting production and reducing inventories; for the rest of this year and 2019, it will mean increasing supply to prevent prices from rising too quickly. One source of supply that may help is the Permian Basin, which has seen remarkable growth during the downturn, and could act as a swing producer and a major oil exporter. A new report from IHS Markit forecasts that Permian production will rise by almost 3 million B/D to 5.4 million B/D by 2023. Production from the Permian by itself would be greater than any OPEC country except Saudi Arabia and the additional output would be more than the production of Kuwait, the report said. Permian output was less than 1 million B/D in 2010. One thing that could derail this predicted increase is strains on infrastructure. Already, logistical bottlenecks in pipelines and trucking have occurred, causing some production to be deferred to next year.

Comments: Offshore Makes a Comeback

Editor's column All eyes in the upstream continue to be on the growth in unconventional production, particularly in the US. But the offshore arena may be making a quiet comeback, at least in the near term. The US Gulf of Mexico, North Sea, Latin America, and other spots have seen renewed interest of late, as operators enforce capital discipline to make these expensive projects feasible given the current price climate. Many offshore megaprojects were cut or scaled back when oil prices began to drop sharply in 2014 and, while global offshore output has been steady, it has not grabbed the head-lines that surging shale production has. World offshore output has remained about 27 million B/D over the past decade. US Gulf of Mexico production, which is rising, made up a quarter of US output in the early 2000s but captures only 16% of the total now with the rise in unconventionals. US Gulf of Mexico production in 2017 rose to 1.65 million B/D, the highest annual level on record, according to the US Energy Information Administration (EIA). It is expected to increase this year and in 2019, maintaining record highs. Output will creep to 1.7 million B/D in 2018 and then to 1.8 million B/D in 2018, according to the EIA. This is due mainly to projects that were sanctioned before the price downturn and went forward in 2016 and 2017. The EIA says that seven deepwater fields will start production this year and another three will start up the following year. Shell will begin production from three fields over the period—Gotcha, Rydberg, and Kaikias. Hess and LLOG both will start up two fields, and Stone Energy and Apache will bring one field each online. An offshore auction by the US government in March, the largest for drilling prospects off the US Gulf Coast in history, attracted only modest interest from operators, proving that they are still wary of market conditions. The bidding was for 77 million acres of deep- and shallow-water tracts. Interest offshore Mexico and Brazil remains high. Brazil’s offshore auction in late March brought winning bids from ExxonMobil, Wintershall, Chevron, Shell, BP, Statoil, and Qatar Petroleum. Several operators said their break-even price for offshore projects is now under $50/bbl, well below where prices were trading in mid-April. The success of Brazil’s auction was not only because of rising oil prices and better capital discipline among operators, but also changes in Brazil regulatory laws that made the projects more attractive. That followed a deepwater auction in Mexico earlier this year that saw aggressive winning bids from Shell, which snatched up nine blocks, as well as Petronas and Qatar Petroleum. But offshore production will not catch US onshore output, which continues to outpace expectations despite fears of infrastructure bottlenecks and people shortages. Total US production will reach 11 million B/D this year, a whole year earlier than projected in March, the EIA said in April. Output is averaging 10.2 million B/D so far this year. The EIA expects US production to reach 11.18 million B/D next year.

The smart money: driving shareholder value through better capital allocation

As shareholder activism has grown both in its scope and influence, management teams are under increasing pressure to justify their decisions around the allocation of capital – whether it be through dividends, share buybacks, an expansion project, M&A or a greenfield project. However, for the oil and gas sector, much like the mining sector, it has been historically difficult to demonstrate continued excellence in capital decision making. In the past, capital intensive, long-dated projects (multi-billion dollar LNG developments) and large-scale M&A saw returns and pay-offs that were both distant and uncertain. Now, with so much investor scrutiny and focus on short term performance, demonstrated capital discipline is paramount – oil and gas leaders must think very carefully about where they allocate capital. Although they present their own challenges, capital allocation decisions, unlike commodity prices or the macroeconomic climate, are within the control of companies, and if a model can be developed to deliver long-term value, these decisions will position shareholders and their management teams well for the future. This paper will chart the performance of a sample of oil and gas companies against their decisions around capital allocation and cost-reduction. The paper will demonstrate to oil and gas leaders the importance of aligning their organisational strategies and balance sheet investments to create future value for shareholders.

Integrating Technology and Organizational Alignment for a Portfolio Implementation

This article, written by JPT Technology Editor Chris Carpenter, contains highlights of paper SPE 187162, “People and Process: Integration of Technology and Organizational Alignment for Successful Implementation of a Strategic Capital Investment Portfolio,” by David S. Fulford, Gregory P. Starley, and Michael Berry, Apache; Derrick W. Turk, Terminus Data Science; and James R. DuBois, 3esi-Enersight, prepared for the 2017 SPE Annual Technical Conference and Exhibition, San Antonio, Texas, USA, 8–11 October. The paper has not been peer reviewed. Choosing the best projects to fund is easy. The true challenge is weighing the complexities of the projects that are at the threshold for funding in a capital-constrained environment. One exploration-and-production (E&P) company has found that implementing and sustaining a portfolio process require technical solutions and application of best practices for three critical elements: production forecasting, project modeling and economic evaluation, and portfolio management and decision making. Introduction When capital is a limited resource, a bottoms-up approach to budget proposals does not provide a clear view to the optimal suite of projects to fund. Fig. 1 illustrates this concept, in which each business unit (BU) submits an independent budget for funding consideration. While the sum of the requests is, for this example, $6 billion, the corporation only has $4 billion to provide in order to meet cash-flow expectations. While each budget proposal may contain many projects that surpass internal economic hurdles, the total sum of requested capital among all submitted budgets cannot be provided. In contrast, the corporate portfolio has clear sight of which projects contribute to corporate values, goals, and targets, and can deselect marginal projects in order to meet the total capital constraint. This approach is particularly important and effective in exercising capital discipline. Optimization of the portfolio is an exercise in linear optimization maximize total discounted net present value. Establishing a corporate portfolio is about more than merely the tools used for linear optimization of the opportunities. A portfolio must start with solutions for the complexities involved in the characterization of the projects themselves, evaluation of uncertainty and thresholds for decisions, and discretization of possible outcomes into cash flows that may be evaluated in the portfolio. Business challenges involved in successful implementation of a corporate-portfolio process include accurate production forecasting, project modeling and economic evaluation, portfolio management, and assessment of organizational alignment and resources (e.g., how decentralized BUs can coordinate effectively with others within a larger organization). Solutions (Technology) Production Forecasting. Monte Carlo simulation methods have been applied for both unconventional and conventional reservoirs. For unconventional-resource plays, a Markov chain Monte Carlo (MCMC) machine-learning technique is used to create more-objective production forecasts.

Capital discipline and financial market relations in retail globalization: insights from the case of Tesco plc

This article provides an in-depth study of leading transnational food retailer Tesco plc to explore how its financial management and relations with the investment community—notably its reputation for capital discipline—underpinned successful expansion. Informed by close dialogue with equity analysts, we investigate how this model deteriorated since the late 2000s with declining returns, leading to high-profile international divestitures. The analysis assesses the drivers of these difficulties, and conceptualizes them. It examines how the retailer, pressured by the investment community, reviewed its international strategy and attempted to ‘reset’ its relations with capital markets to re-emphasize shareholder value and returns. The research teases out the manner in which legitimacy with capital markets underpins the extent, pace and form of global retail expansion, leading to significant implications for workers, consumers and wider stakeholders across spatially dispersed host markets.