The oil industry must reinvent itself

Everyone was taken by surprise when, in the autumn 2014, the global oil industry suddenly found itself in the worst crisis seen in decades. Oil prices fell by more than 50 percent in a matter of a few months. Oil companies and subcontractors alike, both in Denmark and abroad, were forced to tighten their belts: investments were scaled back, projects were postponed and operators focused their activities on mature fields.

The effects are tangible, with more than 22,000 jobs lost in the Norwegian sector in less than ten months and BP recently axing 300 positions in the UK sector. In Esbjerg, oil producers and their chain of subcontractors have all been hit by the plunge in oil prices and the lower level of activity.

The new normal?

In January 2015, the price of a barrel of Brent oil dipped to nearly USD 46, a new low. From April to July, the price was relatively stable at USD 60–65 per barrel, but in August, the price dipped back down below the USD 50 mark. In other words, this perfect storm is not quite over yet, and prices are still considerably lower than before the crisis set in.

Although oil and gas projects are based on various oil price scenarios, no one had expected prices to plunge as dramatically as they did. As Martin Næsby, Managing Director of Oil Gas Denmark, explains:

“What we're seeing now is a situation where the market has moved from a high level of activity to everyone putting off new investments. The entire industry has scaled back, and projects have been postponed or cancelled; and we expect the current situation to continue. From a general perspective, this is an industry facing challenges, so we're not seeing a lot of investments in the pipeline.”

Small hopes

Despite the bleak prospects seen this past winter, the North Sea remains very alive. In the spring, Maersk Oil began producing from the Tyra field, which now has a new well.

“This production start-up is the biggest milestone of the year,” was the message from Maersk Oil when the oil began to flow in March.

Then, in June 2015, the company announced plans to extend its activities in the North Sea, both organically and through acquisitions.

“Our ambition is to become one of the top five producers in the North Sea, and we believe this is realistic given our current portfolio, but we're in the market for both acquisitions and new exploration opportunities,” said Maersk Oil CEO Jakob Thomasen.

Also, the new Hejre field is expected to begin producing in 2017. Operated by DONG Energy and Bayern Gas, Hejre will be the largest project in the Danish sector in decades, confirming that the North Sea still has a future.

Need for innovative thinking

A great task, however, lies ahead: creating a sustainable industry. The industry definitely needs to cut costs, and resources will have to be used more efficiently. This is a challenge that all industry players are taking very seriously. They were also very serious about it even before the downturn, stresses Mr Næsby.

“We see the industry's current cost adjustments as a healthy sign, since costs had become too high during the years when oil prices were high,” he says. “Oil in the Danish sector has never been simple to extract, and we've never had 'easy oil'. The Danish oil industry has always been known for its high degree of innovation and cost efficiency, and, in a situation like this, we simply have to become even more innovative and cost effective. We truly hope that it will give us a competitive edge, both now and in the future.”

One of the ways to do this, he says, will be to help players across the Danish oil sector collaborate more, for example in shared drilling campaigns or utilising their infrastructure better. The message is the same from Johannes Kromann Bie, Director of Oil and Gas of Offshoreenergy.dk, a non-profit organisation with 270 members.

“We need to be innovative – and we need to be innovative together. It is absolutely crucial that we forge ties between all the players along the value chain – both among those who demand the solutions and among those with new ideas or knowledge about how we might do things differently,” says Mr Kromann Bie from Offshoreenergy.dk:

“We need to collaborate across the entire industry, capitalise on the synergies between offshore wind and offshore oil and gas, and by exchanging knowledge and experience. Also, we have to start coming up with some brave new ideas, no matter how far-fetched they may seem. What we need are not simply minor adjustments, but a solid cutback in costs.”

New strategy in the pipeline

Meanwhile, the political efforts to define a new North Sea strategy continues. Launched last year by the now former government and its Minister for Climate, Energy and Buildings, Mr Rasmus Helveg Petersen, this process also involves members of the industry.

“Extending the period of extracting oil and gas from the North Sea would be of huge benefit to Danish society. North Sea operations create highly specialised jobs and economic growth. If we can better utilise the resources from our oil and gas fields, the extra income could help make Denmark greener and better,” the former minister said, emphasising that the last litre of North Sea oil to be put in a Danish car in 2049 should be from the North Sea.

Central to the strategy is the desire to improve the recovery rate. Currently, an average of 26 percent of the oil in the Danish fields is extracted. Increasing the recovery rate by a mere one percentage point would raise oil revenues by DKK 50 billion. According to the Danish Energy Authority, raising this rate by several percentage points is a realistic goal.

The recovery rate depends on a number of factors, including technology innovation, and this is where the new Hydrocarbon Research and Technology Centre at the Technical University of Denmark comes in. Backed by a billion-kroner grant from Dansk Undergrunds Consortium (DUC), the Centre opened in 2014.

Oil prices: Stable or rising?

According to most forecasts, the price of oil will remain stable or rise moderately over the next 12 months. In April 2015, US-based energy and commodities company Vitol, the world's largest oil trader, predicted that oil would remain at a price of USD 60–70 over the next year. At the same time, a rising level of trading activity on the oil commodities exchanges has been interpreted by some analysts as a sign that oil prices may be going up again.

Martin Næsby of Oil Gas Denmark does not dare guess the direction of the price of oil, but he does stress that, in any case, the Danish oil industry will be facing new challenges:

“The Danish oil and gas industry will have challenges whatever the price of oil is, because the business case for North Sea oil is too weak. Oil deposits in the Danish sector are small, deep and difficult to extract. This is an issue we believe is extremely important to address.”

The British government has tried to provide better conditions for the oil and gas industry by easing the tax burden for oil companies, both through lower hydrocarbon taxation and lower taxes on oil companies.

Mr Næsby emphasises that this is not necessarily the model that is right for Denmark, but he does suggest a closer inspection of the country's current incentive structure:

“Many of our North Sea fields are of marginal importance and not economically viable, either because of their distant location or difficult geological conditions. However, these difficulties can be overcome, given the right conditions. Research is a step in the right direction, but it is equally important to create the necessary incentives for producing oil from the marginal fields. A strategy is currently being developed, and we are very confident that we can find the solutions that will be best for Denmark,” he says.

“There has to be a financial incentive to invest in the North Sea. Sometimes, we tend to forget that competition is global. When oil companies invest, their main concern is how best to place their money, and, at the end of the day, the question is: Can we attract investment given the global competition?”

15,000 jobs at stake

Although industry earnings are under pressure both in Denmark and globally, some players are suggesting that the changes taking place now can help the industry as a whole emerge from the crisis stronger and more efficient.

“I believe the longer-term prospects are generally quite encouraging. Restructuring an industry like this is never easy: it's going to hurt, and some people will lose their jobs. But it has forced us to take the first steps to explore new ways for the industry to create new cost-efficient solutions, and this means that we will emerge stronger from the crisis,” says Mr Kromann Bie from Offshoreenergy.dk.

Mr Næsby is not prepared to go quite so far, but does stress that he is confident about the future:

“The players who are best able to adapt to the new situation may emerge all the stronger, but we must not forget that there are a lot of jobs involved. If the potential of the Danish sector cannot be utilised and people don’t understand that the business case is too weak, it may mean a loss of jobs. And if that happens, we won't be emerging from the crisis in a stronger position,” he says.

“We're hopeful that we will be able to make people understand the challenges our industry is facing. Denmark is an oil-producing country, and we have a huge industry with 15,000 jobs and DKK 48 billion in exports. We must do everything we can to protect it.”

This is a translation of the Danish article published in Hav & Kaj 2, 2015.