Competition Amidst Transition

July 2017

For better or for worse, the oil price collapse in late 2014 fundamentally changed the energy marketplace. Gone are the days when success was linked almost exclusively to high production volumes and growing reserves. While prices are recovering, the same supply and demand dynamics that led to the downturn remain in place, which, as we’ve seen in the first half of 2017, may continue to foment wide price swings.

The downturn may be over, but volatility, at least for the foreseeable future, is here to stay. In an environment where higher prices don’t have staying power and political pressure to rebalance the market remains, oil & gas companies face fierce competition for finite demand. In fact, the industry sees 2017 as its most competitive year since 2011: 95 percent cite competition as a top risk factor in their 10-Ks, up from 87 percent the previous year.

Becoming A Petroleum Powerhouse
In this year’s study, 66 percent of U.S. oil & gas companies cite competition from foreign energy sources, including concerns around competitor pricing and availability.

America’s dependence on foreign oil has been a hot-button issue since the 1970s, when members of OPEC imposed an embargo on petroleum exports to the U.S. What’s changed is that as the U.S. has ramped up domestic production and become an exporter of finished petroleum products and crude oil, the rest of the energy-producing world now sees it as a threat. The U.S. is also expected to become a net exporter of liquefied natural gas (LNG) by 2018.

A decade ago, net imports comprised more than 50 percent of U.S. petroleum consumption. However, thanks to the introduction of new drilling techniques and the shale gas boom in 2008, America’s looming energy crisis was averted. Over the past several years, net imports of crude oil and products to the U.S. fell from 12.5 million BPD in 2005 to 4.7 million BPD in 2015—representing 24 percent of U.S. petroleum consumption, the lowest percentage since 1970, according to the U.S. Energy Information Administration (EIA). It is no coincidence that the sharp fall-off in prices coincided with peak production levels in the U.S. 

2017-Oil-Gas-RFR_Graphic-12.png2017-Oil-Gas-RFR_Graphic-13.png

The challenge, for U.S. oil & gas companies and foreign producers alike, is that increases in supply haven’t been commensurate with increases in demand. According to the International Energy Administration (IEA), global supply is predicted to outpace demand in 2018, with non-OPEC nations expected to increase production by 1.5 million barrels per day but global demand increasing only 1.4 million barrels per day. Just over a quarter (28 percent) of oil & gas companies specifically cite this imbalance as an ongoing risk in their annual filings. 

While OPEC extended its deal to cut output through March 2018, of the 21 countries that agreed to the previous six-month cut, only 10 met their target. Increased U.S. shale production— which the IEA reports surpassed five million barrels per day in June—is further bloating supply and dulling the impact of OPEC’s efforts. If the supply glut isn’t eliminated, the winners won’t be those with the highest production volumes, but those who can lower costs and boost profit margins regardless of where they’re based. 

The Green Agenda
Concerns around competition from foreign energy pale in comparison to U.S. oil & gas organizations’ anxiety around the threat posed by alternative energy sources, which have quickly become a serious contender on the global energy stage. While alternative energy still has a long way to go before it surpasses oil, gas and coal, it is making up a bigger slice of the global energy pie with every passing year.

According to the IEA, renewable energy sources, led by solar and wind, accounted for about 10 percent of total U.S. energy consumption and about 15 percent of electricity generation last year. The IEA forecasts this percentage will increase in the future, with total utility-scale solar generation capacity increasing by 48 percent from the end of 2016 to the end of 2018, along with increases in total wind capacity.

The transition to green energy has been driven by technological advancements and increasingly stringent regulations to reduce carbon emissions. While the U.S.’ withdrawal from the Paris climate agreement raises questions about whether this trend may reverse in the country, actions taken by more than 1,200 signatories (including 12 states, Puerto Rico, and more than 200 cities) pledging to stay in the accord suggests the pressure to go green isn’t likely to subside.

New technologies and shifting behaviors are also behind the shift to alternative energy and flattening fuel demand. 

2017-Oil-Gas-RFR_Graphic-14.png

A more environmentally and priceconscious consumer base is taking advantage of innovations like smart thermostats and other energy efficiency initiatives to lower their energy bills and minimize their carbon footprint. Distributed generation systems such as solar panels and small wind turbines have also become much more affordable and reliable for both residential and business customers. According to the Environmental Protection Agency, the United States has more than 12 million distributed generation units—about a sixth of the capacity of the nation’s existing centralized power plants.

And then there is the electric vehicle revolution. The barriers to mass-market adoption are the upfront costs and lack of infrastructure. But recent analysis from Bloomberg New Energy Finance predicts the manufacturing cost of electric cars will drop below that of gasoline-powered vehicles around 2026, which may slow growth in fuel demand from the transportation and industrial sectors.

The rapid growth of renewables has significant implications for the industry’s long-term growth and sustainability. To stay competitive over the longer term, traditional oil & gas players must continue to diversify their energy portfolios to keep pace with the broader global shift to low-carbon alternative fuels.
 

“Most of the industry believes, as do we, that oil & gas will continue to be a vital part of the global energy mix for years to come. But that doesn’t mean companies can afford to ignore the global transition to clean energy and its economic repercussions. The future of energy is inevitably greener than it is today. The savviest oil & gas producers are ahead of this trend and focused on diversifying their revenue streams.”     
2017-Oil-Gas-RFR-headshot_Karampelas.jpg  Tom Elder
  Partner and leader of BDO’s U.S. Natural Resources practice