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Low oil prices

Since averaging above $100 a barrel for most of the period between 2008 and 2014, prices have more than halved over the last two years in response to the US shale revolution, leading to a global glut. Most estimates suggest that the glut will continue for some time yet.

For instance, the International Energy Agency (IEA) recently said1 that the global glut will persist into 2017 as both demand growth slows more than expected – especially from China and India – and Opec continues to maintain supplies. The IEA also said supply would continue to outpace demand at least through the first half of 2017. The low oil price has had a huge impact on the industry, and particularly on exploration as leading players focus on cost-cutting.

In recent years, offshore exploration and production moved from shallow to deep water to keep pace with rising global demand, especially from developing economies which are demanding more oil and gas. This led to the targeting of Arctic and complex subsea reservoirs which meant increasingly sophisticated extraction techniques were required.

However in the wake of the oil glut, Arctic and complex subsea reservoirs are now suffering delays and cancellations due to the high extraction costs. Indeed, the IEA says global oil discoveries have fallen to the lowest level for more than 60 years, while annual investment in oil and gas projects has fallen from €700bn to €400bn over the last two years. It said wells were depleting at an average rate of 9% annually.

The low oil price has unsurprisingly impacted the bottom line of the largest industrial groups. For instance, General Electric Co recently said it expected the market for oil and gas equipment to remain weak into next year as it reported a 48% drop in profits to €285m within its equipment and services division.

However, the long-term view is positive as the current environment is bringing cost deflation in both conventional and unconventional environments, and there are very strong opportunities for increasingly sophisticated extraction techniques and other technological advances.

Shale revolution

The global demand for shale had been growing at twice the rate of oil demand prior to the drop in the price of oil. Since the price fall some shale producers have gone out of business, but many have survived after implementing major cost-cutting programmes. Costs have been cut via innovation in well design and drilling, and by measures such as running drilling and cementing operations on multiple wells at the same time. The IEA says costs for shale drillers fell 30% in 2015 and will fall a further 22% in 2016.

Techniques such as 3D seismology, direction drilling and hydraulic fracturing allow for the extraction of gas from complex reservoirs, while shale has also had a positive impact on other industries such as chemicals and petrochemicals, which is driving repatriation of production to countries such as the US.

According to consultancy Wood Mackenzie, US shale reserves now represent the lowest-cost option for future oil production and are likely to attract more investment than projects such as deepwater fields. It says producers that rely on oilfields in higher cost regions will have to cut costs or face shrinking output.

The potential for shale gas in Europe was recently given a boost when in October the British government authorised the first horizontal shale gas wells to be drilled and tested in the UK. This was a pivotal moment for the UK shale gas industry and will provide exciting opportunities for the supply chain in the coming years.

Although the decision could be subject to a judicial review, site operator Cuadrilla Ltd is hoping to commence drilling and hydraulic fracturing in the second half of 2017. The company is backed by private equity firm Riverstone and Lord Browne, the former Chief Executive of BP plc, is its chairman.

Chinese potential

A huge untapped market for shale remains China which holds the world’s largest shale gas reserves. The industry has the potential to transform the Chinese energy market given that the country is the largest importer of crude oil in the world.

Yet efforts to exploit these supplies have so far faced major challenges. The twisted geology of Chinese shale beds – which can lie up to 4km below ground – pose major issues, as does the fact that China’s reserves lie below arid deserts which makes extraction more difficult.

However, the tide could be turning after BP plc recently struck an exploration deal with China National Petroleum Corp for shale gas exploration in the Sichuan Basin, covering an area of 1,500 sq.km. The move comes after the two sides struck a framework agreement in 2015 covering possible future fuel retailing ventures and LNG trading opportunities, as well as oil exploration.

1 International Energy Agency monthly report September 2016

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