OIL & MINING INDUSTRY PROFILE

The industry’s talent profile is changing. Traditional disciplines such as subsurface and surface engineering are still important, but they must be balanced against new demand for expertise in digital operations. As companies build their capabilities in software engineering and data science for example, senior executives in talent management will need to figure out the right weighting of technical (engineers) versus technological (data scientists and software engineers) staff and how the sector can attract the latter. Moreover, as companies become more efficient through the application of digital solutions and the likelihood of sustained lower oil prices, it is unclear if head counts return to pre-2014 levels.

Irrespective of near-term uncertainty, the 2019 energy conversation is expected to increasingly include long-term issues. Sustainability is no longer a niche issue for energy companies. It is moving to the center of strategy and investment decisions. Major oil companies are investing in renewable energy; natural gas producers, shippers, and consumers are increasing their focus on mitigating methane emissions; and chemicals producers are ramping up their efforts to find solutions to plastic waste, through recycling and use of new materials and processes. Some countries are also stepping up efforts to reduce the environmental and carbon footprints of their energy and industrial sectors, with China, in particular, taking major steps to close down polluting factories and shift towards cleaner energy. Moreover, technology is not standing still—the scope and pace of growth for low-carbon energy, autonomous and electric vehicles, energy efficiency, and distributed energy is becoming not just a topic for futurologists, but a focus of decision-making throughout the oil and gas and chemicals value chains.

The abundance of moderately priced natural gas in North America, like that from the Marcellus and Permian Basins, does not get as much attention as the oil sector. And yet it is enabling very material long-term change in US and global energy markets. Natural gas continues to grow as a source of lower-carbon power generation here and abroad. The wave of new investment in petrochemical facilities would not be possible without the growing US natural gas and NGL supply. Moreover, the United States is now a major player in global LNG markets, with two facilities in operation, at Sabine Pass and Cove Point, and four more due to start up in 2019. This is expected to shape global prices, trade flows, and business models. Although uncertainty exists, the recent decision to take final investment decision (FID) on another major North American LNG project (LNG Canada in Western Canada) is a strong vote of confidence in the viability of North American gas supply.

Oil and gas and chemicals companies are not newcomers to the sustainability agenda. They have been reporting and communicating on environmental footprints, impact mitigation, and sustainability for some years now. However, increasing consumer awareness of environmental and climate impacts and societal expectations are driving more and more companies to embrace sustainability as a core part of business strategy, rather than a niche add-on activity. And it’s not just about plans and communications. Major oil and gas and chemicals companies are making increasingly sizable investments in companies and technologies that bring renewable, low-carbon energy to consumers and to reduce their own environmental and carbon footprints.

As alluded to in the 2018 Oil and Gas Industry Outlook,6 opportunities from digital technologies are becoming increasingly apparent and have the potential to unlock new value. More and more companies are looking hard at deployment of artificial intelligence, analytics, robotics, and blockchain to increase efficiency, productivity, reliability, and predictability of operations.
However, implementation at scale can be complex in the capital-intensive oil and gas and chemicals environment where the challenges of legacy equipment and the large number of suppliers should be addressed. Refining and petrochemicals have been in the vanguard of process automation for many years, but we are now seeing signs that the other sectors are turning their attention to digital opportunities. Those that succeed could be well-equipped to thrive through business cycles and be responsive to customer and societal expectations.

Regional & International Issues

Oil and natural gas systems encompass wells, gas gathering and processing facilities, storage, and transmission and distribution pipelines. These components are all important aspects of the natural gas cycle—the process of getting natural gas out of the ground and to the end user. Natural gas systems encompass the following industry segments:

When crude oil is first brought to the surface, it may contain a mixture of natural gas and produced fluids such as salt water and both dissolved and suspended solids. On land (and at many offshore operations) Natural gas is separated at the well site and is processed for sale if natural gas pipelines (or other transportation vehicles) are nearby, or is flared as a waste (at onshore operations only). Water (which can be more than 90 percent of the fluid extracted in older wells) is separated out, as are solids. Only about one-third of the production platforms offshore in the Gulf of Mexico separate water. The other offshore Gulf platforms transport full well stream, sometimes great distances, to central processing facilities. The crude oil is at least 98 percent free of solids after it passes through this onsite treatment and is prepared for shipment to storage facilities and ultimately refineries (Sittig, 1978).

Natural gas can be produced from oil wells (called associated gas), or wells can be drilled with natural gas as the primary objective (called non-associated gas). Methane is the predominant component of natural gas (approximately 85 percent), but ethane (10 percent), propane, and butane are also significant components. The heavier components, including propane and butane, exist as liquids when cooled and compressed; these are often separated and processed as natural gas liquids.

Less frequently, oil and gas can be produced by other methods. Oil can be found in tar sands, which are porous rock (sandstone) structures on the surface to 100 meters deep. The material is fairly viscous and also is fairly high in sulfur and metals. Although the Athabasca region in Canada is the primary area of significant tar sand mining, there are some deposits in the western United States.

Oil may also be extracted from oil shale. These deposits may be 10 to 800 feet below the surface and can be removed by surface mining or subsurface excavation. The oil, in a highly viscous form called kerogen, is usually heated to allow it to flow. Because only approximately 30 gallons (less than a barrel) are produced per ton of shale, the process is costly, and the oil shale mining industry is currently only a minor contribution to the domestic oil supply.

A small but increasingly significant source of natural gas is coalbed methane. In all coal deposits, methane is found as a byproduct of the coalification process and is loosely bound to coal surface areas. This methane historically was considered a safety hazard in the coal mining process and was vented, but recently it has been recovered in conjunction with mining or produced independently via wells in deposits that are too deep for mining. Generally, coalbed methane is collected by drilling a well similar to those used for conventional oil and gas deposits, but with some adaptations to accommodate mining operations and different rock characteristics (EPA, 1992). In 1997, coal bed methane production accounted for six percent of the total U.S. natural gas production (EIA, 1998).

Methane hydrates are another form of natural gas, for which economically viable recovery methods are still in development. Methane hydrates are structures in which methane molecules are trapped within a lattice of ice. They are found principally in cold and/or pressurized conditions: on land in permafrost regions, or beneath the ocean at depths greater than 1,500 feet below the water surface. These eventually could be an immense resource; estimated amounts of methane in these structures in the United States is 200,000 trillion cubic feet, compared to an estimated 1,400 trillion cubic feet in conventional natural gas deposits. A goal of the U.S. Department of Energy methane hydrates research program is to develop a commercial production system by the year 2015 (U.S. DOE, 1998).

Transmission: Delivery of natural gas from the wellhead and processing plant to city gate stations or industrial end users. Transmission occurs through a vast network of high pressure pipelines. Natural gas storage falls within this sector. Natural gas is typically stored in depleted underground reservoirs, aquifers, and salt caverns.

Distribution: Delivery of natural gas from the major pipelines to the end users (e.g., residential, commercial and industrial).
In the oil industry, some underground crude contains natural gas that is entrained in the oil at high reservoir pressures. When oil is removed from the reservoir, associated natural gas is produced.

Competitive Landscape

If there is one constant in energy markets, it is change, as prices shift and companies adapt. Separately, the chemicals industry has enjoyed positive growth and margins for the past few years, so we will be watching to see if signs of a slowdown emerge. Although no one can truly claim to know what will happen in the next 12 months, it is useful to try to understand how the business environment might evolve.

In oil markets, the depths of the post-2014 downturn seem to be behind us. Oil prices have recovered from the $40 2016 annual average WTI (West Texas Intermediate) price low. It breached $50 in 2017, and through September 2018 it averaged just shy of $67, though many producers in Canada and the Permian saw lower prices due to widening differentials. This recovery has been a result of various factors, including sustained success of the production restraint agreement between OPEC (the Organization of the Petroleum Exporting Countries) and non-OPEC countries in force since the beginning of 2017, less oil coming to market from challenged producers, and continued strong global oil demand growth estimated by the Energy Information Administration at about 1.6 million b/d in 2018. These forces together have brought global oil inventory levels down by more than 175 million barrels since 2016 and buoyed prices.1

These more positive signals have helped US crude oil and natural gas liquids (NGL) production enjoy another impressive growth year, adding an estimated two million b/d in 2018, led by the prolific Permian Basin. Natural gas is a different story, as 2018 prices in the United States remained anchored around $3, as plentiful, low-cost US supply continued to meet growing demand in domestic and export markets.2

Indeed, across oil, natural gas, and chemicals, increasing US exports are helping to bolster activity, with all showing continued growth in shipping to international markets. The United States has been a major producer, but now it is consolidating its position as a leading exporter of crude oil, refined products, and natural gas, thereby becoming a big influence in global market trends.

Upstream capital expenditures have not yet recovered commensurately with prices in 2018 as companies remain cautious, at least for the time being. At the moment, their focus seems to be more on demonstrating returns rather than investing for new growth.

In the chemicals industry, at this stage of the capital cycle, major new capacity in base chemicals is expected to be commissioned now or in the near future. An area of risk may be whether this might lead to lower margins by getting ahead of demand trends. However, the industry could well avoid anything more than a mild downturn by phasing in ramp-ups in the new capacity, selling to the North American market, which is still quite robust, and taking advantage of improved US port facilities to export more efficiently to international markets. So, even with a possible slowing of emerging market growth, and a shift to more reuse of plastics, the chemicals industry in the United States looks reasonably well-shielded from significant downside risk.

Sales & Marketing

The 2018 recovery in commodity prices and cash flows has been good news for the sector. The challenge now will likely be to translate that into sustainable profitability and returns. The downturn saw tremendous gains in cost containment, capital high-grading, and operating efficiency. Will this discipline be maintained? Some costs will inevitably rise, not only to restore margins in the service sector, but also due to rising materials costs. The question is whether acceptable returns can be generated through the commodity price cycle. Learnings from the oil and gas industry downturn should not be forgotten, and continuous improvement in technologies and operating practices will go on, as they always have. Industry players could focus on two key lessons: adopting a disciplined approach to capital investment decisions and leveraging digital technologies to achieve higher capital productivity.

Building and expanding pipelines, processing facilities, import and export terminals, storage facilities, and LNG plants is a vital but often underappreciated part of the value chain. Crude oil price discounts have at times topped $20 in the Permian Basin and $50 in Western Canada because pipeline build-out lagged wellhead activity.5 The phenomenal growth in natural gas production in the Marcellus Basin has often outstripped pipeline capacity, depressing prices for producers. Planning, permitting, and constructing infrastructure seems to be getting longer and more complex and is more often litigated by opposing groups. There are major infrastructure projects moving forward, but delay can be costly. No one in oil and gas or chemicals development can afford to ignore how this plays out, impacting price spreads and physical capacity to move products.