I attended the Rocky Mountain Energy Summit last week here in Denver and had a few observations.
Many industry people that I know and met at the show are increasing optimistic about the state of the Oil and Gas industry. I asked everyone that I spoke with how they felt about the industry and what they felt the near term looked like. Contrary to the last two years, attendees were much more optimistic and looking forward to a more predictable pricing environment and an increase in spending and exploration budgets. It definitely felt like a significant change to me.
Inventories on the decline
While increases in US production, the decrease in worldwide demand and continued Saudi production has led to a huge glut of oil in the US markets there is an end in sight. Rick Allen from the research firm S&P Platts illustrated how through normal field declines and decreased drilling over the last three years, supplies are declining significantly. He is predicting higher crude and perhaps more significantly for Colorado higher natural gas prices caused by continued power plant conversions and the opening up of the US LNG export market. One interesting side note in his presentation was the impact of wind generation in the Rockies, which he is predicting to become almost a third of the power supply by 2021 up from 8% today. Pretty amazing.
Price stability is more important than low prices
Several speakers made the point that price stability was probably more important to their ability to manage their businesses than the impact of low prices. This makes sense in terms of planning, forecasting, hedging, hiring and other activities that require leaders to commit to the future. One Colorado CEO indicated that they could make money at $30/barrel and I suspect many other operators can as well. What really gets impacted in a volatile environment is investment in exploration, which of course is the future revenue stream.
Another theme that I heard a great deal about was using the market slow down as an opportunity to improve operating efficiencies and reduce costs. Phil Mason, from GE, talked about using big data and analytics to optimize assets, managing with “real time” production data and doing proactive failure prediction for field equipment. There is huge cost opportunity here for small and mid-tier producers who in the boom were focused more on growth than efficiency. Making investments now in technology and process improvements will greatly increase their profitability as they emerge from the downturn.
Hans Christian-Frietag, VP of Integrated Technology at Baker Hughes, pointed out the industry has a publicity problem that makes it less competitive against other industries when attracting engineering talent. Finding and retaining skilled technical teams has been a continuing industry problem which has been impacted by both the cyclical nature of the industry and the, often times, negative perception that many have of the industry. He pointed out that this was a good time for companies to examine their “social contract and license to operate” to improve their image with the public.
COGA put on another great conference this year and it was great to see the optimism and forward thinking in the industry. It will still be a long haul, but it feels like we have hit the bottom and are on the way up. This is great news for Colorado and Texas, and many other western states and has a direct impact on companies like Lewis Fowler that work in the Energy industry. I’m glad to see it.