Back to Black

In a previous commentary posted on IEA’s website earlier this year, I raised the point that the oil and gas industry has belied its reputation as a conservative sector and proved it was capable of constant innovation itself and showed its ability to adapt rapidly to a changing world.

The just-ended quarterly season provided another evidence of the journey undertaken by the sector over the last few years. Results and strategies presented by companies highlights that the sector might have turned the corner and it is back in business (and “Back to Black” in terms of balance sheets). Among many important findings, the striking elements coming out from companies result, include:

-         Despite the rapid increase of oil prices seen since mid of this year, companies (so far) continue to implement rigorous financial discipline, reducing both capital investment and operational costs. The result is that most of companies are now back already to the position to cover investment and dividends with cash flow generated by their operations.  

-         The shift in business model continues. On one side, large complex projects are often brought online ahead of schedule and under planned budget (something that it was very rare to happen in pre-2014 era); on the other side, “Big American Oil” accelerates towards US shale, an area so far dominated by smaller and more agile “independent” companies.

-         Upstream costs remain depressed and under-control bringing break-even prices of new sanctioned projects to levels that were not even imaginable just in the earlier part of the current decade.

What appears most relevant – although impossible to quantify – is the change in attitude and culture of most of largest oil and gas companies in the way those shape and implement their business strategies and project execution. If this new company-culture approach is going to stay, if companies would continue to prioritise cost and financial discipline while ensuring adequate level of supplies to energy-hungry world, then the 2014-2017 period might be remembered less painful than what it has been so far.