Perspective: Industry's fundamental restructuring leads to redesign of upstream projects

With the oil price slide marking its first year anniversary, the industry is now reacting to the new realities created by this down cycle. A fundamental industry re-structuring is underway as companies and countries adjust to a lower price environment. The industry 'reset' which began in late 2014 will continue into 2016 as companies re-structure to be profitable in a lower price environment. After companies slashed spending in 2015 and 2016, we expect to continue to see future development questioned, postponed, or cancelled outright. And companies will continue to restructure to reduce costs. But as we look at the emerging trends, we see companies redesigning field developments to be more economic; increased efforts to standardize equipment and designs, and a focus on technologies which improve operating efficiency, especially digital oilfield concepts. We expect to see greater application of technology-enabled cost reduction innovations, for example in the areas of automation and de-manning or in subsea developments. Cost structures will evolve, and a new set of project economics will emerge. Clearly, oil and gas companies are focused on returning their business models to profitability - and they believe they can do it.

Producing countries are starting to face economic and fiscal difficulties, while new pressure to offer better terms to attract new investment could require unpopular and difficult policy changes. Fiscal terms might need to be revisited to keep projects on the future cost curve of a leaner industry. Our IHS research team is focused on the complex supply adjustment that is occurring and the impact on the existing supply cost curve: what its expected shift might mean for future marginal projects and ultimately for prices. In particular, we have looked at Venezuela where the authorities are expected to offer a range of piecemeal incentives to attract foreign investment into the Venezuela upstream over the coming years. In Angola, the exit of an operator will likely result in material delays in further appraisal and development. Large-scale resource developments are likely to be postponed until an experienced deepwater operator takes the reins.

Finally in the US, we highlight two important trends to show how two different segments of the oil industry-- onshore independents, and offshore deepwater competitors--are reacting to the lower prices:

• Our 2016 US independents capital spending guidance suggests many more cuts are coming onshore US, and we now project full-year 2015 capital spending for the IHS Herold Small, Midsize, and Large North American E&P peer groups will decline over 45% from 2014. This is a further reduction from our prior survey, completed in the first quarter, which projected a 37% decline. We have also projected the decline in project capital spending for each of these peer groups for the second half of 2015 relative to the first half.
• Historic lows in Western Gulf of Mexico lease sale illustrate the impact of exploration cuts by the Deepwater players: High bid totals of US$22.67 million for the Western Gulf sale were the lowest since 1983.

Roger Diwan, VP IHS Financial Services on October 16, 2015

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.