The oil and gas industry will continue to face challenges in the future, and the situation may get tougher before it gets better, pressured by volatility partly fueled by activity in other countries.

However, there is potential for growth, especially when it comes to development of shale plays in the US.

Those were some of the thoughts shared by panelists who spoke July 20 during Decision Strategies’ Oilfield Breakfast Forum in Houston.

“The conflicting forces are: there are great growth opportunities in North America; the commodity price environment is a little bit tougher, and some of the outlooks are tougher,” said Dan Pickering, co-president of the Houston-based energy investment and merchant banking firm Tudor, Pickering, Holt & Co. “So at the end of the day, I say it’s macroeconomic mojo. To me, that’s the swing factor.”

He described what he called today’s “North American Renaissance,” a period of high activity with new resources that create a fantastic opportunity. The new shale plays will play out over decades.

“Oil production in the US has turned up, and it’s going to grow for a while,” Pickering said. “But you also have trends like NGLs being down 35% in the last four or five months.”

The next 18 months will be tougher, not necessarily bad, he added. Happenings in other countries, such as Greece or Germany for example, impact oil prices and also influence the way people think. “Individually companies can do a great job at what they are doing. [But] somebody can screw up in France and oil prices can go down. It can be a really tough environment. We are clawing our way through that process.”

Just three weeks ago the crude price fell from $109 to $77. Europe was in another round of chaos. That volatility impacts the industry, creating cycles within trends.

“We are all victims of the world we live in. If commodity prices change, cash flow changes, and that is a big part of E&P spending,” Pickering said. Then, companies have to think about the financial ability to drill wells.
The price of natural gas is flat. Oil is down 20%. NGLs are down 35%. Falling cash flow and stock market choppiness make people nervous, he said.

“At the same time, the oilfield service industry has added some capacity,” he said, turning back to shale basins, particularly the Marcellus and Eagle Ford plays, which have a capacity of 150 Tcf each. “The numbers here are big. The bottom line is we have a lot of running room here.”

But challenges are present there as well, as pointed out by David Dunlap, president and CEO of Superior Energy Services. Low natural gas prices – which have dropped from just below $6 in 2010 to about $3 today – have caused some companies to consider focusing more on oil.

Gas prices deteriorated after a period of stability in 2010-11. Dunlap called natural gas a local commodity, with cycles that differ from oil – a global commodity that has its own trends also marked with unpredictability.

“In 2004, when the world demand moved above 80 million barrels a day, it caused us to enter into a completely different environment in this industry,” Dunlap said, adding companies were no longer able to survive with oil prices at $20-$40 a barrel. Now, “It’s significantly different. It’s three to four times that price to extract oil from these difficult formations that we moved into, and we’re going to support demand above 80 million barrels a day.”

One of the challenges is inflationary pressures that cause some companies to take hits. Other obstacles include a growing need for fleets for horizontal wells and safety, including safely getting rid of old assets offshore to reduce the risk for catastrophic environmental accidents.

There also are concerns about high, water production from reservoirs, an issue Dunlap believes will solve itself considering water is needed in the completion process. Then, there is the challenge to improve recovery rates from shale plays, something that will take improved technology.

Despite the obstacles, the speakers appeared to be optimistic about the industry’s long-term outlook.

“We feel pretty good about growth opportunities going forward,” Dunlap said, pointing out the potential in the US, Gulf of Mexico, and the international market, especially Latin America and Asia for Superior Energy. “It’s our challenge as an industry to kind of balance some of these near-term challenges that we have. It’s still a great time to be in this business. [There’s] a lot to look forward to.”

Contact the author, Velda Addison, at vaddison@hartenergy.com.

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