Oil price shock – Big changes four years later

In 2014, global oil prices fell from more than US$110 to less than US$30. Although prices have since stabilized, the impact of that price shock continues to reverberate across the industry, as operators have taken a host of unprecedented steps to reduce capital and operating expenses.

by Ward Pincus

Digitalization, more efficient project execution, leaner field design and a central role for unconventional North American oil and gas represent some of the most significant of these changes.


The role of digitalization and big data analytics in reducing operating expenses of both new and legacy assets “started when the oil price was high. But when the price collapsed, operators saw it as much more important,” says Giovanni Salerno, Vice President of Project Development (Exploration & Production), at Dubai-headquartered Contax Partners.


“You’re seeing this across the board, from upstream to downstream in areas such as refining and petrochemicals. Everyone recognizes that optimization can be gained by getting this data under control,” says Salerno’s colleague Ann-Marie Carbery, Vice President of Business Advisory.


“Operators are implementing big data, machine learning, Internet of Things, artificial intelligence, quantum computing, and virtual reality in their operations, whether themselves or through collaboration with oilfield services companies, to support decision making, increase efficiencies, reduce risks, and decrease cost,” she says.


With digitalization offering powerful predictive maintenance and asset management tools, the benefits are particularly strong for assets that are aging, Carbery says. “Take refineries. What makes the difference between being profitable and not profitable is largely about maintenance. If you have data optimization, you understand how different units are operating and can use predictive maintenance to optimize service turnarounds and shutdowns.”

Doing more for less

Another major change that gained momentum in the face of falling oil prices is the prioritization of efficiency and optimization. “Both onshore and offshore, cost levels have been reduced by 50 percent,” says Per Magnus Nysveen, Senior Partner and Head of Analysis at Oslo-based Rystad Energy. “This means operators are able to do more for less.”


Salerno observes that operators have been able to achieve these reductions in part through greater efficiency in project execution models, through greater collaboration among oilfield services firms and turnkey solutions for operators.


Siemens offers a model that highlights life cycle costs by bringing both the capital-expense and the operating-expense side of the equation together for assessment and improvement of offshore field development projects. This is applied in cooperation with Aker BP for several platform topsides on the Norwegian Continental Shelf.


Knitted together by the Siemens Topside 4.0 digital life cycle solution, the offshore platform was developed through a partnership that included the operator, EPC contractor, and the technology providers, including Siemens. This new approach provided a visibility that enabled the EPC contractor to take the project life cycle costs into account, thereby addressing both capital expenses and operating expenses.


Through remote operation, predictive maintenance and further automation, electrification and digitalization, large companies operating offshore can see substantial and sustainable reductions in life cycle cost and cycle time to have first oil on deck.


Siemens is deploying digitalization to existing assets as well. By analyzing data from all types of assets, both upstream and downstream, such as electrical submersible pumps and natural gas liquefaction trains, Siemens is giving operators more information to help them reduce downtime, improve availability and increase production.


Beyond digitalization, customers are finding other ways to cut costs, says Nysveen. For example, “they are designing the field just to do exactly what they need to do. They are not building in additional capacity plans.” 

Operators are implementing big data, machine learning, Internet of Things, artificial intelligence, quantum computing, and virtual reality into their operations to support decision making, increase efficiencies, reduce risks, and decrease cost.
Ann-Marie Carbery, Vice President of Business Advisory at Contax Partners

Technological innovations

Other changes are impacting the upstream sector, including more complex drilling and completion. Rystad Energy research shows that while the number of wells being drilled in North America is below its 2014 peak, the amount of sand being used as part of the fracking process is 50 percent higher than at the 2014 peak. “They are drilling the wells longer and these wells are more intensively completed, using more sand,” Nysveen explains.


More advanced completion techniques, such as horizontal drilling, he says, are equally a feature of conventional field development.

Shale oil saved the global economy

The innovations taking place in unconventional North American shale are helping shape a new, increasingly significant role for this onshore resource. “It’s unthinkable, really, to imagine the oil market without these 10 million additional barrels a day that come from US shale oil. Without that oil, prices would have been so high, it would have been a big problem for the global economy. Shale oil saved the global economy,” Nysveen says.


To the looming question of whether shale oil has a future outside of North America, Nysveen says this “will need oil at US$100/barrel.” Nysveen also notes that it appears shale oil outside of North America is found only in smaller amounts, not in large basins, like those in the United States and Canada.

Moving into renewable energy

While Nysveen predicts we might see US$100 oil by the middle of the next decade, most analysts predict it will be a long time before oil prices reach that level. In support of that position, Carbery points to the efforts of both national oil companies and international oil companies to diversify.


“They’re not just interested in shipping a barrel of oil anymore,” says Carbery. “These [national] oil companies are adapting to what I believe they see as the new norm [of below-US$90/barrel oil].”


They are streamlining their organizational structures to maximize the benefits of integration as they expand further downstream. “They are looking to maximize the dollar profit from each barrel,” she adds. Most also are moving into renewable energy – particularly solar and wind, she says.


For example, Oman’s Petroleum Development Company has said that in ten years, it will derive 20 percent of its revenue from new businesses such as solar, tidal and wind energy generation. Algeria’s state-owned oil and gas company Sonatrach plans to expand its solar energy activities. It’s the same elsewhere: Both Indonesian state-owned oil and gas company Pertamina and state-owned China Petroleum & Chemical Corp (Sinopec Corporation) have committed to moving further into renewable energy.


In Europe, Norwegian energy company Equinor changed its name from Statoil in May, explaining that it was “evolving from an oil and gas company into a broad energy company,” particularly through its offshore wind farm assets.


That doesn’t mean, however, that Middle East NOCs – notably Iraq and Iran – are ignoring the need to build new oil and gas production capacity for the medium and long term. “Nobody is slowing down in production activity,” Salerno adds, pointing to that additional supply also supporting the theory that we won’t soon see US$100 oil.

On the demand side, Carbery believes “renewables will be taking center stage” as part of the global energy mix, pointing to growing electric vehicle adoption and increasing parity in the cost of hydrocarbons and renewables. These forces will impact demand for fossil fuels used in less efficient combustion engines.


Rystad Energy’s Nysveen, however, says there is a high probability that “by the middle of the next decade, oil will be above US$100” and that this price level will be sustained. However, before then, he sees prices remaining in the US$60–80/barrel range.


One of the reasons those moderate prices won’t remain, Nysveen says, again returns to US shale. He sees supply growth plateauing or falling by then, while demand will continue to rise annually by more than 1 million barrels of oil a day.

Looking ahead

The debate about oil prices is as old as the oil market itself; however, what is increasingly clear is that fundamental change has occurred in the oil and gas sector in areas such as digitalization, project execution, and field design.


Ward Pincus is a business writer based in the Middle East

Picture credits: Contax Partner, Mariela Bontempi


Per Magnus Nysveen, Senior Partner and Head of Analysis at Rystad Energy, has broad experience in upstream valuation, cost modeling and oil macroanalyses. He has particular expertise in unconventional activities and is in charge of North American shale analysis.

Ann-Marie Carbery, Vice President of Business Advisory at Contax Partners, has an extensive background in the energy, utility and construction sectors, including more than 15 years in the Middle East, Africa and Europe providing strategy, and project and risk management.

Giovanni Salerno, Vice President of Project Development (Exploration & Production) at Contax Partners, has more than 22 years of experience in the Middle East, Australia, Russia, Africa, Latin America and India, particularly in the area of field development and rehabilitation.

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