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Five trends for 2019

24th January 2019

Duane Dickson, US oil, gas & chemicals leader, Deloitte looks ahead to the key trends that will shape the oil and gas sector in 2019

Don’t forget the numbers – can returns and profitability demonstrate value to investors?
The 2018 recovery in commodity prices and cash flows has been good news for the sector. The challenge now will likely be to translate that into sustainable profitability and returns. The downturn saw tremendous gains in cost containment, capital highgrading, and operating efficiency. Will this discipline be maintained? Some costs will inevitably rise, not only to restore margins in the service sector, but also due to rising materials costs. The question is whether acceptable returns can be generated through the commodity price cycle. Learnings from the downturn should not be forgotten, and continuous improvement in technologies and operating practices will go on, as they always have. Industry players could focus on two key lessons: adopting a disciplined approach to capital investment decisions and leveraging digital technologies to achieve higher capital productivity.

It’s not just about supply or markets – infrastructure matters
Building and expanding pipelines, processing facilities, import and export terminals, storage facilities, and LNG plants is a vital but often underappreciated part of the value chain. Crude oil price discounts have at times topped $20 in the Permian Basin and $50 in Western Canada because pipeline build-out lagged wellhead activity. The phenomenal growth in natural gas production in the Marcellus Basin has often outstripped pipeline capacity, depressing prices for producers. Planning, permitting, and constructing infrastructure seems to be getting longer and more complex and is more often litigated by opposing groups. There are major infrastructure projects moving forward, but delay can be costly. No one in oil, gas or chemicals development can afford to ignore how this plays out, impacting price spreads and physical capacity to move products.

Natural gas – here and not forgotten
The abundance of moderately priced natural gas in North America, like that from the Marcellus and Permian Basins, does not get as much attention as the oil sector. And yet it is enabling very material long-term change in US and global energy markets. Natural gas continues to grow as a source of lower-carbon power generation here and abroad. The wave of new investment in petrochemical facilities would not be possible without the growing US natural gas and NGL supply. Moreover, the United States is now a major player in global LNG markets, with two facilities in operation, at Sabine Pass and Cove Point, and four more due to start up in 2019. This is expected to shape global prices, trade flows, and business models. Although uncertainty exists, the recent decision to take final investment decision (FID) on another major North American LNG project (LNG Canada in Western Canada) is a strong vote of confidence in the viability of North American gas supply.

The sustainability imperative – moving from the periphery to the core
Energy and chemicals companies are not newcomers to the sustainability agenda. They have been reporting and communicating on environmental footprints, impact mitigation, and sustainability for some years now. However, increasing consumer awareness of environmental and climate impacts and societal expectations are driving more and more companies to embrace sustainability as a core part of business strategy, rather than a niche add-on activity. And it’s not just about plans and communications. Major oil, gas, and chemicals companies are making increasingly sizable investments in companies and technologies that bring renewable, low-carbon energy to consumers and to reduce their own environmental and carbon footprints.

Digital technologies are increasingly intertwined with the entire oil, gas, and chemicals value chain
As alluded to in the 2018 Outlook, opportunities from digital technologies are becoming increasingly apparent and have the potential to unlock new value. More and more companies are looking hard at deployment of artificial intelligence, analytics, robotics, and blockchain to increase efficiency, productivity, reliability, and predictability of operations. However, implementation at scale can be complex in the capital-intensive oil, gas, and chemicals environment where the challenges of legacy equipment and the large number of suppliers should be addressed. Refining and petrochemicals have been in the vanguard of process automation for many years, but we are now seeing signs that the other sectors are turning their attention to digital opportunities. Those that succeed could be well-equipped to thrive through business cycles and be responsive to customer and societal expectations.