Commentary – New Lexicon for the Oil and Gas Industry
Photo: ARC Financial
Conferences, meetings or analyst calls – you hear it the same everywhere. The challenging oil and gas price environment has created a new lexicon for characterizing the industry. Here is a guide to the latest industry jargon.
Volatility. The degree that price varies over time. The future trajectory of oil price dominates every industry discussion. “Has the market reached the bottom? Could it spike up from here? Will it fall again?”—The industry’s crystal ball has never been hazier. While almost every oil expert agrees that today’s unsustainably low prices will eventually tighten up the market, there is much debate on the future trajectory. Everyone agrees on one thing: oil prices will be volatile through any recovery.
Freeze. A pact to keep oil production below a maximum level. Since an OPEC production cut seems unlikely, the focus is now on a freeze. Since it was first put forward in February, markets have been reacting to any sniff of news on a possible agreement by OPEC and Russia to freeze their oil production.
Balance Sheet Healing. The time period for repairing corporate balance sheets which have been damaged by the downturn. At the CERAWeek conference a few weeks ago, John Hess, the CEO of Hess Corporation, predicted that financially weak oil companies won’t be quick to respond to higher oil prices, because, “balance sheets of a lot of shale producers are in disrepair, they had too much debt, and they have to heal their balance sheets.” Expect that conservative spending will be the new norm, even as prices recover.
Cyclical Cost Savings. Temporary discounts for oil and gas capital and operating expenditures. Cost cutting is top of mind, so much so that the industry has categorized new terms for dissecting its savings. When activity levels increase, the cyclical discounts will at least partly evaporate from higher activity levels that jack-up service pricing.
Structural Cost Savings. Permanent discounts for oil and gas capital and operating expenditures. Unlike cyclical cost savings structural reductions have staying power. Some examples of structural savings include lower costs from improved project scheduling, reduced downtime from operational changes, or less costly completion methods.
Cycle time. The time period between a company committing funding to a project and the investment producing its first unit of oil or gas. Volatile, uncertain markets are propelling shorter cycle projects to the top of the priority list. Tight oil or shale gas cycle times are anywhere between six months to a year or two, while megaprojects like deep water, LNG, or oil sands range between seven and ten years. Due to uncertain prices, a growing group of industry veterans are predicting that long cycle time projects will be approached with much greater reservation than in the past.
Downstream Diversification. A strategy for reducing business risk by owning integrated business units. Upstream crude oil and natural gas producers that also have downstream business units (such as refining, midstream, power and/or petrochemical facilities) tend to profit more in periods when the upstream suffers. Diversification was recently out of fashion, but the downturn has refreshed the memory of industry executives on the merits of integrated, diversified operations.
Post Paris. The time period after the December 2015 COP conference in Paris where 195 countries pledged to reduce their carbon emissions. At the CERAWeek conference, US Energy Secretary, Ernest Moniz, described the Paris meeting as “a turning point for the energy industry” and Gina McCarthy, head of the US EPA said “the clean energy train has left the station folks.” Increasingly, energy executives are discussing how to lower carbon emissions and enhance the attractive qualities of oil and gas to keep demand robust for decades, post Paris.
Methane Leaks. The methane that escapes into the atmosphere during the production, transportation, distribution and combustion of natural gas. Since methane has a higher global warming potential than carbon dioxide, reducing leaks can lead to a sizable drop in greenhouse gas emissions. According to Gina McCarthy, new methane data is showing that “Methane emissions from existing sources in the oil and gas sector are substantially higher than we previously understood.” New rules for stemming these methane leaks are now under development in the United States, Alberta, and British Columbia.
Even though the future is hazy, based on recent industry discussions, one aspect is coming into focus: the industry that emerges on the other side of this severe down cycle will look and behave differently than it did in the past, and undoubtedly, it will talk with a different vocabulary too.
