On Friday, we will feature our annual review of the top Oilpro news stories of the year. As we reviewed the story selections, we were again reminded of just how bruising 2015 has been for O&G.
As realists, we have every reason to believe that 2016 will be just as difficult as 2015, if not more so. But in the oil business, the one sure thing is change. Change in 2016 means conditions will stop deteriorating. Here is a run down of some positive inflections we see ahead, the optimist’s guide for O&G in 2016:
Everything Will Bottom. Oil prices have fallen by $72 since the 2014 peak. That fall magnitude is double the current price of $35, which is below break-even for many new projects. On an absolute basis, little downside remains. Likewise, the 1,135 US land rigs that have gone idle are nearly double the 684 still working. No major US drilling collapse has lasted more than 2 years in O&G, including during the 1980s. Oil service margins are at zero for many PSLs, and leading edge offshore drilling dayrates are also about break-even. This will bankrupt some companies next year, but virtually every economic metric used to measure O&G should trough in 2016, for declines cannot be infinite.
Uncertainty Will Fade. 2015 was a year of trying to figure out the new normal. 2016 will be a year of breaking in the new normal. As everything bottoms, a sense of resolve and conviction in direction will return, and survival strategies will hit their stride.
All Upstream Markets Will Tighten. 2016 will be a year of tightening across the entire O&G value chain. Oil production will decline globally because $320bn of annual E&P investment has been pulled. And zombie iron will be retired en masse from offshore drilling to fracing, tightening excess oil service capacity. Re-balancing in 2016 will set the stage for future growth.
Strong Balance Sheets Will Be Rewarded. Anyone remember John Cassidy from the 1980s? New fortunes will be made by well capitalized risk takers over the next few years. 2016 will present extraordinary opportunities for companies that entered the downturn with strong financial positions and are willing to take risks by buying when others are rushing for the exits.
Doors Will Open For Innovators. In the quest to lower the cost/barrel, no stone will be left unturned. Entrepreneurs that would have struggled to get a foot in the door at big oil companies in 2014 will find the door wide open in 2016.
O&G Will Take Market Share. Solar, wind, and coal will all cede market share to crude oil and natural gas next year. Lower for even longer O&G prices will curb investment in alternative energy sources and lead to switching, boosting demand.
For now, pessimism remains a crowded trade. As the ball drops on 2015, the O&G outlook is about as bleak as it’s ever been. A recovery is not in the cards for 2016 without some unforeseen black swan event. But while 2016 will still be bad, things will stop getting worse soon.
This editorial is part of this week’s Oilpro Weekly Review, which also recaps the best discussions on Oilpro. The Oilpro Weekly Review is delivered to Oilpro inboxes each Thursday morning. To receive these comments by email each week, sign up for Oilpro, or if you are already a member, click here to adjust your email settings.