How to prepare for an upswing in oil prices
Oil and gas companies should prepare for the next oil boom, if there is one
by Robbie Jeffrey
“Lower for longer” isn’t just your game plan for winning the next limbo competition – it’s the mantra of the wilted oil and gas sector. Besieged by the multi-front offensive of low crude prices, creeping regulatory pressure and a public pillorying from activists the world over, with each passing earnings report the landlocked engine of wealth feels more like a V8 Chevy rusting in a junkyard.
But last we checked, Imperial Oil, Enbridge and Suncor all reported about $30 billion in revenue for 2015 and Albertans still outearn their Canadian counterparts by more than $20,000 every year. To its detractors, fossil fuel extraction has an expiration date, but today it’s still fresh – look out your window and chances are you’ll see gasoline-fueled vehicles, not Teslas.
The National Energy Board recently predicted that oil will hit $68 by 2020 and $90 by 2040 – but even the NEB regularly reneges on its predictions. And in the age of electric cars and renewables, 24 years is a long time to wait for a better oil price. Monitor Deloitte, the financial services company’s management consulting wing, just released a report on the future of Canadian oil and gas, and it stresses the ambient uncertainty. It also proposes some guideposts: optimize your place in the carbon value chain, focus on innovation and bolster your corporate social responsibility (CSR) efforts. Those are noble aims, but mere tweaks on the industry’s already-major talking points. So how should an oil and gas company prepare for the next oil boom when we’re not sure we’ll even have one?
That question has been on Bradford Goetz’s mind. The CEO of Volterra Oil and Gas has been through a rough patch of broken loan covenants, deepening debt and a frantic pursuit of valuable assets to buy while the iron’s hot. Now, Volterra’s balance sheet is finally in a respectable state and Goetz is confident in the company’s value proposition. But juniors don’t have the capital for revolutionary technological innovation like Suncor or Imperial might, nor can they embolden their CSR with fancy energy-is-life ad campaigns like their billion-dollar competitors. “Our future won’t be built on revolutionary carbon-sequestration technology or anything like that,” Goetz says. “We’ll build it by pumping oil.” So when it comes to positioning itself for the future – whatever that looks like – what’s a junior to do?
Paul Craig, senior oil and gas sector specialist with Deloitte, agrees that it’ll be a price-constrained environment for the foreseeable future. “From a pure economics perspective, it probably doesn’t make sense [for producers] to invest in building new infrastructure,” he says. Indeed, one of the only constants will be the need to get product to market, so Craig says smart companies will be “investing in some kind of midstream infrastructure.” But this is true for the entire oil and gas sector, too: “[Market access] has an impact on whether Canada remains an attractive value proposition for some of the global companies making choices about where they’re going to invest their capital,” Craig says. “Market access is one of the keys to remaining relevant.”
But there’s something to be said for having the right attitude, too. “When I look around at our clients, we’re seeing more discipline in terms of the decisions being made and the resources being allocated,” Craig says, remembering the glory days of soaring overhead costs. “We’re also seeing more accountability for results and a greater emphasis on accountability being driven from the top down.”
When there’s a price correction, then, there ought to be an attitude adjustment, too. Maybe the best way to prepare for the next oil boom is to pretend there won’t be one.