2017 – our oil and gas predictions

1. The oil price: a turning point

Whilst it is impossible to predict the longevity and medium-term impact of the deals struck by the OPEC and non-OPEC countries, November and December 2016 represent an important turning point for the industry.  As at January 2017, a number of countries are already implementing their commitments to reduce production levels.  Looking ahead, all eyes will be on the US to see what impact higher prices will have on the US shale oil industry.  It seems very likely that there will be a resurgence in activity in the US, which, depending on levels of that activity and US policy, may balance out the OPEC and non-OPEC cuts to production.

2. M&A: more consolidation, restructuring and new models

While the financial position of a number of independent E&P companies seems likely to stabilise following measures implemented over the past two years and a rise in prices, many will continue to labour under the heavy debt burdens that were taken on when the oil price was at much higher levels.  As a result their business plans will be constrained as they focus on attempting to pay down debt.  Due to higher debt margins and lower oil prices, their free cash flow will be limited.  More generally, the continued squeeze on industry participants from "lower than before" oil prices may prompt the attempted sale of non-core/strategic assets by larger operators.  The strengthening and stability of prices means that it is now more likely that deals will be done.

The altered economic conditions are also leading to a fundamental shift in risk and profit allocation in project development.  ‎Companies that have traditionally acted as contractors are becoming co-investors with oil and gas companies in projects.  One such example is OneLNG, a joint venture between Golar LNG Limited and global service company Schlumberger, to develop low-cost gas reserves to LNG.  We predict that 2017 will see a rise in joint ventures involving industry participants that have historically operated in separate parts of the value chain. 

3. Private equity: is the opportunity the same as 12 months ago?

Over the past two years, there has been a significant market expectation that private equity will play a leading role in funding for the upstream and midstream sectors of the oil and gas value chain.  However, the recent price rise may mean that future deal valuations do not look as attractive to private equity players as they did six months ago.  There is a large amount of capital out there – the question is now where and how it will be deployed in this adjusted price environment.

4. LNG: market still favourable to buyers but price is uncertain

We expect the market to remain favourable to buyers, with ample supply in 2017 and short-term market opportunities for meeting demand.

We are expecting new supply opportunities and markets to open up, particularly in Asia.  The activity levels for new LNG receiving facilities have been increasing, and we expect more medium to long-term contracted supply and purchase commitments to be reached during the year for these projects.  This will especially be the case for receiving facilities that can be relatively quickly deployed, such as FSRU projects.

Whilst many buyers will still be looking to the short-term market, we expect some to be taking a longer-term approach.  Those taking that approach may seek to secure long-term contracts in 2017 at favourable pricing covering deliveries into 2021 and beyond, where demand is expected to outstrip supply. 

We expect that pricing will remain an acutely sensitive factor between parties.  Whilst the shorter-term pricing can be benchmarked, the pricing for new contracted supply for deliveries into 2021 and beyond will be challenging given the expected change in market dynamics to a demand driven market in that period. 

We see the same challenge playing out for existing long-term contracts with price reviews covering deliveries extending into that period. 

Also, we expect more pricing related disputes (particularly relating to price reviews) to emerge. Markets with a limited history of disputes (such as Asia) are expected to be more prepared to take pricing down a dispute resolution path in order to preserve value and more rigorously pursue price positioning.

5. Africa: unlocking the beasts, but small is good

2017 will see the opportunity to materially move forward the development of major projects, particularly in East Africa.

However, other participants who have found the going tough over the last two years have made a conscious decision to focus on smaller-scale projects with limited infrastructure costs and lower-key/risk and staged development options.  We predict a rise in development decisions in relation to these smaller projects in 2017.

6. Diversifying the business mix: a blast from the past

A number of major oil and gas companies are returning to making strategic investments in renewable energy and other related new technologies, such as energy storage.  While this is a cycle we have seen before, what is different this time round is that we expect to see this trend to extend to more industry participants, including mid-sized oil and gas companies who are seeking to diversify their business mix at a time when the upstream oil and gas industry is facing some continuing uncertainty.

As leading industry advisors, we are renowned for our proven track record of delivering on major projects and transactions across the oil and gas sector. Our oil and gas expertise page can be found here.