Everyone I talk to says the oil and gas pipeline industry is cyclical. After a historic boom from 2008 until the summer of 2014, oil prices plummeted and sparked a historic downturn. Prices have started to climb back up, but the recovery seems stifled at times.
If the industry is cyclical, where are we along that trajectory? The big question is whether we have hit rock bottom already. I posed that question to John England, vice chairman and U.S. and Americas oil and gas leader for Deloitte LLP, an industry research and consulting firm.
“I’m optimistic. I believe we’re past the bottom and headed back up,” England says. “It’s important to understand that this is a historic downturn. People say they’ve seen this before. We’ve done studies on this downturn, and it has lasted longer than those that have come before it, even the one in 1986. We’re still not at the level of recovery we saw then. We’re still on the way back, but this has been a slow recovery. We’re talking past 2018 before we see the price people want to see to invest in the industry.”
It was 30 years ago that Saudi Arabia ramped up oil production sparked a four-month plunge that dropped oil prices 67 percent to a little more than $10 per barrel. Meanwhile, U.S. production had created a supply glut, much like what happened in the recent boom. Now, the industry has no choice but to wait out the storm. England says recent signs in the market indicate that the industry may be close to balancing out supply and demand, which he says may result in a decline in both over the next few years. The biggest hit has been in the upstream sector, but midstream companies are feeling some pressure too.
“Gathering activities suffer the most in a poor oil price market,” he says. “Long-term pipelines tend to be shielded somewhat, but they’re feeling some of the pressure as producers scale back how much volume is moving through the pipelines. Producers put pressure on midstream companies to reduce prices on volume.”
Aside from seeking cost reductions, England says another way companies can weather the downturn is by working together.
“I’ve heard a lot of talk about different types of collaboration that have gone on in the industry,” he says. “Between service providers and upstream companies, even midstream companies talking to customers about how they can operate more efficiently, these companies need to find economic terms that work for both parties. It’s starting to happen, and I would like to see more of that.”
While the upturn may still be around a few more corners yet, there are ways the industry can partner to improve operational efficiencies and create more opportunities.