How has the sharp decline in oil prices affected the Norwegian oil and gas industry? How has the industry reacted?

KNOWLEDGE @ BI: The future of the Oil Industry

A recent research project undergone at BI attempted to uncover the strategic responses undergone by the industry following the oil price drop in 2014, where the authors conducted several interviews with key actors in the Norwegian industry, representing both Norwegian-owned and foreign owned companies.

Before and during our project, the situation in, not only the Norwegian-based oil and gas industry, but the entire global oil and gas industry has changed significantly.

Sharp decline in oil prices

Following the last peak in the oil price in June 2014, when the oil price per barrel of brent oil was 114$ USD, the price has plummeted to its current level around 35$ USD/barrel. We argue that it is reasonable to assume that the industry will have to adjust itself to a future oil price at a considerably lower level than what it was before the oil price fell in 2014.

We present E24's overview ("E24s oljekart"), computed by Rystad Energy, that showed the profitability of the most important oil fields currently in development on the Norwegian Continental Shelf. At the time of writing this report, only one of the fields in the overview was barely profitable. These shows the profound issues facing the industry today, our report was an attempt to uncover how these issues were solved strategically.

Shock in the industry

The steep decline in oil prices has forced the entire industry to make significant changes in their operations. The natural reaction for the individual firms is to regulate the number of employees in order to cut costs.

Many of our interview objects stated that the shock in the industry was something that it needed in order to regulate its ever-increasing cost levels. However, the steepness of the decline was perhaps more severe than most would have preferred and the considerable lay-offs opened up for new issues for the industry moving forward.

Opportunities for big deals

We found that the industry is facing a period of consolidation, where the biggest companies with the biggest cash reserves view the current market situation as an opportunity to acquire other companies at a cheaper rate.

Many of the current acquisitions, mergers or alliances were years in the making, but the timing and amount of big deals shows a trend in the market. Examples include Schlumberger's acquisition of Cameron and Halliburton's acquisition of Baker Hughes.

An output of this consolidation that we found through our research was that the largest companies in the industry had uncovered an opportunity in the market to supply integrated solutions to the operators.

In search of lower costs

The idea is that the suppliers would be able to offer complete and integrated solutions for various operations on an oil field, in an effort to lower costs for both parties (operators and suppliers).

By utilizing strategic alliances and acquisitions in order to obtain a more complete portfolio of services they believe that they could cut costs for the operators through for example lower administrative costs because they no longer had to control several contracts with several companies at once.

The companies further stated that these solutions would be most viable for smaller sized operator companies with a smaller administrative capacity. Increased cooperation and collaboration in the industry was also one of the key findings in our interviews.

Both suppliers and operators believed that a key way of achieving consistent lower costs in the industry was to increase the cooperation and collaboration between the parties. Several of the interviewees stated that an inherent conservatism in the industry was something that it needed to overcome in order for it to reach its targets.

Retaining the knowledge base

In terms of policy recommendations, we believe it is essential for the competitiveness of Norway attain the knowledge built up within this industry. There are fields under development that will have a lifespan of minimum 70 years, so there will still be demand for new knowledge and competence within the industry. New projects on the NCS is a key component for developing knowledge and activity in the oil and gas industry in Norway, we therefore believe that it is of vital importance that the Norwegian government emphasize that the industry will continue to be a vital part of the Norwegian economy moving forward.

New projects is also a vital part in new innovations, we therefore believe that opening up for new fields in order to stimulate activity on the NCS is of high importance in the future.

In search of lower costs

The idea is that the suppliers would be able to offer complete and integrated solutions for various operations on an oil field, in an effort to lower costs for both parties (operators and suppliers).

By utilizing strategic alliances and acquisitions in order to obtain a more complete portfolio of services they believe that they could cut costs for the operators through for example lower administrative costs because they no longer had to control several contracts with several companies at once.

Highly skilled employees lose their jobs

The layoffs in the industry has led to tens of thousands of engineers and highly skilled employees to lose their jobs. Some of these will move into adjacent industries, such as renewable energy and other ocean industries, while others might start their own company.

However, not all of these highly skilled find suitable jobs after they are laid off. It is therefore severely important for the Norwegian government to put in place policies that make sure that the Norwegian economy capitalize on the innovation capacity and utilize the entrepreneurial capacity in the knowledge base currently in the market.

It is of the utmost importance to find compatible industries for them to move into, for example via further education.

Reference:
This article is based on a research paper on the Norwegian offshore oil supplier industry. Written by Ole Jakob Ramsøy, Professor Torger Reve and Marius Nordkvelde. Funded by The Industry Association Norwegian Oil & Gas.

This article is published in BI Strategy Magazine 2016:
https://issuu.com/bi_business_school/docs/bi_strategy_magazine_2016_e

BI Strategy Magazine is a Science Communication Magazine published by the Department of Strategy at BI Norwegian Business School.

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