Who needs $100 oil? Majors seen making more cash at $50 Is IIoT to Blame (?)

This author has believed that the only thing owner-operators, independent E&P firm, and others in the oil patch today can really control is their costs to find, extract, produce and refine a barrel of oil. ARC has written more than once that the overall impact of lower oil prices on the global economy is a positive one (unless you operate in the upstream oil & gas segment) as consumer pay less for gasoline at the pump, transportation companies pay less for fuel, car buyers acquire more profitable SUVs, and refineries pad their thin margins.

According to Goldman Sachs Group, oil majors are raking in more cash now than they did in the heyday of $100 oil as integrated giants such as BP and Royal Dutch Shell Plc have adapted to lower prices by cutting costs and improving operations. European majors made more cash during the first half of this year, when Brent averaged $52/bbl, than they did in the first half of 2014 when prices were $109.

Back then, high oil prices had caused executives to overreach on projects, leading to delays, cost overruns and inefficiency, Goldman said. Those projects are coming online now, producing more revenue, while companies have tightened their belts and divested some assets to reduce debt burdens.

Some, such as Schlumberger’s CEO, might argue that majority of the cost reductions came as a result of the massive cost cutting (i.e. layoffs) of the four major oilfield service providers who were responding to demands from customers to reduce service fees by 25% or more in order to keep their business. Others, such as ARC, believe that some (not all) of these cost reductions are a result of more owner-operators and independent E&Ps investing in and deploying greater automation and even IIoT-enabled solutions such as advanced analytics, enhanced communications, real-time remote monitoring, and other tools that can help lower cost per boe, increase production and EUR, and/or improve employee productivity and collaboration among both internal and external ecosystems.

In theory, the best case scenario is one in which oil & gas producers continue lower their cost per boe (through digital transformation and changes in culture) such that they can make good returns even if oil prices remain in this new “lower for longer” normal while consumers pay less at the pump, airlines actually reduce airfares (that is another story entirely), trucking and rail companies reduce their costs, and consumers pay less for energy (and perhaps provide energy to those without access to it today), thereby improving the quality of life for hundreds of millions (it not billions).