NASA engineers staring at unemployment found second careers in the energy industry after the space shuttle program closed down this year, reminding those who are listening, not enough it would seem, that trying to extract oil and gas from thousands of feet under the ground in far remote hostile exotic environments is still a pretty cool pursuit.
Unfortunately, another year has passed with the industry failing to convey this dynamic message to young engineers that have only Google and .com in their sights.
Time is short, especially when you bear in mind that the historical source of petroleum engineers has been the West. Since the 1970s, 40 colleges in the US, the world’s largest energy consumer, offered degrees in petroleum engineering. Today, you can count them on one hand.
Not all is lost, especially with another year of $100+ oil, for the importance regarding the development of local national talent in countries rich in energy resources across the world, especially in the Middle East, started to get traction at the conference podiums as one of the key ways for the global industry to mitigate the pending talent crisis.
The past year also consolidated the post credit-crisis investor posture that energy and commodities remain the space of choice by weary investors exhausted from the roller coaster of uncertainty surrounding the ever just around the corner economic recovery. That said, it has to be acknowledged this thesis did undergo a second-quarter siege as oil prices and many commodities appeared to be in free fall as China wobbled, propelling obituaries to be written declaring the end of the so-called supercycle.
Never in the modern history of the global economy has the price of so many commodities — from oil, to metals, to agriculture — risen as much and stayed as high for so long.
The price increase has come to be known as the commodities supercycle: a rare period of higher costs underpinned on the demand side by the industrialization and urbanization of emerging countries, notably China, and on the supply side by years of under investment during the 1980s and 1990s.
The scale and duration of the commodities supercycle matters far beyond the day-to-day business of raw materials markets and trading.
It directly affects many of the world’s largest basic industries, including mining companies such as BHP Billiton and Rio Tinto, oil and gas groups including ExxonMobil and BP, and agribusiness companies including Deere & Co, the maker and distributor of agricultural, commercial and consumer equipment, and Cargill, as well as countries ranging from Saudi Arabia to Chile, which are dependent on natural resource output for their prosperity.
Crude, food and gold came roaring back in the second half of the year to give the supercycle at least a stay of execution, but perhaps with not the same bullish confidence that may trigger many to reconsider the investment landscape in 2013 with Europe falling back into recession and the US looking over a fiscal cliff.
Another year of $ 100+ oil has brought with it changes to the industry the scale of which we have not witnessed since in the wake of $ 10 oil in the late 1990s when a wave of M&A activity redefined the sector. In the last few years, we appear to be witnessing a new transformation, less defined perhaps but equally as radical — Supermajors are slimming down; Independents are joining forces; Service companies are taking on IOC activities; trading firms are diversifying and building asset bases — 2013 may bring clarity to the destination and consequence of this new wave of transformation.
Today many NOCs are increasingly acting like IOCs, expanding beyond their national boundaries and competing for assets overseas — the arrival of Statoil, China National Petroleum Corporation and Korea National Oil Corporation into the Gulf’s upstream energy sector are three good examples. For some, NOCs the motive is commercial, while for others it’s all about security of future supply for their home countries.
Meanwhile, some supermajors are operating more like super project managers. Back in the 1970s and 80s, IOCs controlled the identification, extraction and production of three quarters of global hydrocarbon reserves. Today, state-owned NOCs control roughly three quarters of the world’s reserves, leaving supermajors on occasion to accept the role of glorified service providers. If you study many of the big energy concession deals signed these days, governments pay IOCs a fee to get oil and gas out of the ground, but the IOCs don’t own the assets and cannot book them on their balance sheets.
Iraq’s recent contracts are a good example of this new framework, but the next 12 months may deliver the unraveling of this contract as ExxonMobil appears set to abandon the model.
If NOCs are challenging the supermajors from above, service companies are encroaching into their space from below. To an extent, the IOCs only have themselves to blame for from the late-1980s to the late 1990s as oil prices fell to $ 10 a barrel, major operators downsized and outsourced much of their technical work to service companies such as Schlumberger, Halliburton and Baker Hughes.
In June this year, Mexico’s Petroleos Mexicanos (Pemex), declared that Petrofac together with its partner Schlumberger were the selected bidder on the Pánuco integrated production service contract in Mexico. The contract runs for 30 years, with field operations expected to start around the beginning of 2013.
One of the other big themes to soar in the year of the multi-billion dollar election was that an energy independent America was possibly much closer than previously thought — the shale revolution entered the common vernacular.
In 2000, shale gas represented just 1 percent of American natural gas supplies. Today, it is 30 percent and rising. The US now seems to possess a 100-year supply of natural gas, which is the cleanest of the fossil fuels. This cleaner, cheaper energy source is already replacing dirtier coal-fired plants. Chemical companies rely heavily on natural gas, and the abundance of this new source has induced companies like Dow Chemical to invest in the US rather than abroad. The French company Vallourec is building a $ 650 million plant in Youngstown, Ohio, to make steel tubes for the wells. States like Pennsylvania, Ohio and New York will reap billions in additional revenue. Consumers also benefit.
The lower US gas prices when compared with Europe is now driving a considerable manufacturing cost differential for high energy users. When the grumbles are coming from German manufacturers who are considered the last remaining bedrock of an unstable European economy, then we need to be concerned about long term erosion of demand. So incredibly, low energy prices, which are great for US manufacturing and consumers, could potentially drive a rift between the US and Europe in 2013, another problem the EU doesn’t need.
The European Union is going through its most profound crisis since its establishment more than 50 years ago. The dramatic economic downturn that most countries have experienced, coupled with a lack of agreement among politicians on how to reverse it, has given way to increasing social discontent, the rise of political extremism, and a general erosion of confidence among businesses and citizens in politicians and the European project as a whole.
Despite the clouds of uncertainty, I am optimistic about 2013.
It may yet be a year of two halves, but one thing is for sure it won’t be dull.
Let’s all get out more and spread the word and maybe just maybe we will attract some of the brightest talent out there to join us oldies build an energy rich world that looks forward to both a stable economic and political future for all.
Happy New Year!
— James McCallum is CEO of Senergy
