What happens to innovation now that oil is below US$50/barrel?

Susan L. Sakmar's picture
Susan L. Sakmar, Independent consultant, author and adjunct law professor, University of Houston Law Center
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Not long ago, the LNG industry was considered a niche business with only a handful of key players focused on monetizing large offshore gas fields. Fast forward to today where the LNG industry is now at the forefront with natural gas emerging as the fuel of choice to meet growing energy demand in a less carbon intensive way.

In recent years, large international oil companies (IOCs) such as ChevronExxon and Shell have pushed the bounds of technology to develop massive LNG projects in remote and challenging locations such as Western Australia and Papua New Guinea. Shell’s Prelude FLNG facility will be an incredible 488m (1,600 feet) long and 74m (240 feet) wide, which will make it the world’s largest floating structure once anchored to the seabed floor in 250 metres of water off the coast of Western Australia.

These massive projects were born in a high-priced oil environment, which could support innovative, multi-billion-dollar LNG projects. In fact, 7 out of the 10 most expensive energy projects in the world are LNG projects. When oil was over US$100/barrel, most IOC’s expected their R&D budgets to increase with the main focus areas for innovation being cost reduction, safety improvements and increased efficiency.

So what happens to innovation now that oil is below US$50/barrel? Some companies such as BP and ConocoPhillips have slashed capital expenditures while others, such as Shell’s proposed acquisition of BG Group, have looked to consolidation. Still others have sought innovative contractual structures linking LNG prices to Henry Hub or other indexes and offering flexible destination clauses so gas can flow anywhere in the world depending on market conditions.

Going forward, IOCs will continue to struggle to secure reserves from increasingly challenging environments, most notably the Arctic and other deep-sea areas. If oil remains below US$100/barrel, more innovation than ever will be needed to analyse data and extract resources more efficiently. Smaller players with some innovative niche are likely to be acquired by larger players as the entire sector looks to maintain and increase market share.

In short, the need for innovation in the energy sector is always present, whether oil is US$100 or US$50/barrel. The only difference is the form of innovation. In a low-oil priced environment, we are not likely to see another Gorgon or Prelude sized project anytime soon but there will no doubt be other projects in the coming years that will capture our imaginations and propel the industry forward.

Do you agree with Susan? What drives innovation in the gas sector now that oil is below US$50/barrel? Let us know your views below.

Wednesday 28th October - Attend Gastech Singapore to know more on "Application of Innovative Technology" - Key industry leaders from KOGAS, ExxonMobil, RasGas, Shell etc. will discuss their latest innovative projects.

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Reference image source: Oil & Gas Innovation Centre