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“Innovation Through Dynamic Change” Annual Meeting 2016

PESA members collaborate with top executive industry leaders and keynote speaker Andrew Card, President of Franklin Pierce University, Former White House Chief of Staff and Secretary of Transportation on optimizing current market conditions.

Please save the date for PESA’s 2017 Annual Meeting April 19-21 at The Ritz Carlton, Dove Mountain in Marana, AZ.

The 2016 PESA Annual Meeting held April 6-8 in San Diego, California focused on opportunities and challenges for the upstream industry in transition. Incoming PESA Chairman Saeid Rahimian, President & CEO, Gardner Denver – Energy Group, opened the meeting setting the tone for the conference and giving insight into the theme.

“Often, we don’t know what we are truly capable of achieving until we are challenged, and put our minds to the task at hand. Competing and prospering in the future will hinge on our ability to become more cost competitive through science & technology while increasing efficiency by leveraging best practices. Right now, we have an opportunity to show the rest of the energy industry, and the world, what the service and supply sector is really capable of. That we can, and will, rise to the challenge,” said Rahimian.

Keynote Speaker Andrew Card, President of Franklin Pierce University, Former White House Chief of Staff and Secretary of Transportation, shared insight into the upcoming presidential election and how politics affect the industry.

Card stressed the importance of selecting qualified candidates across all government as the political climate rapidly changes. Card also discussed the President’s responsibility to make difficult decisions regarding national security and safety.

“Do not to pick a President by anticipating their ability in what they have to do, but by their ability in doing what we can’t anticipate them having to do,” said Card.

As Americans focus on the next Presidential election, following elections of the Senate, Congress and Governors remain crucial because politicians influence corporate success. Companies must collaborate to inform lawmakers on how rules and regulations affect the oil and gas industry.

“PESA is significant to your success and significant to America’s ability to have an industry that is competitive with the world and is part of our national security blanket,” stated Card.

Onshore Panel Highlights and CSIS’s Robin West

During the onshore panel, speakers discussed challenges and opportunities available as the market continues to adapt and change. Higher oil prices prompted new innovations that are leading to increased efficiency however, lowered production costs also lowered the price of oil and gas.

“The U.S. oil price going up was the combination of low interest rates which encouraged access to cheap capital, a very responsive service industry, infrastructure and relatively low entry costs onshore,” said Susan Cunningham, EVP – Exploration, New Ventures, Frontier, EHSR and Business Innovation at Noble Energy. “The U.S. enabled onshore conventional to take off and this was only made possible due to the increasing oil price as the unconventional business was known to be high.”

The panelists discussed how the success of the onshore industry led to a supply surplus and drove price down. According to Steve Mueller, Chairman at Southwestern Energy, for every ten percent drop in price, cost structure must be reduced by three times as much to achieve a ten percent return rate. Innovations and increased efficiencies allow the industry to remain incredibly resilient and adapt to commodity price. Mueller says efficiency is both responsible for causing low prices and crucial to surviving them.

“Efficiency is happening throughout the industry and not just from a technology standpoint,” stated Mueller. “As environmental groups raise concerns about greenhouse gases, climate change and other issues, there are times to say ‘Let’s join them rather than fight them.’” Mueller encouraged a proactive approach to environmental sustainability that improves government relations as well as public perception. Staying current on policies and regulations that affect the industry is also imperative to maintaining operational control.

The panel also discussed risk, noting that business models have switched from a focus on production growth to return growth. Proper risk appropriation creates full cycle returns that foster a more collaborative relationship between suppliers and operators, and while headcount reductions help achieve cost reductions, they also hinder innovation.

“Innovation doesn’t come from machines, software or books. It comes from people. We are reducing that capacity for innovation by reducing our workforce,” stated Kevin Neveu, President and CEO, Precision Drilling.

Robin West, Senior Adviser, Energy and National Security Program at Center for Strategic & International Studies, called for a change in the relationship dynamic between operators and the service and supply sector. One barrier to collaboration is a lack of understanding between business models. The combination of distrust and pressure to cut costs impede open communication. West encouraged the two sectors to view each other as partners and work together “to improve efficiency, invest in long-term solutions, develop common methods for reporting and best practices to positively impact the industry.”

Insights from the Offshore and Analyst Panels

The offshore panel continued discussion on cost reduction and importance of safety with an added focus on discipline. According to James Painter, EVP – Execution and Appraisal at Cobalt International Energy, oil opportunities must be larger offshore due to high costs bringing projects online and the long, flat period before returns.

Shifting to a long-term, more holistic planning of supply chain also reduces costs. Mark Mey, EVP and CFO, Transocean, encouraged companies to implement a five year plan instead of a one year budget with a focus on clear targets and measuring performance. Some of Transocean’s innovative cost cutting initiatives include performing inspections offshore, implementing condition-based maintenance and a movement from a materials-based proxy model to an incentive-based model with vendors. As industry members work to reduce costs, the panelists unilaterally urged companies not to reduce safety.

PESA’s first-ever analyst panel engaged with the audience on the outlook of the industry. According to Marshall Adkins, Director of Energy Research at Raymond James, three main factors caused the price of oil to drop: the value of the dollar, the reversal of outages in OPEC due to increased production from Saudi Arabia, Iraq and Iran over the past year and massive U.S. growth following four decades of steady declines. In less than ten years, the U.S. has gone from being the highest cost producer to the lowest cost producer and has zero excess capacity with OPEC.

­Due to a faster and harsher rig count decline in the first quarter of this year, a steeper decline on the exit rate of production at the end of last year based on the most recent EIA numbers, and the corroborating evidence from the E&Ps, Pearce Hammond, Managing Director, Co-Head of E&P Research at Simmons & Co. International, revised their previous expectation for the tapering off of domestic supply from 480k bpd to 660k bpd compared to 2015 average daily production.

The analysts agreed as tough market conditions prevail, onshore will recover sooner than offshore. James Wicklund, Managing Director at Credit Suisse, anticipates an improvement in the deepwater market in 2018. Wicklund believes that the market hit bottom this year at $26 oil.

“We are positive on the industry, we always knew it was going to come back, the question is just how fast,” stated Wicklund. “We believe that 2017 will be stronger than 2016.”

PESA President Leslie Beyer closed the meeting with the message, “It is this sector of the industry that is known for using innovation and optimization to not just survive difficult times, but to forge a new, successful path and emerge stronger than before.”

As market conditions will inevitably improve, a focus on innovation, sustainability and collaboration remains key. PESA members will continue to work together to drive innovation through dynamic change, conquer challenges and create opportunities throughout the downturn cycle and beyond.