After two years of lowered expectations, there is a cautious optimism in the oil patch for 2017…and beyond. There is a growing optimism creeping through the oil patch. It’s nearly a palpable feeling. Whether the city is Abu Dhabi, Basra, Calgary, Houston, Omsk or Stavanger, the language is crude and gushing with the belief the O&G sector is ready to boom again and the current pricing cycle of lower longer will give way to a long upward pricing climb.  But in recent years, the oil patch has seen many blooms turn to dust and while the optimism is real, so is the sober reality of the capriciousness of the economic climate. What’s behind the optimism? There are a number of factors behind the renewed faith in the O&G. Much of that begins with the unexpected November 30, 2016 decision by OPEC (Organization of Petroleum Exporting Nations) to reduce output by 1.2 million b/d (barrels per day)to 32.5 million b/d. It was the first agreement to cut production since 2008. Ironically, the deal was pushed forward by Saudi Arabia, which only two years ago advocated a position of letting the marketplace determine the production/pricing levels. The Ever Shrinking Petro-Dollar But it only takes a cursory view of the numbers to understand the motivation in getting the deal done. In 2012, the OPEC nations earned $920 billion in oil revenues. In 2014, just before the oil prices plummeted, the take was $753 billion. In 2016, the EIA (US Energy Information Administration) is forecasting OPEC revenues at $341 billion, a mere 37% of the record revenues of 2012.  From a pricing standpoint, oil fell from over $90 per barrel in early 2014 to as low as $40 in 2016 – one of the largest plunges in OPEC history. In the boom days of skyrocketing oil prices and ever rising oil production, the petro-dollar financed massive economic growth. But lower oil prices have had a tremendous impact on countries like Saudi Arabia and non-OPEC producer, Russia. With fewer petro dollars, massive curtailments in not only O&G projects but investment across the board have left many projects unfinished, testimony to both the power and the fickleness of the O&G sector. In Russia’s case, the downturn in oil pricing coupled with economic sanctions has driven the economy into near-recession.  With the most to gain and equally the most to lose, Saudi Arabia led the cuts by reducing output by nearly 500,000 b/d to 10.06 million b/d. The OPEC deal was followed up by an agreement with eleven non-OPEC oil producers to cut their output by 558,000 b/d. OPEC had been angling for 600,000 b/d. Still it is considered a critical step in reining in oil production and cutting the surplus inventory of oil. Saudi oil minister Khalid Al-Falih said of the agreement with non-OPEC producers, “[the deal] is meant to accelerate the natural process of rebalancing the oil market.” The immediate impact of the upshot of the announcement was oil hit $50 plus a barrel, before falling back to the high $40s. The dollar per barrel is worth keeping an eye on as some economists think Saudi Arabia needs a mark approaching $60 per barrel to realign revenues with project ambitions. There is a serious question of whether the deal within OPEC and more so with the non-OPEC producers will hold. Douglas-Westbrook (DW), an O&G consultancy company, noted, “OPEC must remain disciplined to avoid oil glut: At present we [DW] expect … an additional 1.2 million b/d of supply to come in 2017 from offshore production. OPEC needs to stick to its cuts to avoid a substantial overhang of production capacity and likely downward pressure on oil prices.” From a more simplistic standpoint, will the members cheat? Future Demand To a degree the market is already setting up for an increase in production outside the parameters of the OPEC/non-OPEC production reduction deal. The first indications and how the agreement might influence O&G production is reflected in the increases in rig counts in the US and Canada. Baker-Hughes in their January 20, 2017 report show the monthly rig count up 35 to 694 in the US and up 27 in Canada. But in Canada the count is 92 over the same period in 2016, reflecting a surge in shale oil activity. On the other hand, the international rig count is only marginally up and down 166 over the same period, following the general pattern of reduced production and pricing. Another aspect of the pricing is the oil stockpiles. At this writing, crude inventories in the US were up 2.3 million barrels, the rise attributed to a decline in US refinery output more than an increase in oil purchases. The US EIA (Energy Information Agency) January Short Term Energy Outlook reported, “U.S. crude oil production averaged an estimated 8.9 million barrels per day (b/d) in 2016 and is forecast to average 9.0 million b/d in 2017 and 9.3 million b/d in 2018.”  Most analysts believe long-term energy demand will push oil prices upward. The scenario oft cited is that India and China will account for 45% of the growth in global energy demand over the next two decades. Following that scenario, the supply & demand for oil on a global basis will certainly dictate investment.  Saudi Arabian Oil Company (Saudi Aramco) CEO Amin Nasser at the World Economic Forum in Davos, said “It will take decades for [renewables] to replace petroleum resources. So what we are doing in Saudi Aramco, we are building our capacity in the oil.” Nasser believes it will require an investment of $25 trillion in developing new oil capacity over the next 25 years to meet rising demand.  Nasser is not alone in his assessment of future demand. ExxonMobil’s Outlook for Energy also is bullish on oil demand. Among the report’s key findings for the 2015-to-2040 period is a 25% increase in the global demand for energy. In 2040, oil and natural gas are expected to make up nearly 60% of global supplies, while nuclear and renewables will be approaching 25%. ExxonMobil also anticipates North America, “which for decades had been an oil importer, is likely to become a significant net exporter by 2025.” O&G Projects The anticipated increase in demand and rising price of oil is expected to underpin a surge in O&G project work. While most agree the OPEC production deal will encourage investment in O&G project, the actual nature of the investment is uncertain.  At least in the near term, most of the project activity seems to be directed at support for existing O&G operations. The collapse of oil prices in 2014, put many projects on hold and put many others in folders with “to do” if oil prices are reliably above $50 per barrel. DW in a recent newsletter, noted “new offshore production systems orders to finally emerge” after a period of nearly 18 months since the last order for an offshore floating production system. DW cited FPSOs for “Hurricane’s Lancaster development, Exxon’s Liza EPS, Petrobras’ Libra & Sepia fields and a semi-submersible for BP’s Mad Dog 2.”  DW also expects Floating Production Systems (FPS) to recover in 2017, after a year (2016) in which no orders were placed. The DW is forecasting FPS orders will hit record levels of $50 billion with a majority falling in the 2017-2018 period – although the orders themselves were placed much earlier. There is also a lot of downstream activity that will feed the project sector. For example, with the abundance of shale gas feeder stock in the US Gulf region, it’s expected to fuel a near-term chemical plant building boom. According to the ACC (American Chemistry Council), there were around 275 new chemical production projects in the works worth over $170 billion. With demand expected to grow, the ACC is forecasting capital expenditures to increase from $4.8 billion in 2016 to $58.6 billion in 2021. Globally there are a number of real mega-O&G projects either underway or start-up that will be important if the OPEC deal delivers on pricing. The political implications are obvious but nonetheless pipelines are among the largest of the projects most likely to be pursued. The $15.1 billion Turkish Stream pipeline project which involves laying 505 miles of pipeline beneath the Black Sea to a system of 177 miles of onshore pipes to deliver gas (63 bn/cu-m per year) to Europe via Turkey is among the key O&G projects. Another Russia gas pipeline project Nord Stream 2 looks to benefit from a friendlier Trump Administration. Russia supplies around 38% of Germany’s natural gas and demand is rising. The problem is the main trunk line transverses the Ukraine. Russia, similar to the proposed line in Turkey, would like to bypass the Ukraine by moving the gas from a terminal in Vyborg through a new undersea pipeline to Greifswald on the northern coast of Germany. Russia’s Gazprom $11 billion Nord Stream 2 project runs 746 miles and peak production is expected to hit 55 billion cu/m of gas annually. The project’s first pipes arrived in October 2016 from Germany’s Europipe GmBH, the first gas deliveries are expected in 2019. Mega Projects There are a number of other mega-projects O&G underway - many which get little mention in the West. Egina Field development in Nigeria is a field about 81miles offshore. The first FPSO is expected in 2017 and peak output is forecast at 200,000 b/d. Another major project is the Tengiz Field expansion in Kazakhstan. The project is expected to start this year at a cost of around $36.8 billion. Production is expected until 2022. Currently the Tengiz Field is ranked as the sixth largest in the world. Another field that could alter the O&G landscape is the Leviathan gas field in Israel. A relatively new field – discovered in 2010 – the Leviathan field lies about 81 miles offshore of Israel. The US Geological Survey estimates the reserves at 1.7 million barrels of oil and 3.4 trillion feet of gas. Production in the field is expected to start 2019, although numerous political problems color the prospects of development. Another mega-project that hasn’t gathered much ink is Azerbaijan’s Shah Deniz gas field expansion. BP’s Shah Deniz $28 billion production project is expected to add 26 production wells, 311 miles of subsea pipeline and two bridge linked offshore platforms to produce an 10.8 billion cu/ft per year. The first gas production is expected in 2018.