How Declining Oil Prices Will Impact Digitizing the Energy Sector

Oil rig. Photo: Pete Markham (Flickr)

[Via Satellite 10-29-2015] A few years ago it seemed like the energy sector had reached a new turning point. The cost of a barrel of crude had crested $100, and exploration into shale was bringing even more energy resources to the fore than imagined. Fast-forward to 2015, and $50 or lower is the new norm. What’s more, the factors influencing the price of a barrel — and the price of energy — show little sign of near-term change.

This has real implications for the satellite industry, where the oil and gas sector is a valuable market. With the cost of oil holding low, exploration for new sites to drill is curtailed, and expenses that can be done away with get axed. Yet the market downturn comes as a new era of digitization is on the upswing. More sensors, greater computing, and better telecommunications promise to bring about new efficiencies and cost savings that were previously not possible. So the question is: How valuable is digitization? Is it worth keeping, cutting, or waiting for a little longer?

The Strength of Digitization

Like other industries, the oil and gas sector seeks ways to optimize, particularly when faced with economic headwinds. Richard D. Hastings, macro strategist at Seaport Global Securities, told Via Satellite that many companies are finding insights today that were impossible a decade ago, thanks largely to digitization. More data coming from oil and gas sites can yield better insight on practices and techniques, leading to greater efficiency.

These benefits form the lynchpin of arguments from satellite and other telecommunications companies as they vie to prove their worth during more stringent times. If connectivity improves the cost effectiveness of the energy business, then the case closes. Northern Sky Research (NSR) expects satellite companies will ultimately be able to validate their claims.

“Even though per site demand is strong and robust, the overall status is that demand for satellite communications is probably down this year compared to last year or the year before,” said Brad Grady, senior analyst at NSR. “It ratcheted down this year, it will probably ratchet down again next year, and then stabilize and rise thereafter. So the one to three-year outlook: maybe some decreases; three to five year outlook: expect some flat mean moderate gain; and the five to 10 year outlook still looks pretty strong.”

High Throughput Satellites (HTS) could have a major impact here as well. In addition to boosting data rates, HTS systems have the potential to lower the cost of using satellite connectivity. Grady said the energy market is gradually becoming less skeptical and more interested in using HTS today than in the past. He expects a hybrid model with HTS and traditional wide beams will be the favored approach.

However, the price of oil barrels will have the final say.

“The problem is that if oil prices go down quite a bit more, then the ability to spend money on new optimization systems, including digital methodology, starts to get difficult to achieve,” cautioned Hastings. “Once you start to get in the low $30 per barrel, then its very likely that production will decline further when producers will no longer be able to discover new cost and expense savings through optimization.”

The Production Problem

“The single greatest cause of uncertainty and potential weakness in oil prices over the next 12 months is the combination of slowing global demand for crude oil and petroleum products, concurrent to an insufficient decline in global production of crude oil,” Hastings said. “If crude oil production doesn’t go down enough and if demand slows too much, then you wind up with a constant imbalance of a little too much supply and not enough demand. That is already weighing on the markets right now and that imbalance might continue to be the case for much longer than the oil market would like.”

The factors influencing the rate of production are legion — among the most significant is politics. The geopolitical landscape is shifting: Iran is poised to offer its oil on the global market; Russia is increasing its focus on selling to China; and countries such as Saudi Arabia, Kuwait, and Venezuela, whose economies are tied closely to oil, are challenged to adapt in the face of impending economic downturns. When it comes to production, Hastings said it is difficult to get oil production to go lower, and therefore challenging for prices to go up.

“It is very possible that oil prices will drift slowly lower because it is very difficult for crude oil production to slow down in a dramatic way,” he explained. “Late next year supply and demand will tighten up a little bit, but that’s a long way off, and some of that requires that production goes down more than what we are seeing. Crude oil is a supply-based business and the connection between production and demand is very indirect.”

Winds of Change

Markets go through cycles, but the one the energy sector is currently going through is different. Unlike previous times where fossil fuel prices waxed and waned indiscriminate to other fuels, new contenders in the form of renewable energies are beginning to hold their own. In the past, high prices for nonrenewables spurred investment in clean energy, and low prices would deplete that interest. Now, alternative energy sources — namely wind and solar — have become sturdier even in adverse market conditions.

“In the past, when there was much less volume of solar and wind, then variance in fossil fuel prices had a big impact. Now the renewable side has discovered that with enough volume, the impact of lower fossil fuel prices doesn’t matter as much. That’s a big turning point. One of the reasons why fossil fuel prices are so low is the damage being done on the demand side because of renewables and the outlook toward even more development of renewable infrastructure over the next five to seven years,” explained Hastings.

Though renewables may contribute to slackening demand in the oil and gas sector, they also often suffer from Not In My Back Yard (NIMBY) opposition, thus relegating these energy sites to remote locations. Excluding residential solar panels and similar limited systems, large renewable energy power sites are often distanced from terrestrial telecommunications networks, making them an opportunity for satellite.

“One of the things that makes renewable energy very difficult to integrate into the grid is because it can vary. Sometimes there is wind, sometimes there are clouds — there are all these environmental conditions that impact the amount of electricity these things generate. Satellite is very important for grid operators who have to match supply and demand in real time,” said Grady, adding that this presents opportunity for both weather data constellations and for VSAT.

Additionally, some offshore support vessel companies are moving their resources from supporting offshore rigs in the deep sea to supporting offshore wind farms.

“There are a couple of contracts where they are the ones providing connectivity to these vessels,” he said. “It’s not a one-to-one replacement, but it shows that this sector is being changed by renewable resources in a way you wouldn’t expect.”

Hastings added that alternative energy and the growing popularity of hybrid vehicles could have large market-swaying impact on the overall energy sector in the next seven to 10 years.

Conclusion

The changes impacting the energy sector don’t appear to be normal fluctuations between high and low. The factors at play, from politics to new energy technology to digitalization and connectivity are all creating new shifts. Both the energy side and the telecommunications side are in a state of metamorphosis. While the future price of a barrel of oil might be too elusive to peg, demand for connectivity is likely to remain strong for whoever is keeping the lights on.