SINGAPORE: The outlook for oil and natural gas markets remains bleak for the rest of the year and much of 2016, meaning there will be no let up in pressure to control costs, executives from two European energy majors said.
Oil and liquefied natural gas (LNG) prices have more than halved from peaks in 2014, eroding producer revenues and forcing cost cuts and layoffs.
"The industry is under so much pressure that you need to have a clear plan. You need to balance capital expenditure against production," BG Group chief executive Helge Lund told Reuters on the sidelines of a conference in Singapore.
"Our capex in 2015 will be around 30% lower than in 2014. Given the current market environment, we need to improve efficiency of oil and natural gas production," he said.
Lund said that in the past decade industry costs had doubled to produce the same amount of oil and gas, which given reduced revenues required a radical review of how the industry is run.
BG Group is in the process of being taken over by Royal Dutch Shell at an estimated US$70 billion price tag.
Due to lower revenues and shrinking market capitalisation of energy firms, Lund said he "would not rule out" further mergers and acquisitions.
Tor Martin Anfinnsen, senior vice-president for marketing and trading at Norway's Statoil, said that markets would likely remain low for some time.
"There's a fair chance that the market structure might flip into backwardation in 2016," he said, referring to a price structure in which contracts further out in the future are cheaper than those for immediate delivery.
"This implies that the market prospects are not getting better (and) the oversupply in oil markets will take some time to work down," he said, noting a glut was also beginning to show in refined oil products markets.
Anfinnsen said due to market conditions there were increased counter-party trading risks. "The counterparties we have are well within our tolerance zone, but given current market conditions it's definitely something we keep a very close eye on."
Both executives said, however, that demand would recover in the long term.
"We will see a significant increase in oil and gas demand by 2040," Lund said.
Anfinnsen said once the current oversupply passed, the industry faced a huge challenge developing new reserves.
"In order to meet demand, we still need to find and develop 5-6 Saudi Arabias," he said, referring to the world's biggest oil exporter. "It's such a tall order that I'm not sure we'll manage, given that the world has consumed more oil than our industry has been able to replace the last few years."
Statoil reported weaker-than-expected earnings on Wednesday and said it would cut its 2015 costs by $1 billion.
BG Group reports third-quarter results on Friday. - Reuters
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