A tentative look into the future of NDT in the oil & gas industry

Entering 2020, the outlook for North America’s downstream oil & gas industry was one of strong margins, a buoyant economy and robust demand. The only cloud on the horizon was the potential impact of the energy transition. Companies were building for a future of plenty. For a decade, downstream companies in North America invested in capitalising on booming North American shale, retooled their refining and transport capacities and entered adjacent industries. The sector managed to outperform similar industries in total value creation over ten years, and even as far back as the early 1990s, but there was also a downside. The North American downstream companies developed large, inflexible technical and engineering functions, loosened their control over administrative costs and failed to seize new opportunities for margin improvement through digitising refineries.

The global COVID-19 pandemic caught the oil & gas industry unprepared for a completely changed landscape. Planes were grounded and cars parked. Countries outside the Organization of the Petroleum Exporting Countries (OPEC) that export crude oil (known as OPEC-plus countries) initially turned up the spigots and oil prices collapsed. Demand for transportation fuels fell by up to half and storage tanks filled. This forced refineries to cut their rates or even stop production. Oil & gas companies experienced the sharpest shock they had ever seen, which may also turn out to be their most enduring one. Long after countries tentatively emerge from quarantine, constantly on the lookout for another surge in COVID-19 cases, the oil & gas industry will face the twin spectres: sudden travel interruptions (and a longer-term demand decline caused by an economic downturn) and a rise in telecommuting.

Downstream oil & gas returns have outperformed similar industries for the past decade, with crisis impacts evident in the first quarter of 2020. It is expected that the global growth in hydrocarbon demand will peak in the 2030s. As it does, it will expose excess refining capacity and put downward pressure on profits. Adding to the demand-side challenges are vacillation over regulatory policy, the possibility of a breakdown in OPEC’s uneasy production discipline and the chance that refiners will prolong the glut in petroleum-product inventories by increasing output as soon as their margins improve.

To adjust, oil & gas companies will have to transform radically. Those that succeed will shape the industry’s future; those that fail will become consolidation targets. Even among companies ultimately acquired, there is an important benefit to getting as far down the path of transformation as possible. The further they progress, the higher their valuations will be.

Many have already begun to react. As in past downturns, they are cutting headcount, reviewing operating expenses and curtailing capital expenditures. NDT suppliers of contract services are on the receiving end of a dramatic reduction in NDT service requirement.

To emerge from these challenging times with the capability of delivering another decade of long-term growth, companies need strong market perspectives and a clear strategic vision informed by five fundamental changes that define the current downturn.

Five key structural challenges have fundamentally altered North America’s downstream oil & gas market. To adapt successfully to the new and volatile landscape during and after the COVID-19 crisis, companies will need to consider each of the developments as they formulate their short-, medium- and long-term approaches.

The abrupt demand shock associated with the COVID-19 crisis has created a glut of crude and product inventories, constraining infrastructure in a way that the oil & gas industry has never seen. Abrupt demand shock has created high inventories of crude and product, which will require the rest of 2020 and longer to work off. Regulatory compliance costs have tripled since previous market pullbacks challenged consumption norms include telecommuting. Airline miles travelled are projected to remain down by 15-20% in the near term; projections of vehicle miles travelled vary.

Reopening markets could cause geographic arbitrage and short-term instability. Limited price stability OPEC alliance is tenuous, with the propensity for member nations to act in their own interests. Streamlined Permian Basin activity will return and bring rapid supply and price feedback. Five structural challenges define the current downturn in downstream oil & gas.

Companies that provide contract NDT services have already seen a dramatic reduction in the employment of technicians. Economics have resulted in employees working alternate weeks or being declared redundant. The larger NDT supplier companies are more likely to survive, but the smaller companies may not. Add to the equation the increased application of automated systems and use of artificial intelligence and the outlook for incoming NDT trainees is bleak.

The NDT technician of the future will be educated to engineer equivalence and have a university or technical college background. The changes will be gradual at first and then accelerate to meet the advanced NDT equipment and techniques. Having said all that, I hope that society will have programmes to provide more advanced training and that the change will be orderly.

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