Nov. 15, 2016 (updated 9/13/2018)
Even in an industry known for boom-bust cycles, the extreme oil price correction experienced from 2014 to 2017 left an indelible mark on energy companies and their real estate. The impact of the downturn, however, varied considerably across the industry, as the upstream, midstream and downstream sectors each faced a unique set of challenges and opportunities.
Upstream streamlined to survive
The energy downturn hit the upstream sector of the oil and gas industry the hardest. The exploration & production (E&P) companies that make up this sector hired talent, spent capital and leased office space from 2010 to 2014 based on the assumption of continued $100-a-barrel oil. Throughout the most recent downturn, these companies dramatically streamlined operations to cut costs. Energy tenants downsized significantly and released record amounts of sublease space into property markets across North America. Houston, for instance, saw a record 12.2 million square feet of office sublease space in the third quarter of 2016. More recently, price stabilization has allowed for capital budgets to increase and firms are starting to eye new rounds of hiring, but this activity has yet to translate into net growth in most energy office markets.
Midstream resilient in the face of volatility
While the lower-oil-price environment and regulatory scrutiny of new infrastructure created some distress, the midstream sector remained resilient in the face of industry volatility. Most midstream companies responded with a focus on gaining scale and synergies from mergers, acquisitions and asset sales.
The net effect of midstream sector changes on commercial real estate was relatively neutral, with some firms downsizing and others maintaining occupancy levels. Today, one of the biggest challenges facing the midstream sector is overburdened infrastructure. Where some regions benefit from a vast network of pipelines, areas such as Alberta and west Texas are facing capacity shortages.
Enormous investments made in downstream
Refineries are among the least affected from the downturn and outperformed the energy industry as a whole over the last few years. The emergence of American shale gas and oil as a cheap feedstock triggered a boom in domestic petrochemical production. According to the American Chemistry Council, U.S. petrochemical investments totaled $185 billion as of October 2017. While the Texas Gulf Coast was the largest benefactor of increased activity, western Pennsylvania and Canada have also seen significant downstream investments. Capital flowing into these areas has spurred demand for specialized industrial projects as well as manufacturing and warehouse space.
Late 2017 marked an inflection point with West Texas Intermediate’s (WTI’s) prices crossing the $50-per-barrel threshold. While the sector has largely recovered, the impact to energy real estate markets can still be felt, particularly in the office sector. Today, the oil and gas industry is capitalizing on opportunities at every stage of production and leveraging efficiencies in all areas of their business. As a result, demand for more flexible real estate strategies is higher than ever.