Access to funding the biggest hindrance for oil and gas investments in 2013
London, 18 January 2013
The Ernst & Young Global Oil & Gas quarterly outlook shows that many of the factors that shaped the corporate agenda in 2012 will continue into 2013. Global economic growth has fallen short of expectations over the last few years and the path ahead for 2013 is beset with challenges.
- Considerable investment opportunities available for oil and gas sector
Dale Nijoka, Global Oil & Gas Leader at Ernst & Young comments:
“Emerging markets will once again be relied upon to provide the momentum for recovery in the global economy. However there are reasons to believe that there are more upside opportunities than downside risks for the oil and gas sector in the year ahead.”
He added: “There is no shortage of investment opportunities available to oil and gas companies. The key issue, as it has been since the onset of the financial crisis, will be access to capital. Cash constraints among small to mid-sized companies are likely to be a key driver for both asset and corporate opportunities in 2013, resulting in further consolidation in the independent sector. However, the findings of our Global Capital Confidence Barometer showed that oil companies’ appetite for acquisition activity was muted. Many are concerned about the gap between their valuation of potential acquisitions and the prices sought by sellers.”
Supported by greater confidence in the oil price outlook, and strong gas prices outside North America, upstream spending hit a record high in 2012. Capital investment by oil and gas companies in 2013 is expected to increase at a slower rate of around 8-10% according to industry estimates. Exploration and development of conventional resources will continue to account for the majority of upstream spending. In North America, spending, particularly in the unconventional sector, is likely to hold up. However, the share of investment dedicated to unconventional resources outside North America will increase at a more modest pace as progress in developing these resources will be more gradual.
Rapid expansion in non-OPEC oil production
The rapid expansion in tight oil production in the US is helping reshape the global oil production outlook. The US will be the main contributor to the forecast increase in non-OPEC oil supply over the next 10 years. Investment in Canada’s oil sands and the ramp-up of production from Iraq, along with the gradual development of Brazil’s pre-salt reserves, will ensure that markets remain well supplied in the next few years. This should help moderate oil prices, although instability in the Middle East and the political divisions that remain in Egypt and Libya will lead to some price volatility. If oil prices fall below US$90 per barrel for a sustained period, OPEC may decide to take action to support prices by lowering its output ceiling.
Commenting on the outlook for global gas markets, Nijoka says: “The immediate focus will be on delivering on the capital-intensive LNG projects in Australia, which will turn the country into one of the world’s largest liquefied natural gas (LNG) exporters, and implementing plans to monetize the significant gas discoveries made off East Africa. The spread between gas prices in North America and both Europe and Asia is unlikely to narrow until more gas supplies are brought on stream closer to demand centers or until the US or Canada begin to export liquefied natural gas .
Cost inflation a growing challenge
The high level of activity across the industry suggests that cost inflation will be a challenge in markets with high work backlogs. The greatest challenges will be in countries such as Australia, Norway and Canada where the pace of activity has resulted in some capacity shortages. Cost inflation will also be an increasing concern in countries like Colombia and Angola, where the next phases of exploration activity are planned. The focus on organic reserve replacement through exploration has been successful for a number of companies. In 2013, the results of exploration programs in the Arctic, Angola, Uganda, Morocco and the Eastern Mediterranean will be keenly anticipated.
Unfettered by capital constraints, reserve hungry national oil companies (NOCs) will continue to extend their global presence. However, stricter new rules on takeovers of Canadian companies by foreign state-controlled entities means that Asian NOCs may have to look beyond their favored locations for future corporate acquisitions. They will still be permitted to form partnerships or alliances with Canadian companies to gain access to the country’s resource wealth.
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About Ernst & Young’s Global Oil & Gas Center
The oil and gas industry is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. Ernst & Young’s Global Oil & Gas Center supports over 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors. The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key industry issues. With our deep industry focus, we can help your organization drive down costs and compete more effectively to achieve its potential. For more information, please visit www.ey.com/oilandgas. Follow us on Twitter @EY_OilGas.