Striking a balance
London, 21 April 2010 – In a new outlook issued today the Ernst & Young Global Oil & Gas Center says that oil and gas industry fundamentals are improving in line with the global economy. Developing countries continue to take the lead in terms of growth, with positive indicators throughout the globe and with generally rising economic expectations, energy market sentiment remains relatively positive.
“The markets are coming back into balance,” said Dale Nijoka, Global Oil and Gas Leader, Ernst & Young. “However, the environment could change significantly if there are setbacks in the global economic recovery.”
Most analysts see the market coming into balance this year, with ample spare capacity to meet increases in demand. Prices steadily increased at a comfortable pace over the past quarter and this trend will continue as demand grows.
However, with prices over US$80 per barrel, and a recovering economy, concerns are being raised with respect to a tipping point – where high oil prices may negatively impact manufacturers and consumers and slow economic recovery.
The US shale boom is lowering gas prices globally, redrawing LNG trade, pressuring oil-linked gas contracts, reviving interest in longer-term gas contracting, delaying other mega gas projects, such as Gazprom’s massive Shtockman development, and causing some governments to re-examine royalty rates.
Canadian shale plays are looking to replicate the US success and while the European and Asian shale booms are likely still some ways off, they will be impacted by developments in North America.
Global gas markets are coming under some pressure from increased LNG supply due to new liquefaction capacity, mostly in the Middle East, and from contractual linkages to oil prices. Gas prices in Asia are generally explicitly linked to oil prices, while European gas prices typically have some indirect linkages.
For the first time in several quarters, there is some improvement in refining margins. Margins in Europe are better than US margins; however Asian margins remain very weak due to excess capacity. Globally spare capacity remains and refiners will have to keep capacity shuttered and may even have to consider shutting in additional capacity. Oil demand is slowly returning but is unlikely to return to pre-2008 levels as consumption levels have shifted. Companies are continuing to rationalize their refining assets.
Continued increases in exploration and production spending are trickling down to oilfield services’ bottom line. The past quarter witnessed improvements in rig counts, largely as a result of growth in horizontal drilling. This positive trend is likely to continue into Q2.
The US lead transaction activity in the first quarter of 2010 with global deal values surpassing $70 billion. Transactions remained weak in Europe and Asia. While the global financial crisis is still impacting deal flow, there is evidence of loosening in capital markets. While there are fewer deals made, they have been greater in value than recent quarters.
“Overall, we expect to continue seeing both ‘offensive’ and ‘defensive’ deals in the sector in the near term,” said Nijoka. “For example, we expect to see well-funded and capitalised companies act on opportunities to fill strategic needs, such as big oil investing in unconventional gas and new provinces and the national oil companies acquiring strategic reserves when they become available.”
Source: IHS Herold, Inc.
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The oil and gas industry is constantly changing. Increasing regulatory pressures, price fluctuations and geopolitical complexities all present significant challenges. Ernst & Young’s Global Oil & Gas Center brings together a worldwide team of professionals to help you achieve your potential —a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.
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