Ernst & Young Q4 Oil and Gas Outlook reveals an industry influx
LONDON 3 November 2010 — Sharp differences in the strength and pace of economic recovery between regions, a changing regulatory landscape and ongoing worries about business and consumer confidence will create an uncertain environment for the oil and gas industry in the final quarter of 2010.
Dale Nijoka, Global Oil and Gas Leader for Ernst & Young, says: “Energy market sentiment is less optimistic heading into the final few months of the year, except in parts of Asia, which is leading global economic growth. Globally, high unemployment and the waning effects of stimulus policies threaten the durability and sustainability of any recovery, with subsequent negative implications for energy demand.”
The risk profile of the industry has been substantially elevated by recent events. Regulatory uncertainty remains high, with the absence of clarity around regulatory and legislative changes creating an uncertain framework for investments in the industry. There is considerable international debate over offshore safety policies, in particular where the primary responsibility for safety lies.
The dynamics of oil demand have changed. Despite current price weakness, natural gas is full of promise but key pieces of the puzzle, such as adequate infrastructure and strong demand, are missing. The downstream sector is faced with the challenge of too much capacity, as well as uncertainty regarding regulation and fuels quality. Oilfield service companies are facing a geographic shift to better serve their clients. And transactions are being scrutinized following the Gulf of Mexico spill.
Oil demand is polarized and continues to be driven largely by emerging economies. Advanced countries’ continued low demand is attributable primarily to the economic recession, but gains in efficiency may be permanent. There is likely to be a deceleration of oil demand growth in Asia, particularly China.
Following years of record high prices and with businesses working to reduce carbon footprints, less oil-intensive economies are emerging. Nevertheless, if the global economy continues to improve, oil demand will increase. Upstream producers are facing rising costs as a result of a tighter regulatory environment and are potentially facing the loss of key tax advantages in certain markets.
Source: International Energy Agency
Shale gas remains the hot topic, with many positioning it as a global game changer. Nonetheless, the degree of uncertainty over the level of future gas demand is probably at its highest in decades. Ongoing concerns with potential risks of hydraulic fracturing, new safety concerns after well blow-outs in the US and questions over water contamination all may limit growth outside the US.
As more of the majors move into the shale space with “go big or go home” production expectations, Ernst & Young expects continued growth in supply.
Last quarter saw some relief in refining margins, but those have retreated again to pre-boom levels as a result of modest utilization in the US and Europe. In addition, while spare capacity abounds, new capacity is coming from the Middle East and Asia, which will further strain margins. There are ongoing questions as to the prospects for sustained transportation fuel growth in advanced economies. Possible public policy shifts resulting from the Gulf of Mexico spill and increasingly stringent environmental targets may point to greater utilization of alternative fuels. All of this creates a very difficult operating environment and further uncertainty for refiners.
Global upstream spending declined by 25% in 2009, but is expected to be up 15-20% in 2010. While the Gulf of Mexico moratorium, which has now been lifted, created sharp downward pressures on rig utilization and day rates, new opportunities in South America and offshore Africa are emerging. The boom in unconventional, oil and gas drilling has resulted in rising service intensity and has fed the demand for new, high-complexity rigs. Enforcement of “Idle Iron” regulations in the US— which will require full decommissioning of wells, platforms and pipelines that are no longer producing or providing operational support — will provide opportunities for some oilfield service companies.
Source: IHS Herold (FIGURES IN $US)
Continued loosening of credit markets, strong oil prices and evidence of a financial recovery have driven a clear uptick in upstream transactions over the past two quarters. Gas focused deals are expected to dominate upstream activity, particularly in North America, as International and National Oil Companies begin to invest heavily in the play. In addition to a potential uptick in oilfield services consolidations, many companies are re-examining how they structure deals. However, the weakness in refining markets is limiting opportunities for majors to divest non-core assets.
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