Ernst & Young Oil & Gas quarterly report:
Houston, 20 January 2011 — Strong global economic growth at the close of 2010 created the second biggest demand spike in the past 30 years, according to Ernst & Young’s Oil & Gas quarterly report. Demand is expected to continue to increase, though less dramatically, in 2011.
“Spare production and new refining capacity should be ample to absorb short-term demand growth,” said Marcela Donadio, Americas Oil and Gas Leader for Ernst & Young LLP. “However, US policymakers and energy producers should remain focused on long-term issues and work together to create policies that encourage domestic resource production, in addition to conservation and the development of alternative energy sources, in order to prevent future demand-induced price spikes.”
The last quarter of 2010 saw the greatest spike in demand the world has experienced since 2004, and the second greatest since 1980. While demand is anticipated to continue growing as the market improves, the rate of increase is not likely to be as dramatic as year-end 2010. Unknowns, including economic improvement in Europe and demand from China and India, will significantly impact the demand picture.
All signs point to continued energy demand creating an opportunity for alternatives to oil and thus a ripe environment for marked increases in natural gas use and development of alternative and renewable energy sources.
Strong growth in shale gas production, oversupply in the market and low prices continue to plague natural gas producers. In order to capitalize on higher oil prices, there has been a marked shift in shale production from gas to liquids. This could somewhat ease the flood of natural gas in the market. Additionally, growth in demand could come if we see support build for natural gas as a transportation fuel or if carbon emissions are further regulated. And, until the price of gas goes up, alternative energy providers are not able to compete without significant subsidies.
Coming off 2009, a year characterized by record-low margins, the first half of 2010 was a marked improvement for the downstream sector. However, margins went south very quickly for refiners in the summer, after the spring peak. By the third quarter, margins were making gains once again. The segment finished last year strong, indicating that it may have rebounded from the bottom. With ample capacity and more expansions and re-openings coming online in the near future, the downstream industry is well positioned to respond to demand increases.
With spending increases pushing 20% in 2010, the oilfield services sector had a good year, and 2011 is shaping up to be even busier. Recent spending plans announced by major integrateds including ExxonMobil, Shell, Chevron and BP, indicate the industry is eager to ramp up investment in an effort to meet demand. However, regulatory uncertainty surrounding offshore production and hydraulic fracturing will continue to impact operators’ long-term planning abilities.
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About Ernst & Young's Americas Oil & Gas Center
The oil and gas industry is faced with complex issues and constant change. Volatile prices, business consolidation, difficult operating environments, ever-increasing customer demand, continuously evolving regulatory environments and the reliability of supply all present significant challenges. The Ernst & Young Americas Oil & Gas Center (www.ey.com/us/oilandgas) can draw upon a network of Ernst & Young energy professionals in the Americas and around the world to work closely with clients to facilitate the development of coordinated approaches to managing risk, improving performance and increasing operational effectiveness. The Center works to anticipate market trends, identify the implications of and develop points of view on relevant industry issues. Our deep energy industry focus helps Ernst & Young make a difference.
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