Events of 2011 shape the O&G industry in 2012
Houston, 2 February 2012 — Key events and trends in 2011 frame Ernst & Young’s Oil & Gas Center leaders’ expectations for 2012. Global politics, midstream capacity, new domestic sources of crude, environmental concerns, the shale gas boom and natural gas pricing market are reshaping the oil and gas industry moving forward.
“As oil and gas activities have become more global in nature, macro-economic factors worldwide will continue to impact the US energy industry,” said Marcela Donadio, Americas Oil & Gas Leader for Ernst & Young LLP. “At the same time, changes in domestic energy supply and demand require careful monitoring and response in order to seize opportunities and manage risk at home. This is the year to expect the unexpected.”
- Geopolitical upheaval impacts oil prices
Oil prices could increase from rising global geopolitical concerns. While the dynamics of last year’s “Arab Spring” continue, an even larger risk is the current situation in the Strait of Hormuz, through which approximately 17 million barrels of oil travel daily. Political instability also continues in other key oil exporting countries like Venezuela and Nigeria. Additional impacts may come from upcoming elections in oil-producing countries in the CIS, the Middle East and South America.
- Stranded crude dampens downstream margins
Largely as a result of bottlenecks caused by limited capacity to transport increased supply in the mid-continent and Canada to refiners along the Gulf Coast, West Texas Intermediate (WTI) crude oil prices became disconnected from global benchmarks in 2011. At one point in the middle of the year, the quoted WTI price was almost $30 a barrel below comparable crude benchmarks. The bottlenecks will persist in 2012.
WTI’s disconnect will continue to provide some pricing advantages for mid-continent refiners. However, those who were exposed to the higher prices of the globally traded crudes were challenged in 2011. These pressures contributed to decisions by several East Coast refiners to close down or sell underperforming refining capacity. Closures could create higher product prices on the East Coast and overall gasoline tightness. Potential new buyers of the refineries could prevent the closures or re-open the capacity. Companies from China and India were highly acquisitive in European downstream businesses in 2011. In 2012, it is possible that they could make a move into the US given the relatively wide availability of downstream assets.
- US crude renaissance
Long thought of as an oil producing region in terminal decline, the combination of strong prices and improving technology has turned the US into a growth area. The application of shale gas technology to shale oil resources is largely to thank for a turnaround in US production.
A dramatic rise in oil production in North Dakota, largely from the Bakken shale, had a notable impact on the market in 2011 and will continue to constitute a significant portion of domestic energy production growth in 2012. As a result of the rise in production, we expect further growth and transaction activity in the Bakken as more undeveloped property comes online and begins to produce.
- Environmental and safety concerns intensify
As the industry began to move past the Gulf of Mexico oil spill and concerns regarding environmental and drilling safety were being addressed, several other oil spills occurred in 2011. This once again heightened the public’s and policymakers’ attention on the industry. Additionally, concerns around hydraulic fracturing continue. These include issues related to potential water contamination, as well as questions around the possible linkages of hydraulic fracturing and seismic activity.
- Unconventional gas boom creates LNG export potential
Due to rapidly growing natural gas production, the US is transforming itself from an expected net gas importer to a potentially huge exporter. It is anticipated that more proposals for natural gas liquefaction facilities will come forward in 2012.
Led by shale gas output, US gas production is surging even as gas-directed drilling has slowed. US gas production is at its highest level in almost 40 years, despite supply and demand imbalance and continued uncertainty around shale production’s impacts on air, water and geologic formations. With a recovering economy and competitive gas prices, the US Department of Energy sees modest demand growth continuing. However, many gas producers are concerned about the current very depressed price environment, and in the near term are hoping for some support from a cold winter.
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