Events of 2011 will continue to shape the Oil and Gas industry in 2012

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LONDON, MOSCOW, 6 February 2012  Key events and trends in 2011 frame EY’s Oil & Gas expectations for 2012. Issues such as geopolitical upheaval, the Fukushima nuclear power plant disaster, high oil prices, as well as environmental and safety concerns have all provided real challenges in the period under review. On a more positive note, shale gas developments have surged ahead in China, Poland and Argentina.

Dale Nijoka, EY’s Global Oil & Gas Leader says, “The past 12 months have been extremely volatile in the Oil & Gas industry. While political risk remains a key concern, unexpected disasters have also sent oil and gas companies back to the drawing board, with the focus being very much on alternative options to nuclear power, natural gas in particular.”

1. 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 CIS, the Middle East and South America.

2. Fukushima reshapes global energy debate

Japan’s tragic tsunami and nuclear power plant disaster boosted global gas use in 2011. More importantly however, it has reshaped the longer-term global energy debate. Nuclear power had become a linchpin in the climate change strategy, but it now faces major scepticism which stands to positively impact long-term prospects for natural gas.

3. High oil prices despite major economic woes

Despite significant economic problems in the US and Europe, oil prices averaged over US$100/barrel. With the US economy expected to improve in 2012, it is safe to assume that oil prices could rise significantly.

4. Environmental and safety concerns continue to intensify

Just as the industry began to move past the Gulf of Mexico oil spill, and concerns regarding environmental and drilling safety were being addressed, a series of 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.

5. Unconventional gas boom continues and begins to internationalise

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. 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. Meanwhile, Poland, Argentina, and most importantly, China are moving rapidly ahead in shale gas development.

The continuing global economic uncertainty will continue to influence the Oil & Gas sector over the next quarter. Most importantly, geopolitical issues in the Middle East will continue to impact the sector. This will be balanced with the ongoing investment in the sector and supported by continued transaction activity.

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