Sharp differences in economic strength or weakness between regions, new development opportunities, a changing environmental landscape and the fall out from the mid-term elections in the US have created an uncertain environment for the oil and gas industry.
“The industry, which has been portrayed negatively in the recent past, needs to be an active collaborator and have a clear voice in developing new policies. Clarity around the future of energy policy would go a long way toward helping companies adapt and respond to this period of transformation,” said Marcela Donadio, Americas Oil and Gas Leader for Ernst & Young LLP.
The dynamics of oil demand are changing. 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 about regulation and fuels. Oilfield service companies are facing a geographic shift. And transactions are being scrutinized following the Gulf of Mexico spill.
Sector digest: Oil
Oil demand 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. Following years of record high prices and with businesses working to reduce their carbon footprints, less oil-intensive economies are emerging. Upstream producers are also facing rising costs as a result of a tighter regulatory environment and are facing the potential loss of key tax advantages. Nevertheless, if the economy continues to improve, oil demand will inevitably increase.
Natural gas
With the North American unconventional gas boom and new liquefied natural gas capacity coming online, natural gas supply remains strong and storage levels remain high. As more of the majors move into the shale space and validate the unconventional gas strategy, Ernst & Young expects growth in supply to accelerate. “The natural gas resource potential is incredible,” said Donadio. “Currently, demand is not keeping up with supply growth however, a supportive public policy could go a long way toward increasing demand.”
Oilfield services
Global upstream spending declined by 25 percent in 2009, but is expected to be up 15-20 percent in 2010. While the Gulf of Mexico moratorium has 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 — 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.
