Following a year of slow economic recovery, unstable price fluctuations and damaging incidents in the Gulf of Mexico and China, the oil and gas industry is predicting healthy investment in new exploration and market opportunities in 2011, according to a report on the future of the sector published earlier this year by the Economist Intelligence Unit and commissioned by GL Noble Denton, a leading independent technical advisor to the oil and gas industry
Despite concerns over tougher industry regulation and increased operating costs, the 194 board-level executives and policymakers from some of the industry’s leading international companies that were surveyed for the report were optimistic that 2011 would be a key turning point for the industry, as operators prepare to drill deeper in new geographies.
Indeed, 76% of respondents to the Economist Intelligence Unit’s research described themselves as either “highly” or “somewhat” confident about their company’s business outlook this year, compared with only 8% describing themselves as “highly” or “somewhat” pessimistic.
This renewed confidence in the industry’s growth is largely thanks to a period of relative price stability, particularly in North America and the fast-growth economies in Asia. The largest proportion of industry executives surveyed (32%) saw South-east Asia as offering the greatest opportunities for their business in 2011, while nearly a third (30%) of respondents to the Economist Intelligence Unit’s research saw North America the most significant region. Additionally, emerging regions such as India, China and Brazil are underpinning oil demand as a result of their robust markets. Growth was also predicted for the Middle East this year, although the unexpected political uprising in some parts of North Africa has resulted in a reliance on the Gulf States to keep the region buoyant.
Uncertainty over regulation
It’s positive to see that the industry still values the potential of North American production and, for larger oil companies in particular, the US Gulf of Mexico remains an attractive province, according to the Economist Intelligence Unit’s report. In the trail of the first anniversary of the Deepwater Horizon incident, the potential impact of the regulation following the biggest oil disaster in US history continues to feature heavily in industry debate, and the results of the Economist Intelligence Unit survey reinforce the industry’s feeling of uncertainty towards the effect of future legislation.
According to the report, the oil and gas industry recognises that increased regulation will follow the Macondo incident, but respondents to the Economist Intelligence Unit’s survey seem unclear when new legislation will appear and what effect it will have. A very large proportion (72%) of respondents to the research said that they expect regulation to become more stringent in North America in particular, while a substantial majority (68%) expects cost increases in general.
During a round-table discussion on the findings of the Economist Intelligence Unit’s report, organised by GL Noble Denton in London recently, European industry leaders voiced concern over how the increased cost of post-Macondo regulatory compliance may price smaller operators out of the market. A senior representative from an international oil company suggested that potential new regulation put into place after Macondo might have a pendulum effect, where operating costs will start off high before settling to a more manageable level.
The report also acknowledges that rising costs are likely to be more problematic for smaller E&P firms. Nearly two-thirds of production in the Gulf of Mexico is accounted for by such companies, and proposals to raise the US$75m cap on liabilities related to offshore oil spills will most likely hit them hardest as insurance becomes impossible or too costly to obtain.
Rising demand for energy resources means that companies are also increasingly required to develop resources in more challenging environments, such as the deepwater offshore. Reserves in these areas are becoming an increasingly prominent feature in global oil and gas production. With 20% of major oil firms’ portfolios now coming from deepwater positions, this will clearly have an additional impact on spending.
The longer-term impact of Macondo however, looks set to be on companies’ operational strategy, with the report suggesting that their safety record will become a more important factor in gaining access to global reserves.
Natural gas: a global ‘game changer’?
Natural gas has gained a reputation as a relatively low-carbon “transition fuel” in recent years - especially for electricity generation - and the global demand for liquefied natural gas (LNG) has grown as countries in Asia and Europe have sought to increase their supply options.
According to the Economist Intelligence Unit’s report, the emergence of large reserves of “unconventional” gas in North America has proved highly attractive to oil and gas companies looking to replace declining production and, instead of an anticipated decline in the region, extraction has increased dramatically as new technologies have helped to unlock vast tight gas resources.
But some of the industry’s key players have disagreed with the report’s findings, which dub natural gas as an industry ‘game changer’. They suggest that companies may find the cost of extracting unconventional gas from reserves such as those in the United States will result in a weaker return on investment than originally expected.
The regulation of energy sources such as shale gas may also add cost to the process of extraction, with concerns being raised by some around the best practice for the controversial process of hydraulic fracturing. Currently regulated in North America by the individual states, the report highlighted the concerns of those worried that the potential addition of a further federal layer of regulation could slow operations in addition to resulting in subsequent price rises. The report also notes that there is an expectation for closer scrutiny of the environmental impact of unconventional gas – due to the fact that the techniques required to access it are still not fully understood.
Overall, the majority of the industry executives polled by the Economist Intelligence Unit expect a modest shift upwards in natural gas prices; especially as global demand is forecast to increase steadily over the next decade. Nearly one-half (48%) expect an increase of at least 10% in gas prices, compared with just 7% who think prices will fall by 10% or more. Most of the rest (35%) expect prices to fluctuate around the current price range.
Developing the next generation
The increasing shortage of technical skills across the industry is another topic close to the hearts of many oil and gas professionals, and was raised among sector leaders at the recent round-table discussions on Economist Intelligence Unit’s report. Now we are faced with a period of investment and expansion, there is an overall feeling that the sector will come against challenges as a result of its failure to attract, recruit and retain highly talented people.
There are a number of reasons why the oil and gas industry is likely to experience a skills deficit within the next 15 years; the success of the finance industry - pre-credit crunch - to recruit talented graduates through the promise of high salaries and quick career progression have been detrimental to the oil and gas industry’s recruitment of “fresh blood”. The negative impact of the Macondo disaster on the industry has also played a role, alongside scepticism over the oil and gas industry’s efforts to support more environmentally friendly approaches to energy production and distribution among younger generations.
Before the recent economic crisis, when investment into the oil and gas industry was last at its peak, initiatives were implemented by players from across the industry, who came together to introduce and develop emerging talent in a coordinated manner. Alongside the economic downturn came sweeping budget cuts and this good work has likely been halted, but if a period of investment comes to pass, as forecast by the Economist Intelligence Unit report, the industry could soon find itself returning to in a situation in which demand for technical resource outweighs supply.
Participants in the round-table discussions agreed that the industry needs to work more closely together to address the skills problem, rather than trying to pursue each others’ technical staff. One industry association leader felt that the sector had lost its appeal to university graduates over the last 20 years, and while a number of oil and gas companies operate graduate programmes, the industry needs to do more to educate students at an even younger age about the innovations being developed to drive the sector forward.
Technical consultancies such as GL Noble Denton were also recognized as becoming increasingly important to the industry, in that they are able to provide the industry with consistent knowledge and advice during periods of talent deficit. Emerging nations such as India and China may also be depended upon more heavily to provide resource where more mature regions have difficulties in generating new industry talent.
With activity set to rise in the sector, companies need to focus on recruitment now, ensuring that the right talent is in place for the right price.
It is clear from the Economist Intelligence Unit’s report - and the debates that its findings have sparked since its publication - that the oil and gas industry is extremely focused on its future challenges. It understands very well the need to find more innovative solutions to operating more safely, sustainably and efficiently.
It’s encouraging to see that industry executives expect to see an upturn in investment into the sector, despite fears of tougher regulation and a more costly operating environment. But it is also clear that the industry still has hurdles to overcome if it is to take realize the full potential of that market growth.
The demand for energy is taking the exploration, production and distribution of oil and gas to tougher extremes of geography and climate; pushing the boundaries of the industry’s technical knowledge to its very limits. The success of key players in the industry in finding more innovative solutions to mitigate risk while remaining resourceful whilst sustaining activity will define their position and reputation in the market over the coming years.
Oil and gas professionals are invited to contribute their views to research for a new Economist Intelligence Unit report on the future of the industry, which will be published in January 2012. To take part, visit www.gl-nobledenton.com/eiusurvey2012 and complete the online survey.
By Essa Bayoumi - Executive Vice President, Middle East and Africa, GL Noble Denton