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2012 The Year Of Big Spenders
Oil and gas industry leaders have forecast a regional shift in who has greatest potential, according to a new Economist Intelligence Unit report commissioned by industry technical advisor GL Noble Denton.
This year started on a positive note for the oil and gas industry. Among a wealth of new developments, MEO Australia Limited advised in February that it has commenced seismic work in the Timor Sea, while Senex Energy, operator of the PRL 15 joint venture, commenced drilling on the Growler-8 appraisal well – the seventh in the JV's 11-well drilling program on the western flank of the South Australian Cooper Basin.
This industry confidence is also reflected globally. Exxon Mobil and Statoil confirmed in the new year that they will commence planning production on the giant Julia deep water oil field in the Gulf of Mexico, while Valiant Petroleum announced plans to embark on its, "most extensive exploration and appraisal drilling campaign ever", across 2012.
Despite concerns over global economic instability, a sense of optimism for the year ahead prevails across the sector, and a new Economist Intelligence Unit report on the outlook for the oil and gas industry in 2012 suggests that there's no sign of it stopping.
The report commissioned by GL Noble Denton, titled Big Spenders, provides a detailed examination of major trends expected across the worldwide energy sector over the next 12 months, according to a survey of nearly 200 industry board-level directors and policy makers.
An overwhelming 82% of the industry leaders surveyed for the Economist Intelligence Unit's second annual oil and gas industry barometer are either highly or somewhat confident about the business outlook for their company in 2012, compared to a figure of 76% last year. Just 8% of those polled described themselves as pessimistic over performance in 2012.
Findings from the research also show that 63% of executives plan to invest either somewhat or substantially more over the next year, with capital expenditure set to increase significantly across the industry.
This was also reflected in a smaller industry poll taken of international and Australian oil and gas workers and executives at the 22–24 February Australasian Oil and Gas Exhibition and Conference (AOG) in Perth [which expected over 11,000 participants], 61% thought that increased regulation would not damage prospects for new oil and gas projects in Asia and the Pacific, while 39% said that it would. The survey indicates that oil and gas professionals are more bullish about the potential deterrent of increased regulation in the Asia Pacific region than elsewhere in the industry. The threat of a tightening regulatory landscape is one of the top three barriers to business growth, according to the Economist Intelligence Unit report.
GL Noble Denton's Executive Vice President for Asia Pacific Richard Bailey said: "The result of this poll shows clear confidence for strong growth in the Asia Pacific energy sector. Increased regulation often brings the prospect of higher operating overheads, project delays and increased litigation. Yet, according to the oil and gas professionals we surveyed, the development of new projects in the region would not be negatively impacted if the regulatory landscape was to change."
GL Noble Denton conducted Industry Snapshot Polls in February at its stand on each day of AOG. Delegates were also asked to vote on whether Australia will become the world's largest gas exporter by 2030 and if the country is doing enough to develop its own oil and gas talent. GL Noble Denton's Day 1 poll at AOG revealed that 84% of participants said that Australia would grow to become the premium exporter of gas by 2030, while 16% thought that it would not. The second day's poll revealed that 68% of delegates believed that Australia needs to invest more in developing a local skills base, while 32% thought that the country is doing enough to increase the pool of local professionals.
According to those surveyed for the Economist Intelligence Unit, North America will eclipse South East Asia to take the top spot of the region offering the greatest business opportunities this year, while the Far East (including China) is fast emerging as a potentially major future source of unconventional gas.
This strong message of optimism does not mean that companies are entirely sanguine about prospects, according to the report. The sector recognises the tough challenges that lie ahead of it this year. As rising operating costs emerge as a top barrier to growth, regulatory risk becomes a greater concern and the sector-wide shortage of skilled labour continues to give cause for worry.
The potential of a fall out in the global economy is also playing on the minds of industry leaders, it seems. While the industry intends to spend this year, participants in the GL Noble Denton-commissioned research have a clear strategy to scale back their spending commitments in certain areas if a recession sets in.
Optimism feeding capital investment
Investment looks set to grow across the board in 2012, particularly in the upstream sector, where exploration has emerged as the principal beneficiary of increased capital expenditure. 56% of participants in the Economist Intelligence Unit's research thought that upstream activities will present the strongest source of business growth in 2012, rising from 42% last year.
Among the companies looking to invest primarily in upstream is Shell. Its Chief Financial Officer Simon Henry said he sees strong opportunities for profitable growth this year, during an exclusive interview for Big Spenders. Similarly, US major ConocoPhillips plans to execute a US$28 B capital program – almost 90% of which has been allocated to exploration and production activity; while Chevron continues to develop an unparalleled project queue this year, according to the report.
While confidence for the year ahead has risen by more than 10% across the industry compared to last year, findings from the Economist Intelligence Unit's research also reveal that levels vary significantly depending on region. In North America, 90% of respondents describe themselves as highly or somewhat confident, while in Asia Pacific, this figure drops to 81%. In Europe confidence dropped to 70%, sparking concern over the effect of a potential Eurozone recession, and a possible result of recent increases in taxation on North Sea operators.
Russian energy operators are particularly anxious about the European economy and its effect on the future. Hamid Gayibov, Managing Director of Moscow-based Xenon Capital Partners, told the Economist Intelligence Unit that the onset of a recession will provide little incentive for Russian oil companies to increase investment, while TAQA Chief Executive Carl Sheldon warned the UK government that it needs to provide incentives for North Sea operators to "shoot small game and invest in old infrastructure".
The lower level of confidence in Europe reflects a major caveat in oil and gas companies' plans to invest this year. According to the report, some companies, whether big or small, will have to scale back their spending commitments in those areas where they can do so without creating damage to their wider portfolios, if economic conditions deteriorate.
Shift in promising regions
Perhaps one of the largest changes in oil and gas executives' sentiment over the past year is a shift in which region companies see the greatest opportunities for revenue growth.
According to Big Spenders, North America is placed first, indicating executives' high hopes for strong results from the growing unconventional gas sector in the US. The Far East moved up three places to become the region identified as having the second greatest opportunities in the sector, with Southeast Asia ranking third, and Latin America coming in fourth place.
This is quite a change from where respondents felt the greatest opportunities were 12 months ago, when Southeast Asia topped the list, with North America coming second, the Middle East and North Africa third and the Far East, including China, fourth.
Expectations for capital spending vary across regions as well, according to the report. In the Asia Pacific region, 72% of respondents predict an increase in capital expenditure, compared to only 55% in North America and 57% in Europe.
Companies are not complacent
While Big Spenders paints an appealing picture of oil and gas executives' expectations for the industry this year, the report makes it clear that companies are by no means complacent about the tough challenges they are likely to face in 2012.
The report identifies a wealth of hurdles for the year ahead, with the challenge of rising operating overheads proving to be the biggest headache. When questioned in more detail about costs, more than half of respondents said they expect there to be an increase in wages across the year, with concerns over the rising cost of contractors identified as a barrier to growth by 54% of respondents.
The growing shortage of skilled professionals is also a burgeoning concern for oil and gas executives across the industry. This year, 34% of those polled identified it as a barrier to growth, placing it second in the list, up three places from 2011, when 25% of respondents identified it as a key barrier to the success of their business.
In Western Australia, for example, it is estimated that a staggering 150,000 skilled professionals will be needed by 2015 to develop the country's projects, according to the Economist Intelligence Unit's research for the report.
Recognising the snowball effect that the shortage in skilled professionals will bring, some companies are beginning to address this issue, according to participants of the research for Big Spenders.
In an exclusive interview for the report, BP's head of attraction, Jon Tait, said that the company is making a concerted effort to break away from the cyclical nature of the industry, which causes slow recruitment in the sector when the price of oil becomes low. Tait said that BP takes a longer-term view of its human capital strategy nowadays, ensuring that it has the right pipeline of talent consistently entering the organisation, regardless of oil price.
Evolving attitudes towards risk
The challenge of balancing risk and return is tougher than ever, as the oil and gas industry comes to terms with operating in the post-Macondo era. The steady move into deeper water, the increasing trend of companies exploiting tight hydrocarbon formations, and events such as last year's Arab Spring, also mean oil companies now have to confront an environment in which risk is far more prominent.
According to this year's GL Noble Denton-commissioned report, an overwhelming 82% of respondents either strongly or somewhat agree that regulatory issues have become more important in the post-Macondo period. Furthermore, 55% of participants think that drilling permits have become more difficult to obtain in the aftermath of the Deepwater Horizon tragedy.
Surprisingly, the USA and Canada were identified as having the most favourable regulatory climate in which to operate in 2012 – a possible result of more clearly established operating guidelines in the region and a return to drilling in the Gulf of Mexico.
For service companies, new sources of risk have also been created, according to Schlumberger Chairman Andrew Gould in an interview for the report. In the Post-Macondo operating environment, Gould said that there are many oil company lawyers who now consider it their duty to pass the catastrophic risk horizon arising incidents like Macondo onto contractors. It seems that trend is set to continue.
Conclusion
The second annual Economist Intelligence Unit oil and gas industry barometer sends a clear message for the year ahead: companies are preparing to spend big in 2012, despite concerns over the future of the global economy.
But they are not resting on their laurels this year either. They are cognisant of the challenges that lay ahead of them, from rising operating costs to the worry of an impending shortage of skilled professionals and an uncertain regulatory environment in the post-Macondo era.
Although Big Spenders highlights oil and gas executives' confidence to make significant and much needed investment, they'll do so while keeping operating risks low during a period of prolonged uncertainty. Their success will be defined by an ability to develop innovative approaches to operating more safely, efficiently and sustainably than ever.
