28-12-07

Increasing global demand for energy and subsequent high prices have created a robust environment for oil and gas producers. At the same time, high prices have had an adverse effect on the downstream sector as the cost of raw materials impacted refining margins.
According to Ernst & Young, demand is expected to drive industry transformation for 2008 in the following ways:
-- Increased activity on the part of National Oil Companies;
-- Unprecedented competition for reserves;
-- Increased emphasis on enterprise-wide risk management;
-- High-volume and high-priced transaction activity; and
-- Expanded use of International Financial Reporting Standards.

Ernst & Young's Global Oil & Gas Centre works with companies throughout the world, helping them succeed in the ever-evolving oil and gas business.
Drawing from industry experience gained from working with their oil and gas clients, the centre’s practitioners offer the following assessment of the oil and gas industry in the year ahead.

Upstream E&P
The cost of exploration and production (E&P) continues to rise sharply. Heightened resource nationalism and geopolitical issues are increasing costs and decreasing access to reserves for International Oil Companies. Investment opportunities are becoming less lucrative, and returns are decreasing.
On a positive note, access restrictions may be lifted in the Gulf of Mexico, creating new opportunities for upstream activity. Ernst & Young anticipates that companies will take a slower, more cautious approach to upstream spending in 2008.

Midstream
New midstream opportunities are emerging in support of the Rocky Mountain natural gas, Barnett Shale, and liquefied natural gas (LNG).
New technologies, like carbon sequestration, may prompt major changes in the way midstream companies conduct business in the coming year.

Downstream
This segment of the industry continues to walk a tight rope, balancing capacity and margins. Global refining capacity continues to be tight, and margins are expected to remain volatile.
Ernst & Young expects that margin averages may fall from recent highs, but remain above longer-term historical levels until new capacity is added. Upgrades later this decade should alleviate the strain.

Enterprise risk management
Despite healthy revenues in recent years, energy companies face a growing number of business risks ranging from uncertain energy and environmental policies, to talent shortages, and supply interruptions.
In years past, these risks were often managed independently, but there is a growing recognition of the value to capturing and weighing all risks across the enterprise and understanding the relationships they may have to each other and the combined impact on the business.

Transactions
Investors seeking attractive growth and high margin acquisition opportunities will look to the oil and gas industry's significant, sustained, and growing cash flows. Just as outside investors are investing in oil and gas, large oil and gas companies flush with cash will look for opportunities to enhance technology capabilities and reserve bases through acquisition. Smaller E&P companies will be of particular interest to this investor.
In the United States, Master Limited Partnerships (MLPs) have emerged as the dominant deal structure in oil and gas and will gain more ground in the coming year, according to a recent Ernst & Young survey. The MLP structure, however, is creating companies with unbalanced portfolios as specific areas or divisions of a company are bought up and developed as stand-alone entities. Private Equity continues to have a keen interest in energy, with a particular focus in refining.

International Financial Reporting Standards (IFRS)
European Union countries have all adopted IRFS, almost 100 other countries require or allow the use of IFRS, and other countries -- including the United States -- are moving to do the same. If implemented by the US Securities and Exchange Commission, IFRS could transform global financial operations.
IFRS standards, which could go into effect as early as the first half of 2008, would streamline financial operations by creating one set of international accounting rules.

Source: www.oilvoice.com