Oil and Gas outlook: Energy challenge or world domination?
Unprecedented amounts of domestic oil and natural gas resources, energy security concerns, and efforts to improve the environment and boost the economy are turning the nation's attention toward the oil and gas industry.
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"It is no surprise that there is a lot of attention focused on this clean, domestic, abundant foundation fuel," said Dave McCurdy, president and CEO of the American Gas Association. "America's natural gas utilities are delivering these promises today, and increased use of this foundation fuel can help address many of the energy challenges facing our nation."
Global Domination
In 2012, the U.S. experienced a dramatic surge in oil production. In 2013, the U.S. will remain the largest source of new oil growth worldwide aided by the shale boom, according to Ernst & Young, but surpassing Saudi Arabia as the top global oil producer by 2020 will be a challenge.
Oil production comes at an extremely high cost. Anticipated increases in domestic oil production may not materialize if crude prices decline below $80 a barrel. In the U.S., despite a substantial build-out of the oil transportation infrastructure in 2013, bottlenecks in the Midwest are expected to continue to put pressure on U.S. oil prices, according to Ernst & Young.
Global domination should not be the ultimate goal.
| ______________________________ The U.S. will remain the largest source of new oil growth worldwide aided by the shale boom. ___________________________ |
"Whether the U.S. will become the world's top producer is not the most important thing to focus on," said Marcela Donadio, Americas Oil and Gas Leader at Ernst & Young. "What matters is the dramatic reversal of the U.S. energy fortunes and the need for the U.S. to take significant steps to ensure oil supply growth continues. Coherent energy policy, access to resources, improved infrastructure and economic stability are all key to future success."
The global oil and gas supply and demand balance is expected to remain uneasy amid geopolitical tensions and economic uncertainty. Small gas producers are expected to continue struggling in 2013 with U.S. natural gas exports remaining a controversial issue as supporters and opponents escalate political tensions around how much exports could impact domestic natural gas prices, predicts Ernst & Young.
"2013 appears to face many of the same geopolitical and economic uncertainties as 2012 and, unfortunately, these do not seem likely to be fully resolved soon. However, in the absence of material shocks, we currently expect the sector to continue to be resilient in M&A terms as the key strategic drivers remain the same and participants have become accustomed to making decisions in a highly uncertain environment," said Andy Brogan of Ernst & Young's Oil & Gas Transaction Advisory Services.
"While capital availability is generally improving (especially debt), funding will remain a challenge for smaller companies for both debt and equity, and we continue to expect cash constraints coupled with cost escalation to be a driver for both asset and corporate opportunities. Those at the larger end of the scale with stronger balance sheets are likely to be the beneficiaries of this," he added.
Mergers and Acquisitions
With an average of more than four transactions announced every day in 2012, the oil and gas sector has remained one of the most active sectors for mergers and acquisitions.
According to Ernst & Young's global oil and gas transactions review, oil and gas transactions recorded a staggering $402 billion in 2012, up from $337 billion in 2011, representing a 19 percent increase.
A BDO USA study revealed that mergers and acquisitions in the U.S. oil and gas industry will rise in 2013 as companies seek to strengthen their financial position and take advantage of increased prices and an anticipated abundance in supply and demand for oil and gas. In fact, 53 percent of oil and gas CFOs are predicting an increase in merger and acquisition activity for the second consecutive year.
"Despite a weak national economy, and some uncertainty over the ability to access capital and credit, overall market conditions have created an environment conducive to M&A activity," said Charles Dewhurst, practice leader, natural resources industry group, BDO USA. "The energy sector has seen a lot of consolidation in 2011 and 2012. Companies anticipate this trend will carry over to 2013, buoyed by several factors, including the continued exploration and development of nonconventional resources."
As important as M&A activity has become, few CFOs see the trend as being the primary driver of growth in the industry in 2013, according to BDO. Mergers and acquisitions are cited by just more than one-fourth of CFOs as a primary option for increasing shareholder value.
Information Technology
Information technology (IT) will play a critical role in addressing many of the challenges facing the United States.
"The oil and gas industry is undergoing a profound transformation with investment and importance shifting among countries and between the oil and natural gas segments. IT will play a crucial role in enabling this transformation," Rick Nicholson, group vice president, IDC Energy Insights, said.
He added that, "The most likely business scenario for 2013 includes increased security threats, growth in the volume, variety and velocity of technical data, a larger role for unconventional resources like shale gas and tight oil, and ongoing talent shortages," said Rick Nicholson, group vice president, IDC Energy Insights. "These factors will drive oil and gas companies to focus their IT investments on security, data management and analytics, as well as mobility and social business."
Oil and gas companies have been fallen victim to sophisticated cyberthreats since 2009. The oil and gas sector is critical and its infrastructure should be one of the most secure -- both physically and virtually -- but this is not the case.
"The lack of appropriate security has already allowed a number of destructive cyberattacks to lay waste to some of the most high-profile companies in the industry," Michela Menting, ABI senior cybersecurity analyst, said. "Many of these attacks have caused significant financial damages -- and yet the industry is painstakingly slow in deploying proper cybersecurity measures adapted to the infrastructure."
A multi-billion dollar industry, trading one of the most valuable commodities on the market, is connecting its industrial control systems full of unpatched vulnerabilities to the Internet, notes ABI, adding that these systems are poorly protected against cyberthreats -- at best, they are secured with IT solutions which are ill-adapted to legacy control systems such as SCADA.
As cyberattacks increase, the financial implications will boost cybersecurity spending especially accelerating in 2014. ABI Research calculates that cybersecurity spending on the oil and gas infrastructure will reach $1.87 billion by 2018, including spending on IT networks, industrial control systems and data security; counter measures; and policies and procedures.
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