Spending Increases In 2012 With A Close Eye On Certain Challenges

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Oil and gas industry leaders have forecast a year of significant capital expenditure in 2012, but companies are prepared to cut back if the economy fails.

This year has started on a positive note for the oil and gas industry. Among a wealth of new developments, ExxonMobil and Statoil confirmed that they will begin planning production on the giant Julia deepwater oil field in the Gulf of Mexico, while Valiant Petroleum announced plans to embark on its "most extensive exploration and appraisal drilling campaign ever" in 2012.

Despite concerns over global economic instability, a sense of optimism for the year ahead prevails, and a new Economist Intelligence Unit (EIU) report on the outlook for the sector in 2012 suggests that there's no sign of it stopping.

Commissioned by GL Noble Denton, the report, "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 policymakers.

An overwhelming 82% of industry leaders surveyed for the EIU'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 about performance in 2012.

According to those surveyed, North America will eclipse Southeast Asia to become 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.

Optimism feeds 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. Of those polled, 56% of participants thought that upstream activities will present the strongest source of business growth in 2012, rising from 42% last year.

During an exclusive interview for the report, Shell CFO Simon Henry said he sees strong opportunities for profitable growth this year. Similarly, ConocoPhillips plans to execute a US $28 billion capital program – almost 90% of which has been allocated to E&P activity – and 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 also reveal levels of investment 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 has dropped to 70%, sparking concern over the impact of a potential Eurozone recession and a possible result of recent increases in taxation on North Sea operators.

Promising regions are changing: 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 the report, North America has placed first, indicating executives' high hopes for strong results from the growing unconventional gas sector in the US. The Far East has 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.

Just 12 months ago, Southeast Asia topped the list, with North America coming in second, followed by the Middle East and North Africa third and the Far East, including China, fourth.

Companies are not complacent: While the report paints an appealing picture of oil and gas executives' expectations for the industry this year, it also indicates that companies are by no means complacent about the tough challenges they are likely to face in 2012.

The growing shortage of skilled professionals also is 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. Some companies are beginning to address this issue, according to research participants.

In an exclusive interview for the report, Jon Tait, BP's head of attraction, said that the company is making a concerted effort to break away from the cyclical nature of staffing in the industry, which causes slow recruitment in the sector when the price of oil becomes low.

"BP takes a longer term view of its human capital strategy nowadays, ensuring that it has the right pipeline of talent consistently entering the organization regardless of oil price," Tait said.

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 deep water, in addition to the increasing trend of companies exploiting tight hydrocarbon formations and events such as last year's Arab Spring, also means oil companies now have to confront an environment in which risk is far more prominent.

According to the 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 US and Canada were identified as having the most favorable 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 GoM.

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, "there are many oil company lawyers who now consider it their duty to pass the catastrophic risk horizon arising from incidents like Macondo onto contractors." It seems that trend is set to continue.

Full steam ahead: The second annual EIU 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 cognizant of the challenges that lie 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 the GL Noble Denton-commissioned report highlights oil and gas executives' confidence to make significant and much needed investment, they will 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.

Date: 1 March, 2012
Author: Pekka Paasivaara, GL Noble Denton
Source: http://www.epmag.com/item/Spending-Increases-2012-A-Close-Eye-Certain-Challenges_97039