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Big Spenders: the outlook for the oil and gas industry in 2012 is an Economist Intelligence Unit report which analyses the oil and gas industry outlook from the point of view of top-level operators, ...

Big Spenders: the outlook for the oil and gas industry in 2012 is an Economist Intelligence Unit report which analyses the oil and gas industry outlook from the point of view of top-level operators, including CEOs and other board-level executives and policymakers. The report has been commissioned by GL Noble Denton.

Our research drew on two main initiatives. A global survey of senior executives was conducted in October and November 2011, involving 185 executives from a range of companies across the oil and gas industry. These executives were very senior: one in three was a CEO or managing director of their company. To complement the findings of the survey, a series of interviews was carried out with leading industry figures between October and December 2011.

Big spenders is a follow-up report to Deep water ahead: The outlook for the oil and gas industry in 2011, which was also commissioned by GL Noble Denton.

The Economist Intelligence Unit bears sole responsibility for the content of this report. Our editorial team executed the survey, conducted the interviews and wrote the report. The findings and views expressed do not necessarily reflect the views of GL Noble Denton.We would like to thank all those who participated in the research.

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Big spenders: The outlook for the oil and gas industry in 2012 Document Transcript

  • 1. Big spenders The outlook for the oil and gas industry in 2012BigspendersThe outlook for the oil and gasindustry in 2012A report from the Economist Intelligence Unit Commissioned by © The Economist Intelligence Unit Limited 2012 1
  • 2. Big spenders The outlook for the oil and gas industry in 2012 About this report Big Spenders: the outlook for the oil and gas industry Interviewees and other contributors: in 2012 is an Economist Intelligence Unit report which Thomas Ahlbrandt*, former vice president of analyses the oil and gas industry outlook from the point exploration, Falcon Oil & Gas of view of top-level operators, including CEOs and other Marc Albers*, senior vice president, ExxonMobil board-level executives and policymakers. The report has Thomas P Barney, chief economist, Marathon been commissioned by GL Noble Denton. Petroleum Corp Steve Chazen*, chief executive, Occidental Petroleum The Economist Intelligence Unit bears sole responsibility Jean-François Cirelli*, vice chairman and president, for the content of this report. Our editorial team GDF Suez executed the survey, conducted the interviews and wrote Fereidun Fesharaki*, chief executive, FG Energy the report. The findings and views expressed do not Hamid Gayibov, managing director, Xenon Capital necessarily reflect the views of GL Noble Denton. Andrew Gould*, chairman, Schlumberger Our research drew on two main initiatives: Simon Henry, chief financial officer, Shell Jaap Huijskes, executive board member responsible A global survey of senior executives was conducted in for exploration and production (E&P), OMV October and November 2011. In total, 185 executives took Bill Day, corporate communications manager, Valero part, representing a cross-section of firms in the oil and Bill Klesse, CEO, Valero gas industry. These executives were very senior: one in David Knox, chief executive officer, Santos three respondents were CEOs or managing directors. They Helge Lund, chief executive, Statoil represented firms ranging in size from less than US$500m John Richels*, chief executive officer, Devon Energy in revenue (76 executives) to more than US$500m (109). Christof Ruehl, chief economist, BP Carl Sheldon, chief executive officer, Abu Dhabi A series of interviews was carried out with leading National Energy Corp industry figures between October and December 2011. Jon Tait, head of global attraction, BP Interviewees and other contributors are listed here. Donald C Templin, senior vice president and chief financial officer, Marathon Petroleum Corp We would like to thank all those who participated Mehdi Varzi, president, Varzi Energy in the research. Gonzalo Velasco, communications manager, Repsol *Comments from these executives were obtained from conferences and company conference calls.2 © The Economist Intelligence Unit Limited 2012
  • 3. Big spenders The outlook for the oil and gas industry in 2012 Contents About this report 2 Executive summary 41 The oil and gas industry barometer Key findings from the Economist Intelligence Unit’s survey of oil and gas industry professionals 62 Investment prospects A look at the industry’s investment plans for the year ahead 93 Risky business  After a tumultuous couple of years for the sector, how are attitudes to risk evolving? 114 A new energy politics?  Implications from a year of turmoil in the Arab world 135 In focus  Is unconventional gas really the game changer industry players think it is? 156 Refining A focus on downstream investment prospects 18 Skills 207 What are companies doing to plug the skills gap? © The Economist Intelligence Unit Limited 2012 3
  • 4. Big spenders The outlook for the oil and gas industry in 2012 Executive summary Oil and gas industry confidence is rising. In a 2011 report by the Economist Intelligence Unit, commissioned by GL Noble Denton, 76% of our survey respondents said they were either highly or somewhat confident about the business outlook for their company over the next 12 months. This time around, that figure has grown to 82%. Backing this up, we find a large rise in the share of respondents who describe themselves as highly confident about the next 12 months. Only 8% of respondents describe themselves as pessimistic about the outlook for 2012. This optimism does not mean that executives are sanguine about the industry’s prospects, however. Rising costs and increasing regulation are both big concerns. Moreover, the outlook for the global economy remains deeply uncertain and, if economic conditions deteriorate, oil and gas companies will have to scale back their spending commitments accordingly.4 © The Economist Intelligence Unit Limited 2012
  • 5. Big spenders The outlook for the oil and gas industry in 2012 Key findingsIncreased optimism will feed through into capital become harder to obtain. Even more decisively, anspending increases. According to our survey, nearly overwhelming majority of respondents (82%) agreetwo-thirds (63%) of respondents are planning to that in the post-Macondo period regulatory issuesinvest either somewhat or substantially more over the have become more important. The survey shows thatnext 12 months, whereas in last year’s survey that increasing regulation is regarded by more than 30% offigure was just 49%. There has also been a shift in respondents as the main challenge for their companywhere companies see the greatest opportunities for over the next 12 months, exceeded only by the impactrevenue growth. Last year South-east Asia came top of of rising operating costs and the shortage of skilledthe pile, with North America second, the Middle East professionals.and North Africa third and the Far East fourth. Thisyear the rankings have changed, with North America Unconventionals have revolutionised Northtop, the Far East second, South-east Asia third and America’s gas sector, but progress has been muchLatin America fourth. slower elsewhere. The advent of projects such as the Marcellus, Barnett, Haynesville and FayettevilleRising operating costs emerge as the main barrier shales has created a supply glut that has affectedto growth. When questioned in detail about costs, global prices. Development has been slower elsewheremore than 50% of respondents say that they expect because the “perfect storm” that made shale gas aan increase in wages over the next 12 months. scalable reality in the US is not as powerful inThe second-biggest concern is the rising cost of other geographies.contractors, with 54% expecting costs to increase,compared with only 11% anticipating a decline. There is some scope for optimism for refiners. After a dismal few years the downstream sector is showing someThe upstream remains the core focus for spending. signs of life, at least in the US. Refining profitability hasA majority of respondents identify the upstream as the improved in the US, where robust margins have resultedkey area for business growth in 2012, meaning that from a revival of consumption of refined products. Butexploration will be a major beneficiary of increased Asia and Europe remain in the doldrums.investment. Our survey shows that 41% of industryprofessionals expect to see increased investment Skills shortages are becoming more acute. Accordingin exploration activities over the year, with only 4% to our survey, this will be one of the major barriers toanticipating a decline. growth over the next 12 months. Last year skills issues came fifth on our list of barriers and were only identifiedRisk remains a key challenge. A combined 55% of as a top-three issue by 25% of respondents. This yearrespondents confirm that in the aftermath of the 2010 the issue has risen to second on the list and has beenoil spill in the Gulf of Mexico, drilling permits have identified as a key barrier by 34% of respondents. © The Economist Intelligence Unit Limited 2012 5
  • 6. Big spenders The outlook for the oil and gas industry in 2012 1 The oil and gas industry barometer Findings from the Economist Intelligence Unit’s survey of oil and gas industry professionals Key points • Optimism is high across the industry. • The biggest challenges are rising costs for both labour and contractors. • Skills shortages are a growing concern and regulation has remained a key issue. • The Far East (including China, Japan and Korea) has emerged as the key area for revenue growth, leapfrogging three places from last year’s survey. • In the aftermath of the 2010 Gulf of Mexico oil spill, executives are pessimistic about the regulatory impact. Figure 1 This second Economist Intelligence Unit oil and gas barometer shows that industry confidence is rising. In last year’s survey 76% of respondents said How confident are you about the business outlook for your company they were either highly or somewhat confident about the business outlook for in the next 12 months? their company over the next 12 months; in this year’s survey, that figure has (% respondents) grown to 82%. 2011 2012 As figure 1 shows, most of the increase is attributable to a large rise in the 34% Highly confident 42% Highly confident share of respondents who describe themselves as highly confident about the next 12 months. Only 8% of respondents say they are pessimistic about the outlook for the coming year. Optimism is high across the industry, but confidence levels vary significantly between regions. In North America 90% of respondents describe themselves as highly or somewhat confident, in Asia-Pacific the figure falls to 81%, and in 42% Europe it drops to 70% (see figure 2). Somewhat confident 40% Increased optimism looks set to feed an expansion in capital expenditure Somewhat confident during 2012. According to our survey, nearly two-thirds (63%) of respondents are planning to invest either somewhat or substantially more over the next 12 months, whereas in last year’s survey that figure was just 49% (see figure 3). Our poll also shows that there has been a shift in where companies see the greatest opportunities for revenue growth. Last year South-east Asia 16% (including India) came top of the pile, with North America second, the Middle East and North Africa third and the Far East (including China, Japan and Neither confident nor pessimistic 10%Neither nor confident pessimistic Korea) fourth. This year the rankings have changed, with North America top, the Far East second, South-east Asia third and Latin America fourth 7%Somewhat pessimistic 7%Somewhat pessimistic (see figure 4 for the full rankings). 1% Highly pessimistic 1% Highly pessimistic Figures for 2011 were collected at the end of 2010. Figures for 2012 were collected at the end of 2011. There has also been some rebalancing in expectations about which part of Source: Economist Intelligence Unit6 © The Economist Intelligence Unit Limited 2012
  • 7. Big spenders The outlook for the oil and gas industry in 2012 Figure 2 EuropeHow confident are Northyou about the America 71%business outlookfor your company 90%in the next 12 months?(% respondents) Asia-Pacific 81%Source: Economist Intelligence Unitthe industry is likely to be the strongest source of business appears to be a growing concern for the industry, rising fromgrowth over the next 12 months. Upstream activities were 7th to 4th in the list of top 10 issues.the most popular choice for this question last year, and theyhave become even more heavily favoured this year, with Regulation remains a key concern, coming third onthe share of people selecting this option rising from 42% this year’s list of barriers to growth. When asked aboutto 56%. Downstream activities are also expected to provide regulation directly, more than 82% of respondents agreeda stronger source of growth than last year, rising from 10% that regulatory issues have become more important sinceto 14%. Meanwhile, marketing has declined significantly, the Deepwater Horizon disaster in the Gulf of Mexico infalling from 22% to 8%. 2010, and 55% of them think that obtaining drilling permits has become more difficult in the aftermath of Macondo.Continued challengesOf course, growing optimism about the future does not Figure 3mean that companies are sanguine about the challenges Does your company plan to make more or less capital investment inthey are likely to confront. For the second year running, dollar terms over the next 12 months? Select one. (% respondents)rising operating costs come out as the top barrier to growthin the industry (see figure 6). When questioned in detail 2011:about costs, more than 50% of respondents said that theyexpect an increase in wages over the next 12 months. The 16% 33% 33% 11% 4%next-biggest concern is the rising cost of contractors, with54% expecting costs to increase, compared with only 11%anticipating a decline. 2012:One of the issues businesses seem to be getting moreconcerned about is a shortage of skills. Last year, skills 20% 43% 22% 9% 3%issues came fifth on the list of barriers, and it was onlyidentified as a top-three issue by 25% of respondents. Thisyear 34% of respondents think skills shortages are going to Invest substantially Invest substantially Invest Keep investment Investbe a big problem, placing the issue second in importance, more (At least 25% somewhat the same as before somewhat less (At least 25% annual increase) more less annual decrease)behind rising operating costs. Similarly, access to finance Source: Economist Intelligence Unit © The Economist Intelligence Unit Limited 2012 7
  • 8. Big spenders The outlook for the oil and gas industry in 2012 Figure 4 Which of the following regions do you think will offer the greatest opportunities for your business in terms of revenue growth over the next 12 months? 2011 region rankings 2012 region rankings South-east Asia (including India) 32 % North America 36% North America 30 % Far East (including China) 31% Middle East and North Africa 29 % South-east Asia (including India) 29% Far East (including China) 26 % Latin America 26% Latin America 23 % Middle East and North Africa 23% Western Europe 15 % Eastern Europe and CIS 17% Eastern Europe and CIS 13 % Australasia 17% Sub-Saharan Africa 13 % Sub-Saharan Africa 15% Australasia 10 % Western Europe (including Scandinavia) 12% Central America 6% Central America 8% Source: Economist Intelligence Unit. Figure 5 Which sgment of the industry do you expect to see the strongest business growth in the next 12 months? Select one. (% respondents) 2011: 2012: 42% 17% 10% 22% 56% 12% 14% 8% Upstream Midstream Downstream Marketing Upstream Midstream Downstream Marketing Figure 6 Top 10 barriers to growth 2011 Top 10 barriers to growth 2012  Rising operating costs, including insurance Rising operating costs, including insurance 36 % 36% premiums premiums Increasing regulation 30 % Shortage of skilled professionals 34% Competitors 28 % Increasing regulation 31% Limited new areas for exploration 25 % Limited access to capital/finance 23% Shortage of skilled labour 25 % Limited new areas for exploration 20% Increasingly limited areas of “easy” production 20 % Competitors 20% Public backlash/litigation over environmental Limited access to capital/finance 16 % 18% concerns Public backlash/litigation over environmental 16 % Rising taxation/demands from states 17% concerns Ensuring adequate safety measures—for 13 % Increasingly limited areas of “easy” production 16% environmental risks Ensuring adequate safety measures—for Rising taxation/demands from states 12 % 10% environmental risks Source: Economist Intelligence Unit. Note: Figures do not add up to 100% because respondents are asked to select their three top barriers to growth.8 © The Economist Intelligence Unit Limited 2012
  • 9. Big spenders The outlook for the oil and gas industry in 2012 2 Big spenders The outlook for the oil and gas industry in 202. Investment prospects A look at the industry’s investment plans for the year ahead 2 Investment prospects A look at the industry’s investment plans for the year ahead Key points • Investment intentions have risen significantly. •Exploration is looming as a key spending growth area for a number of oil companies. Key points • While most companies expect a supportive price climate, smaller firms may be more exposed to weaker prices. l Investment intentions have risen significantly. • National oil companies appear particularly bullish about raising capital expenditure in 2012. l Exploration is looming as a key spending growth area for a number of oil companies. • There is no evidence yet that the euro zone crisis will have a major impact on investment. l While most companies expect a supportive price climate, smaller firms may be more exposed to weaker prices. Despite the difficult economic climate and fears of recession bullish about raising capital expenditure in 202. deep water in the Gulf l National oil companies appear particularly major growth themes for Shell include in the euro zone, the oil and gas industry is showing euro zone crisis will have a major impact on investment. (LNG) in Australia, tight gas l There is no evidence yet that the a growing of Mexico, liquefied natural gas sense of confidence about the future investment outlook. in North America, traditional plays in the North Sea, and its Growing investment worldwideincrease in capital spending, compared with an exploration programme. More than four-fifths of respondents (82%) say they are either Despite the difficult economic climate and fears of only 55% in North America and 57% in Europe. highly or somewhat confident about the business outlook for industry recession in the euro zone, the oil and gas In general, the Anglo-Dutch supermajor sees a robust demand their company over the next 12 months. Translating this into aboutoutlook fordesire togas, and host governments and regulators is showing a growing sense of confidence the The oil and invest also varies between corporate action, a significantly larger share of companies than are supportive of Shell’s plans to invest for newspending future investment outlook. companies. Majors like Shell are in active energy last year (63% this year compared with 49% last year) say their supplies. “The thinking tends to be long-term – many years or More than four-fifths of respondents (82%) sayeven decades in our industry, rather than driven by short-term firm plans to increase investment over the next 12 months. Figure 7 they are either highly or somewhat confident factors,” says Shell’s chief financial officer, Simon Henry. If your company is involved in Upstream activities are seenthethe majority of respondents about by business outlook for their company exploration, does it plan to increase as the key area for business growth 2 months. Translatingit into Figure 7 over the next over the next year, so this or decrease the frequency or intensity should come as little surprise that exploration will belarger share of corporate action, a significantly a major If your company is involved in exploration,over the of its exploration activities does it plan companies than lastOur survey this year compared to increasenext 12 months? Select or intensity of its beneficiary of this increased investment. year (6% shows or decrease the frequency one. with 49% lastexpect to their firm plans to increase exploration activities over the next 12 months? Select one. that 41% of industry professionals year) say see increased (% respondents) investment over the next 2 months. (% respondents) investment in exploration activities over the course of 2012, with Significantly only 4% anticipating aUpstream activities are seen by the majority decline (see figure 7). increase of respondents as the key area for business Reflecting differencesgrowth overand next year, so it should come as in demand the infrastructure 11% requirements, however, expectations about capital spending little surprise that exploration will be a major vary across regions. Inbeneficiary of thisarea 72% of survey Our the Asia-Pacific increased investment. 38% Don’t know/ respondents predict an increase in capital spending, compared survey shows that % of industry professionals not applicable with only 55% in North Americasee increased investment in exploration expect to and 57% in Europe. 30% Somewhat activities over the course of 202, with only % increase The desire to invest also varies between companies. Majors like anticipating a decline (see figure 7). Shell are in active spending mode. The company has taken 16 17% new final investment decisions since the start demand for more Reflecting differences in of 2010 and 1% Stay the same infrastructure requirements, however, expectations than 400,000 barrels of oil equivalent per day of new production. Significantly decrease 3% As spending ramps up about capital spending vary across regions. In the on these and other projects, it expects Somewhat Asia-Pacific area 72% of survey respondents predict decrease Source: Economist Intelligence Unit that overall capital spending levels will increase as well. The0 © The Economist Intelligence Unit Limited 202 © The Economist Intelligence Unit Limited 2012 9
  • 10. Big spenders The outlook for the oil and gas industry in 2012 Bullish in the US In South America, Brazil’s market-leading giant Petrobras is The oil majors are generally more confident about the investment planning a 24% increase in spending, much of it focused on its outlook than their smaller rivals. Over the next two years the deepwater reserves in the Atlantic, and Mexico’s state-owned US firm ConocoPhillips plans to execute a US$28bn capital oil company Pemex is also lavishing large sums on an expanded programme, almost 90% of which has been allocated to offshore drilling programme. exploration and production (E&P) supporting the company’s 100%-plus reserve replacement target. There is, however, evidence of a more cautious approach in the Middle East. For example, Carl Sheldon, the CEO of Abu In geographical terms, the US is absorbing the largest amounts Dhabi National Energy Company (TAQA), sees the company of capital in the current market. According to Barclays Capital, it spending US$2bn in 2012, a small increase on the previous year: pulled in 21% of US$529bn in global E&P spend in 2011, with the “Essentially we have a capital spending programme that started capital commitment of US$110.7bn representing an 18% increase in 2010 and goes up to 2013. For each of those years we’ll spend over 2010 spending levels. roughly US$2bn each year in five major programmes – drilling in Western Canada, drilling in the North Sea, the Bergermeer gas Companies with large international portfolios are in the midst of storage project in the Netherlands and two power projects in ambitious capital expenditure (capex) programmes. Occidental Morocco and Ghana.” Petroleum, the fourth-largest US oil and gas company, revealed a 56% increase in 2011 capital spending to US$6.1bn, which Like other companies, TAQA is prepared to cut spending should will increase further as the company proceeds with its extremely the price climate become less inviting. “If prices went south capital-intensive Shah sour gas development in the UAE offshore in a big way it is pretty easy for us to toggle our Canadian with Abu Dhabi National Oil Co (Adnoc). expenditure down, because we drill a lot of wells in the onshore. We drill 70-100 wells a season in Canada, whereas in the North Big spending from NOCs Sea we might drill just 8-12,” says Mr Sheldon. Meanwhile, many national oil companies (NOCs) also look likely to go on spending in 2012. In Europe, Norway’s giant Statoil will The threat of another major downturn in the global economy continue to invest at a high level, “to mature our attractive portfolio could see this happening, warns Hamid Gayibov, the and realise our strategy for growth towards 2020”, according to managing director of Xenon Capital Partners, which advises the company’s CEO, Helge Lund. And in Russia, Rosneft has said on Russian energy merger and acquisition (M&A) deals. “I do that it will boost its investment programme for the year by 35% to see there being some increase in capex, and the momentum approximately US$15bn as part of its push to upgrade refineries. is there. However, there is big uncertainty regarding the global oil market, and if there is a major dislocation in the Figure 8 global economy, we could see the oil price collapsing and fundamentals continuing to weaken. In that event there Does your company plan to make more or less capital will be little incentive for Russian oil companies to increase investment in dollar terms over the next 12 months? (% respondents) investment.” This sense of caution contrasts with the generally positive view North America Europe of industry fundamentals outlined by the international majors. 55% 57% Statoil’s Mr Lund, for example, argues that the industry remains fundamentally attractive, with energy demand growing. Asia-Pacific The overall message is that for those plays where the economics 72% are supportive, oil companies will continue to spend big in 2012. There remains a big caveat, however: if global economic conditions were to foment, oil and gas companies, whether big or small, would have to scale back their spending commitments Invest substantially/somewhat more in those areas where they can do so without creating damage to Source: Economist Intelligence Unit their wider portfolio.10 © The Economist Intelligence Unit Limited 2012
  • 11. Big spenders The outlook for the oil and gas industry in 2012 3 Risky business How are oil companies’ attitudes to risk evolving?Key points• Across the board, oil companies confront a wider array of risks.• The post-Macondo environment has seen operators seeking to offload risks onto contractors.• In the context of troubled finances, governments are seeking to tax the industry more heavily. Risk is integral to the investment process in the oil and gas Despite the lifting of the moratorium on drilling in the Gulf, industry. As the supply-demand gap drives oil companies activity had not returned to pre-Macondo levels by end-2011. towards resources that are more difficult to develop and increasingly located in politically challenging terrain, the risk Ironically, given the location of the Macondo disaster, the challenge is gaining in intensity. countries named by the largest number of respondents as having the most favourable regulatory climate in which to Our survey bears out the sense of heightened risk and operate in 2012 are the US and Canada, at a combined 23%. regulation. A combined 55% of respondents confirmed that However, North America also comes top of the list of regions in the aftermath of the 2010 oil spill in the Gulf of Mexico, expected to see an increase in regulation over the next 12 drilling permits have become harder to obtain. Even more months, with 69% of respondents forecasting an increase in decisively, an overwhelming majority of respondents (82%) 2012. agree that the in the post-Macondo period, regulatory issues have become more important. Regulation has also emerged as a major issue in Asia, precipitated by events like the subsea oil rupture in June From the secular trends shaping the industry – the steady 2011 at China’s largest oilfield in Bohai Bay. In late 2011, move into deep water, the tapping of tight hydrocarbon China’s Ministry of Land and Resources announced plans to formations – to the “black swan” events like the Deepwater revise offshore drilling regulations regarding joint ventures Horizon disaster of April 2010, oil companies must confront with foreign entities. an environment where risk is far more prominent. Africa is another region where regulation is increasing. In “The outlook for upstream is shifting as the reserve South Africa, for example, the government has imposed a base addition is becoming increasingly complex and moratorium on exploration in the semi-desert Karoo region unconventional. Complex hydrocarbons make up amid strong opposition to the use of hydraulic fracturing in approximately 85% of the world’s total yet-to-find resources, drilling activities there. In Nigeria, the Petroleum Industry and conventional resources are increasingly hard to access Bill threatens to impose a range of increases in taxes and for international companies,” says Mr Lund. royalties, as part of a wider overhaul that includes reform of the state oil company. More than 18 months after the Macondo oil spill, the disaster still casts a shadow over the industry through raised risk Above-ground risks increase aversion, heavier financial commitments and a stronger Many of the regulatory bugbears are familiar. The oil industry regulatory footprint in the Gulf of Mexico and beyond. has been heavily regulated for years, more than the natural © The Economist Intelligence Unit Limited 2012 11
  • 12. Big spenders The outlook for the oil and gas industry in 2012 gas sector. “Oil prices are higher for ‘above-ground’ reasons,” the unexpected tax change has rendered marginal 30% of says Christof Ruehl, chief economist at BP. “It is because of investment in projects previously considered likely to proceed politics, and the cartels.” Reflecting this, our survey shows in the next decade. that increasing regulation is regarded by more than 30% of respondents as the main challenge for their company over Despite this, the UK government announced 46 new licenses the next 12 months, exceeded only by the impact of rising for North Sea exploration in early January 2012, including operating costs and the shortage of skilled professionals. awards for the French major Total, suggesting that the impact of the tax change might not be as significant as some had New sources of risk feared. Issues like Macondo will also exert a lasting impact because of the ways in which governments and oil companies must Nevertheless, industry insiders remain hostile. “In an era when now formulate new responses to mitigate or disperse the the government has to adopt far-reaching austerity measures, heightened risk profile. this was a quick way of hitting a constituency that doesn’t have any votes,” says Mr Sheldon of TAQA, which has a number of Companies acknowledge the necessity of instituting greater production assets in the Brent system of the North Sea. remedial measures to prevent the recurrence of such events. For example, large oil companies, including BP, ExxonMobil, “However, in the long run it was not a very well thought- Shell, Chevron and ConocoPhillips, joined forces in 2011 to through thing to do. Hopefully they will take a more pragmatic spend US$1bn to establish the Marine Well Containment approach going forward and will try hard to incentivise further Company, a new entity that will respond to blowouts and spills investment in the basin - and understand that is not going to in the Gulf of Mexico. come from the supermajors.” For Andrew Gould, the chairman of the oilfield services group The political risk premium Schlumberger, the post-Macondo industry shakedown has Inconsistent regulatory approaches remain a cause of created new sources of risk: “Post-Macondo there are many consternation across the industry, with broad agreement oil company lawyers who consider it their duty to pass the among industry leaders on this point. Jean-François Cirelli, the catastrophic risk horizon arising from an incident like Macondo vice chairman and president of GDF Suez, told the European off onto the contractors. In the past, there has always been Autumn Gas conference in Paris in mid-November 2011 that EU a tacit bargain that catastrophic risk, except in cases of gross regulations were creating an unstable investment climate that negligence, was a risk that belonged to the operator – because was discouraging essential energy investments. the operator held the resources and therefore had the upside “Governments do not hesitate to take decisions that are not if things went right. But a lot of lawyers are now trying to break totally based on economic rationale,” he said. “European that model.” political risk has become a major concern to energy companies Tax and spend and investors and will clearly impede our ability to invest in Tax is another pressing issue, identified as the main challenge Europe.” by 17% of respondents. The growing tax burden is one by- This concern about the damaging effects of government action product of the global economic crisis. For example, the UK is widely shared. The largest US refiner, Valero, is keeping government, strapped for cash, has identified the country’s a close eye on is the implementation of California’s carbon maturing offshore oil and gas sector as a revenue source that dioxide cap-and-trade regime, known as AB 32. Rules have should be squeezed. been approved and will start taking effect in 2013. “We believe It announced in March 2011 that the supplementary charge this will be very costly to Californian consumers and the state’s on corporation tax would be increased from 20% to 32%, economy, and will have no impact whatsoever on overall resulting in a tax rate on UK oil and gas production of between carbon levels or climate change,” says Valero’s corporate 62% and 81%. The lobby group Oil & Gas UK estimates that communications manager, Bill Day.12 © The Economist Intelligence Unit Limited 2012
  • 13. Big spenders The outlook for the oil and gas industry in 2012 4 A new energy politics Implications from a year of turmoil in the Arab world Key points • Ongoing political unrest in the Middle East and North Africa (MENA) will have long-term, rather than short-term, impacts on the oil and gas sector. • Governments affected by the Arab Spring are under pressure to increase spending and drop subsidy reforms. • Security will remain a key concern for IOCs active in MENA. • Pressure on Iran could have a starker impact on oil and gas markets in 2012 than the Arab uprisings.Few oil company executives could have anticipated the Arabia have massively ramped up social spending, and withcollective shock to the system that would unfold in the Middle it the oil price they need to balance the state budget. TheEast and North Africa (MENA) region in 2012. kingdom, which at the end of 2011 was pumping nearly 10m barrels/day (b/d), has seen its target budget figure riseThe Arab Spring, still a work in progress in early 2012, will leave to above US$90/b, as it seeks to increase revenue to funda substantially altered political and economic landscape. additional US$130bn in spending programmes aimed at raising living standards for ordinary Saudi citizens.According to our survey, however, there is unlikely to be asignificant near-term impact on MENA host government policestowards international oil companies (IOCs). Approximately Arab Spring’s mixed resultsone-quarter of our survey respondents (25.9%) believe that Yet the direct impact of the uprisings on the oil and gas sectorgovernment and/or NOC policies towards IOCs will become more is mixed. There has been some collateral damage: the sporadicrestrictive, whereas about one-fifth (20.5%) think they will sabotage on the main Egypt-Israel gas export pipeline is a by-become more favourable, and nearly four out of ten (37.3%) product of the security vacuum that affected Egypt in the wakethink approaches will be broadly unchanged. of the Arab Spring; Yemeni gas exports have been disrupted; and the Syrian regime’s robust response to its domestic protests has triggered a ban on Syrian oil exports from the EU. The Arab Spring will take time to settle, Despite the disruptions, the short-term effect on oil and gas but it will bring with it a lot of opportunities markets was smaller than initially feared. Global markets were because one reason it happened is that broadly able to cope with the Libyan oil and gas outages, with many of these countries have young, sufficient spare capacity to prevent sharp price increases – growing populations with rising expectations. helped along by dampened demand in Europe and a surfeit of You cannot contain those expectations – global LNG. they have to be met. Increased security in key oil- and gas-producing areas is one Carl Sheldon, obvious consequence for oil companies. “As of now we have 540 chief executive officer, Abu Dhabi National Energy Corp security consultants working for Schlumberger, 440 of these inIn an attempt to thwart the spread of the uprisings into the Iraq. And I suspect we will have 100 in Libya by year-end,” saysArabian peninsula, major MENA oil producers such as Saudi the chairman of Schlumberger, Mr Gould. © The Economist Intelligence Unit Limited 2012 13
  • 14. Big spenders The outlook for the oil and gas industry in 2012 And now, the upside… to be met. And within that bunch of expectations is economic But some senior oil executives disagree with the notion that advancement – better living standards, access to clean water, the Arab Spring is necessarily bad for business. Those in strong power, better economics,” says Mr Sheldon. regional positions believe the Arab Spring will ultimately offer growth opportunities. TAQA is active across the region, with a mix The Arab Spring is far from over, and 2012 will see continued of properties in oil, gas and power and water sectors. political risk impinging on oil company strategies in the Middle East-North Africa region. In the long term, industry fundamentals “The Arab Spring will take time to settle, but it will bring with it a will reassert themselves more strongly. Says Mr Sheldon: “The lot of opportunities because one reason it happened is that many upheaval and lack of certainty make it harder to put a lot of of these countries have young, growing populations with rising money at risk quickly, but over time, as things stabilise, the basic expectations. You cannot contain those expectations – they have dynamics will be the same, whoever leads.”14 © The Economist Intelligence Unit Limited 2012
  • 15. Big spenders The outlook for the oil and gas industry in 2012 5 In focus Is unconventional gas really the game changer industry players think it is?Key points• Unconventional gas is now approaching 30% of total US natural gas output, transforming the global supply situation.• Production of 10bn cu ft/day of unconventional US gas will continue to depress gas prices.• Shale plays are economically competitive to develop, though not unanimously so.• European oil companies are cautious about prospects for developing unconventional resources in Europe.• Unconventional projects will absorb a larger proportion of corporate capex in 2012. The shale revolution has transformed the US natural gas Talking ‘bout a revolution market over the past five years in a way few could have The foundations of this unconventional “revolution” were laid imagined, dramatically altering the supply landscape and in the US, where advances in technology such as horizontal depressing gas prices. The rapid development of projects like drilling and hydraulic fracturing have dramatically increased the Marcellus, Barnett, Haynesville and Fayetteville shales has production. Unconventional US output soared to 10bn cu ft/ created a ripple effect that has spread across the global energy day in 2010, around one-quarter of the country’s total. By industry. In Europe, Poland and Ukraine have emerged as a 2035 this proportion could rise to one-half, according to the focus for shale gas exploration. Even oil and gas companies US Energy Information Administration. with no exposure to unconventional energy sources have been affected by its speedy rise. Oil companies active in this terrain acknowledge the transformative impact of unconventionals on the industry, The scale of the ramp-up bears examination. A decade ago, particularly natural gas. “We are in the midst of a structural gas from shale accounted for barely 2% of US natural gas revolution. There are now three times the number of gas wells production. Today it is approaching 30% and rising. The price being drilled compared to oil wells. The debate is no longer, impact has a significant bearing on the industry. The surge in ‘are we running out of gas?’ The debate is, ‘do we now have 100 production has forced domestic natural gas prices to plummet or 200 years of gas supply in the US?’,” says Thomas Ahlbrandt, below US$4/m Btu (British thermal units), considered too the former vice president of exploration at Falcon Oil & Gas. low to justify many large investment projects. The advent of substantial domestic gas supply has rendered a number of North America’s unconventional revolution rests on a North American LNG projects uneconomic, with majors like confluence of favourable factors — a “perfect storm” in ExxonMobil spending billions building LNG receiving terminals the words of one executive. Most important is the strong that may never reach their intended capacity. geological resource base, estimated by the US Energy Information Administration (EIA) at 862,000bn cu ft. Also Despite these signs, our latest survey shows that 53% of important are the US’s provision breaks, a stable regulatory respondents worldwide think that gas prices are set to rise regime, private ownership of mineral rights and the existence over the next 12 months. of a strong service industry. © The Economist Intelligence Unit Limited 2012 15
  • 16. Big spenders The outlook for the oil and gas industry in 2012 Big spenders Thespenders The outlook for the oil and gas industry inin 202. Big outlook for the oil and gas industryand202. Big spenders The outlook for the oil in gas industry 202. Big spenders Figure 9 Figure 99 Figure Figure 9 Figure 9 How do youHow do you expect natural gas prices expect natural gas prices gas prices How do you expect natural How do you expect natural gas pric How do you expect natural gas Hub benchmarks) (as per Henry Hub or European or European benchmarks) (as per Henry Hub or European benchmarks) (as per Henry prices (as per Henry Hub or European benchmarks) to change over the next 12 months? (as per Henry Hub or European ben to change over the next 12the next 12 months? to change over months? 12 months? to change over the next to change over the next 12 months (% respondents) (% respondents) (% respondents) (% respondents) (% respondents) 2011 2011 2011: 2011 2012: 2012 2012 2012 201 Rise by 50% Rise by 50% or more or more 50% or more Rise by 2% 2%5% 2% 5% 5% Rise by 50% or more Rise by 25% Rise by 25% or more or more 25% or more Rise by 18% 18% 18% 14% 14% 14% Rise by 25% or more Rise by 10% Rise by 10% or more or more 10% or more Rise by 28% 28% 28% 34% 34% 34% Rise by 10% or more 28% Fluctuate byFluctuate by no more no more by no more Fluctuate Fluctuate by no more than 10% 35% than 10% upthan 10% up or down or down up or down 35% 35% 31% 31% 31% than 10% up or down 35% Drop by 10%Drop by 10% or more or more 10% or more Drop by 5% 5%7% 5% 7% 7% Drop by 10% or more Drop by 25%Drop by 25% or more or more 25% or more Drop by 2% 2% 2% 1% 1% 1% Drop by 25% or more Figures for 2011 Figures for 2011 wereend of 2010 at the end of 2010 and figures for 2012 were collected at the end of 2011. were collected at the collected at and figures2010 and were collected atwereend of 2011. the end of 2011. Figures for 2011 were collected the end of for 2012 figures for 2012 the collected at Figures for 2011 were collected at the end of 2010 and figures fo Shale playsthe numberthegas wellsofof gasdrilledbeing drilled playsShale plays are proving a aoil for oil times aretimes of number beingfor oil companies. In are proving a magnet formagnet for oil proving number gas wells being drilled times the a magnet wells Shale Shale plays are proving magnet America alone? times the number of gas wells being drilled companies.companies. In the play, ,00 play, ,00 permit compared to comparedTheoil wells. The debate is no longer, compared to oildebate The debate is no longer, oil wells. to wells. is no longer, In the Eagle In the Eagle Ford play, ,00 permit companies. Ford Eagle Ford permit compared to oil wells. The debate is no long the Eagle we runningwe1,010 permit gas?’ The debate applicationsapplicationsThere isto drill into the Texas as to whether the unconventionals The debate is, ‘ ‘are Ford play, running out of gas?’ The‘do we is, ‘do we applicationsto were into widespread doubt ‘are out of gas?’ The debate is, debate were we were filed were filed thedrill into the Texas ‘are we running out of applications is, ‘do filed drill filed to Texas ‘are we running out of gas?’ to drill into thenow haveplayorof gasyearsa of gas supplyplay on200,play in 200, a ten-fold rise on the exported outside North now have 00 or 200 years of gas supply in now have 00 or 200 yearsin 2010, of in the Texas 00 or 200supplyten-fold risethe the a ten-fold rise on the risecan be previous now have 00 200 years gas supply in the in in revolution on the play in 200, a ten-fold previous previous America. The previous year. In 2011 itThomas Ahlbrandt, viceformer vice In 20year. In 20more than 2,000than 2,000 these developments scalable Ahlbrandt, the former v attracted more than 2,000 permitattractedperfect storm that 2,000 year. US?’,” says US?’,” says Thomas Ahlbrandt, the former vice Thomas says US?’,” Ahlbrandt, the former the year. In 20 itit attracted more than it attracted more made US?’,” says Thomas president of exploration at Falcon Oil at Gas. Oil && permit applications. president of exploration at& Falcon Oil Gas. president of exploration Falcon Gas. permit applications. permit applications. president of exploration at Falcon Oil & Gas applications. realities in the US is not evident in other geographies. North America’s unconventional revolution America has America has seen the bulk of the activity North America’s unconventional revolution revolution North America’s unconventional “North “North America has seen the bulk of the activity “North seen the bulk of activity North America’s unconventional revolution rests on a confluencea confluence ofof the activity — a far, so far,regionthat a region has a well-developed rests on a confluence of favourable factors so a sincesince has region has a well-developed rests on of favourable factors — a factors — since that since that well-developed favourable so far, so far, “North America has seen the bulk Furthermore, the technologies that maderests on a confluence of favourable factors the rapid US oil servicesoil services rigs and crews – and crews – and “perfect storm” in the words in the words of one executive. “perfect storm” inof one executive. executive. “perfect storm” the words of one industry – industry – – rigs and oil services industry rigs and crews – and “perfect storm” in the words of one executi that region hasMostis important is the strong geologicalan extensiverigs network to network to movehorizontal drilling and fracking — havestrong geological res a well-developed oil services industry –anpipeline pipeline move the to move the extensive advance possible – the Most the strong the strong geological resource an extensive pipeline network Most important important is geological resource resource Most important is the and crews – andbase, estimated by the US Energy Information toproducts to market,” saysHenry. Mr criticism. Governments,base, estimated by the US Energy Informat base, estimated by pipeline networkproducts the an extensive the US Energy Information base, estimated by the US Energy Information to move market,” says Shell’s increasing Henry. drawn says Shell’s products to market,”Mr Shell’s Mr Henry. such as that of products to market,” says Shell’satcu ft. Also cu ft.“At Shell, we“At Shell, weFrance, are seeking drilling moratoriums.Administration (EIA) at is Administration (EIA) at 862,000bn 862,000bn cu ft. Also Administration (EIA) at 862,000bn Administration (EIA) Mr Henry. Also Meanwhile, there 862,000bn cu ft. A important are the US’s provision breaks, a stable a a stable “At Shell, we are looking into the opportunity important are the US’s provision breaks, stable important are the US’s provision breaks, are looking into looking into the opportunity are the opportunity important are the US’s provision breaks, a s regulatory regime, private ownership ofownership of mineral worldwide, including intereststheChina, eastern regulatory regime, private mineral worldwide, including interests in China, eastern eastern rates of unconventional fields are ownership of mi regulatory regime, private ownership of mineral worldwide, including interests in depletion concern that in China, regulatory regime, private “At Shell, we arerights and the existence of a strong service South Africa. TheseAfrica.need plays need to be rights and the existenceinto the opportunity worldwide, looking of a strong service Europe, Europe, South Africa. These to be need to be rights and the existence of a strong service Europe, South plays These plays far faster than those of their conventionalrights and the existence of a strong service counterparts. including interests in China, eastern Europe, South Africa. tothe potential, and industry. industry. industry. drilled to delineate to delineate the potential, and drilled delineate the potential, and drilled industry. These plays need to be drilled to delineate the potential, and Whereas US-focused players are notably bullish about unconventional plays, European industry executives are the industry at large will need to build up©the services Economist Intelligence Unit Limited 202 more cautious. “Unconventional gas, and especially and The Economist Intelligence Unit Limited 202 Unit Limited 202 © The Economist Intelligence © The notably 9 9 9 pipeline infrastructure in these new regions,” he adds. shale gas, was a game changer in the US gas industry. Operations in Europe are far less mature, and Europe has seen However, some senior executives caution that shale plays only a couple of exploration wells targeting shale gas,” may not be as economically competitive as advocates make says Jaap Huijskes, executive board member responsible out – highlighting the point that unconventionals is one area for E&P at OMV. where oil industry consensus is distinctly lacking. “Over time, if you look at the marginal cost of producing shale in volume, Slow progress only the very best properties in the big shales in Haynesville, Europe’s unconventional developments will advance at a Barnett and Horn River can be produced for US$4. Everything slower pace than those in North America. “No significant else is in the range of US$5.5 to US$6,” says Mr Sheldon. production contribution is expected within this decade, as16 © The Economist Intelligence Unit Limited 2012
  • 17. Big spenders The outlook for the oil and gas industry in 2012 Unconventional capexactivities are at best at the technical pilot stage,” says Inflation is having an impact, particularly in the newMr Huijskes, whose company has access to interesting unconventional plays that are revolutionising theunconventional acreage in Central Europe, Tunisia industry. In the US, E&P companies have responded toand Pakistan. inflation in the oilfield services sector with steadily rising capex spend on liquids-rich plays such as the Permian“E&P is, however, by its very nature, a long-term, capital- and Eagle Ford basins in Texas, and the Bakken in Northintensive and risky business. It is definitely too early to Dakota.say if commercial production of unconventional gas/shalegas in Europe is possible,” says Mr Huijskes. The migration to liquids-rich projects has served to heighten competition for staff and equipment on theseLook East fields. The result is that companies are factoring in muchChina has been talked up as a major future source of larger capex spend in 2012. The chief executive of Apache,unconventional developments with estimated reserves Steven Farris, says his company saw cost inflation on theat 1,275trn cu ft – greater even than North America’s scale of 10% to 15% in the oil-rich Permian Basin in Westcombined 1,250trn cu ft. Beijing held its first shale gas Texas and New Mexico during the first quarter of 2012. Forlicensing round in June 2011, with several exploration the industry as a whole this could lead to 10-12% growthblocks awarded to domestic companies. in spending in the next 12 months in the region and high single-digit increases annually through to 2015.“China will develop shale gas, but it will take time,”says David Knox, the CEO of Santos, which is developing Strong project economics has incentivised greater spendunconventional gas projects in Australia to serve the on shale plays compared with conventional natural gasAsian market. projects, which are still compromised by the generally weak price environment for gas.In Australia, the speedy development of coal-bedmethane to LNG export projects promises to make the Hess, a significant US integrated company active in thecountry the world’s biggest exporter of unconventional Bakken shale, is meanwhile spending nearly half of itsgas. However, broader issues of licence to operate US$7.2bn capital budget on unconventional development,are a consideration for the companies tapping its up from 16% two years ago. With Bakken productionunconventional gas base. alone expected to more than triple to 120,000 b/d by 2015, Hess sees unconventionals contributing “What is challenging in Australia is the enormous ramp- 40-50% of its production and reserve growth over theup [in gas production],” says Mr Knox, whose company, next five to seven years.Santos, is the sponsor of the large-scale Gladstone LNGproject, processing coal seam gas (CSG) into LNG. “The Despite the rapid advance of unconventional energies inlarger onshore footprint of gas production does raise North America, its capacity to transform the long-termchallenges for our industry. One of the concerns we global natural gas supply picture is still unproven. Themust address and manage is overland access and water horizontal drilling and fracking technologies that haveproduction. At Santos we are committed to developing brought these volumes of unconventional gas on streamCSG to co-exist with local communities and with remain highly controversial. And the conditions thatagriculture. The environmental regulations are also very have made these projects viable in the US are not easilyonerous – but that is valuable to us as well, as we can show replicated in other geographies. Time will tell asto communities that we are heavily regulated.“ to whether the reality of unconventional gas will ever live up to the hype. © The Economist Intelligence Unit Limited 2012 17
  • 18. Big spenders The outlook for the oil and gas industry in 202. Big spenders The outlook for the oil and gas industry in 2012 66 Refining Better daysRefining ahead? Better days ahead? Key points l Refining profitability is improving, with margins looking generally stronger. Key points l Gasoline consumption is stronger, with international demand for products driving growth. • Refining profitabilityl Many refiners will continue to cut capacitystronger. is improving, with margins looking generally in 2012. • Gasoline consumption is stronger, with international demand for products driving growth. • Many refiners will continue to cut capacity in 2012. After a dismal few years the downstream sector is respondents believe that downstream margins will showing some signs ofsector is showing some Margin call After a dismal few years the downstream life. Refining profitability be higher in late 202 than in the previous year, has improved, particularly in the US, where signs of life. Refining profitability has improved, particularly in Betterwith a combined 8% expecting them to be either reverse margins have enabled integrated oil companies to robust margins have resulted from a revival of a strategy of growing somewhat better in 12 months’ time, has the US, where robust margins have resulted from a revival of significantly or all lines of their business. Divestment consumption of refined products. refined products. consumption of compared with a combined 2% who expect them to become a theme. Conoco, for example, announced in July 2011 that itbe significantlyrefining and marketing operations during would shed its or somewhat worse. After four years of declining oil-products use, US demand was upUS 2012 in order to create a new company, to be called Philips 66. After four years of declining oil-products use, by 2% in 2010 over demand was up by at 19.148m over the previous That same month Marathon completed the separation of its the previous year, 2% in 200 b/d, according Margin call to the EIA. Total consumption of liquid fuels in 2010to the by Total downstream operations into two separate units, with refining year, at 9.8m b/d, according grew EIA. Better margins have enabled integrated consumption ofrate offuels in 200 grew by 0,000 oil companies to reverse a strategy of 410,000 b/d, or 2.2%, the highest liquid growth since 2004. operations undertaken by Marathon Petroleum Corporation b/d, or 2.2%, the highest rate of growth since 200. (MPC). In the third quarter of 2011 US Gulf Coast gasoline margins Figure 10 In the third quarter of 20 US Gulf Coast gasoline per barrel vs Louisiana Light Sweet increased by 89% to Figure 10 Do you expect downstream margins margins per barrel vs Louisiana Light Sweet US$8.20, from US$4.35 in the third quarter 2010. A US Gulf for oil and gas to be better or worse Coast refinery running a typical mix of crudes for the area to a in the increased by 89% to US$8.20, from US$.5 Do you expect downstream margins for oil and gas to be in 12 months time? better or worse in 12 months’ time? catalytic cracking yield would have monthlyGulf Coast refinery running (% respondents)respondents) third quarter 2010. A US margins rising to (% a typical mix of crudes for the area to a catalytic US$21.45/b in July – the highest figure recorded for a cracking cracking yield would have monthly margins rising refinery by Jacobs, a downstream consultancy. Don’t Significantly to US$21.45/b in July – the highest figure recorded 1% know better International demand, for aparticularly in theby Jacobs, a markets, cracking refinery developing downstream Significantly consultancy. worse 9% 8% has been the key driver for growth in 2011 and helped to elevate margins. Diesel demand is expected to recover its former International demand, particularly in the strength and grow rapidly in 2012. developing markets, has been the key driver for 22% 31% Somewhat Such conditions are supporting a morehelped to elevate margins. growth in 20 and optimistic view on worse Somewhat better margins going forward. A demand is expected to recover its former Diesel majority of survey respondents believe that downstream margins will begrow rapidly in2012 than in the strength and higher in late 202. previous year, with a combined 38% expecting them to be either Such conditions are supporting a more optimistic 30% significantly or somewhat better in 12 months’ time, majority of survey view on margins going forward. A compared No change with a combined 23% who expect them to be significantly or somewhat worse.22 © The Economist Intelligence Unit Limited 202 Source: Economist Intelligence Unit 18 © The Economist Intelligence Unit Limited 2012
  • 19. Big spenders The outlook for the oil and gas industry in 2012MPC aims to boost crude oil refining capacity by 50,000 b/d In Europe, many refineries have been put up for sale asat its six refinery systems in early 2012 to 1.19m b/d, with a companies undertake a rationalisation of capacity. Shell hascapex target of US$1.2bn in its first full year of operations. significantly scaled back its refining exposure. In March 2011 itThis capital expenditure will be directed primarily toward sold its 270,000 b/d Stanlow refinery in the UK and associatedprojects that increase the company’s ability to refine difficult- local marketing businesses to Essar Oil for US$1.3bn.to-process crudes such as Canadian heavy oil sands, increaseits diesel yield, debottleneck its logistics to access additional According to Shell’s downstream director, Mark Williams, theinland crude oil, prepare to receive new crude oil production decision to sell Stanlow is part of its drive to concentrate thefrom eastern Ohio’s Utica shale, and grow its retail presence in company’s global manufacturing portfolio on larger assets andregions where MPC already has strong logistics in place. means that the supermajor will have reduced its global refining exposure through a combination of asset sales and closures byIndependent refiners are also investing heavily in expansion. a total of 1.6m barrels since 2002.The US’ largest independent refiner, Valero, will by the endof 2012 have finished construction on two new 60,000 b/d Switzerland-based Petroplus Holdings, Europe’s largesthydrocrackers – one at its Port Arthur refinery in Texas and independent refiner, announced that it would start theone at its St Charles refinery in Louisiana. Together these temporary economic shutdowns of three of its five refinerieshydrocrackers will cost over US$3bn. Total capital expenditure in January 2012, given the limited credit availability and thein 2011 at Valero is estimated at around US$3.2bn; 2012 should economic climate in Europe. The highly cyclical nature of thesee something similar, says the company. refining industry, European refiners’ weak cash flows since 2009 and persistent overcapacity make the refining industryEconomics look stronger one of the corporate sectors to which European banks areThere appears to be greater confidence that economic likely to reduce credit exposure this year, noted the ratingconditions will be supportive of refining margins in 2012. agency Fitch. In the longer term, Fitch anticipates that onlyAccording to Valero’s CEO, Bill Klesse: “We think many of the a considerable capacity reduction can materially improvethings that contributed to this year’s financial performance are utilisation rates and cash flow in European refining, given weakgoing to continue next year. And so we’re anticipating a good demand prospects for refined products. This can be achievedyear next year [2012] as well.” through the closure of less efficient or persistently unprofitable refineries, or the conversion of idle capacity into storageValero believes that the spinning-off of Conoco’s and depots.Marathon’s downstream assets will have a stimulative effecton the industry, introducing two new large independent Asian refining margins felt the positive impact of supplyrefiners to the market. It maintains that it is strong enough to shocks in 2011, as China refocused its attentions on meetingsee off the competition. “Valero is currently by far the largest a domestic demand surge. However, margins are expected toindependent refiner – it’s of a size similar to integrated energy come under more pressure following larger capacity additionscompanies, and didn’t have a close peer. Now the spun-off in 2012, with Asia likely to add some 900,000 b/d of newMarathon Petroleum and ConocoPhillips refineries will be of refining output, according to FG Energy, a consultancy.a size closer to what Valero is. But we were already competingwith them anyway,” says company spokesman Bill Day. The overall sector faces mixed fortunes in 2012. Areas of strength, such as stronger middle distillate yields, contrastRationalisation of capacity looks to be a major theme in 2012, with concerns that new capacity additions could exceedwith more refinery closures due. There have been continued demand growth and lead to weaker margins. Ongoing capacityannouncements of delays and cancellations of large refinery closures will help to firm up downstream economics, but withexpansions and new-build projects. The 2012-14 period may the global economy displaying worrying signs of vulnerability,see further capacity closures announced by refinery operators. there will be continued doubts over demand strength in theFor example, Conoco intends to divest “non-core” refineries next 12 months.and reduce the company’s refining capacity by 500,000 b/d bythe end of 2012. © The Economist Intelligence Unit Limited 2012 19
  • 20. Big spenders The outlook for the oil and gas industry in 2012 7 Skills What are companies doing to plug the skills gap? Key points • Skills shortages are a key barrier to growth and are of increasing concern. • Following the example of BP and Shell, companies should consider delinking recruitment drives from the oil price cycle. Skills shortages are becoming more acute and emerge from North Sea acreage. Some of the majors active in this area our survey as one of the biggest barriers to growth over the have hinted at problems recruiting enough people to fuel next 12 months. Last year, skills issues came fifth on our list expansion of their UK Continental Shelf (UKCS) operations. of barriers and were only identified as a top-three issue by 25% of respondents. This year, the issue has risen to second According to a UK oil training body, Opito, the most difficult on the list and has been identified as a key barrier by 34% of vacancies to fill in the subsea sector are those for engineers, respondents. professional engineers and managers, a difficulty which is compounded by the fact that the skills, knowledge and The lack of suitably qualified labour is a global problem. In experience lost through retirement are more difficult to replace Western Australia, where a number of resource plays are in these areas than is the case with other workforce areas. under way to meet growing Asian demand, it is estimated that by 2015 there will be a shortage of roughly 150,000 people The industry’s long-standing skills gap appears to be getting needed to develop projects in the north of the state. oil companies’ full attention. Lessons are being learned, as oil companies are now acutely aware of the dangers of failing to In the UK, engineering skills shortages threaten to invest in talent. The two case studies here explain how BP undermine growth in the development of the maturing and Shell are trying to overcome the problem.20 © The Economist Intelligence Unit Limited 2012
  • 21. Big spenders The outlook for the oil and gas industry in 2012Case study: BPLike other oil majors, BP faces a constant challenge to our organisation,” says Mr Tait.secure skilled labour. Graduate recruitment is critical. BP recruits thousands ofThe company hires between 6,000 and 8,000 people every year, experienced and lateral hires [recruited from other oil companies]of whom around 10% are graduates. But in certain geographies every year, but in terms of growing talent in the organisation thethere’s less talent entering the industry than companies would company is looking to have the right feeder stock of talent cominglike. “In the UK, for example, we are concerned that there aren’t in at graduate levels.enough STEM (science, technology, engineering and maths) Vocational training is a key component of BP’s employmentstudents coming out of universities,” says Jon Tait, BP’s head of offering, with a US$500m annual budget earmarked for trainingglobal attraction. “We are not struggling to hire graduates – we and development purposes globally.hire about 150 a year in the UK – but we are keen to make surethat pipeline of good talent comes through the schools and “In the UK we have an educational services resource centreuniversities and then into our organisation.” that provides tools for interactive teaching and lesson plans for teachers. And we have the BP UK Schools Link programme whichThe cyclical nature of oil and gas industry hiring – with periods was set up in 1968 and now covers 194 schools and enables BPof depressed prices traditionally yielding reduced hiring – is employees to work with local schools and help enhance theirsomething that companies like BP are looking to break out of. curriculum especially in the science and engineering space,”“What you’ve seen in the industry is a direct correlation between says Mr Tait.hiring and the oil price, and what BP is trying to do is regardless ofthe oil price ensure we have the right pipeline of talent coming toCase study: ShellThe energy industry needs a deep pool of motivated workers with recruiting new talent continuously through the business cycle.technical expertise in a range of disciplines, from microbiology Even during the recent economic downturn and in the midst of ato lean manufacturing. The highly skilled nature of many of major corporate restructuring at Shell that removed 7,000 jobsthese jobs means that recruitment can be a challenge. To worldwide, we aimed to recruit about 1,000 graduates a year, upmeet that challenge, says Shell CFO Simon Henry, Shell starts from around 400 in 2003,” explains Mr Henry.with a truly global approach in which it assesses which of the About two-thirds of those new recruits are in skilled technicalcompany’s businesses will grow, which will decline and how its disciplines. When it has had to cut jobs, the company says it hasgeographical presence will change over time. And it then assesses been careful not to disrupt the talent pipeline of skilled youngthe demographic profile of its 93,000 employees against these workers.changing requirements. Shell has developed close links with leading universities such as“This allows us to pursue a selective approach to recruitment, Cornell in the US, Imperial College London, and the Technicalchoosing the markets, skills and schools we wish to target University of Delft in the Netherlands, assigning a senior Shellon the basis of both global and local need. We aim to recruit employee to manage the company’s relationship with eachhigh-potential employees early, developing their skills over an university.extended period of time,” says Mr Henry. “That’s also why we’veinvested heavily in graduate recruitment during the recent “Every year our engineers and scientists visit universities torecession. This is not something our energy industry has always discuss career possibilities and conduct interviews in person.done well in the past. Recruitment has sometimes tended to That’s helped to improve our standing as an employer of choicefollow the oil price.” among students, ensuring we consistently attract the top talent in every field,” says Mr Henry.“Today, we’re taking a much more consistent approach, © The Economist Intelligence Unit Limited 2012 21
  • 22. Big spenders The outlook for the oil and gas industry in 202. Big spenders The outlook for the oil and gas industry in 2012 Appendix Survey results Do you operate in the oil/gas sector? Select all that apply. (% respondents) Oil 46 Gas 42 Neither 43 Which of the following aspects of the sector do you operate in? Select all that apply. (% respondents) Upstream (including exploration, development and production of oil and/or natural gas) 34 Midstream (processing) 14 Downstream (including tankers, refiners and retailers) 24 Other (including pipeline, marine and other services) 58 How confident are you about the business outlook for your company in the next 12 months? (% respondents) Highly confident 40 Somewhat confident 41 Neither confident nor pessimistic 11 Somewhat pessimistic 7 Highly pessimistic 1 Don’t know 028 © The Economist Intelligence Unit Limited 202 22 © The Economist Intelligence Unit Limited 2012
  • 23. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202.Does your company plan to make more or less capital investment in dollar terms over the next 12 months?(% respondents)Invest substantially more (>25% increase year on year) 19Invest somewhat more 45Keep investment the same as before 22Invest somewhat less 7Invest substantially less (>25% decrease year on year) 2Don’t know 4If your company is involved in exploration, does it plan to increase or decrease the frequency or intensity of its explorationactivities over the next 12 months? Select one.(% respondents)Significantly increase 13Somewhat increase 29Stay the same 18Somewhat decrease 3Significantly decrease 1Don’t know/not applicable 36How do you expect costs across the following aspects of the business will change over the next 12 months?Select one in each row.(% respondents) Increase substantially Increase somewhat Stay the same Decrease somewhat Decrease substantially Don’t know/Not applicableExploration 19 43 17 2 19Transmission and distribution 10 37 33 3 16Safety 17 38 39 3 3Wages 7 39 34 5 4Marketing 6 24 48 91 12Operating expenditure 12 47 27 10 5Contractors 11 42 31 11 1 4Recruitment 11 32 37 13 2 4Training 11 31 44 10 1 3R&D 12 33 40 6 10 © The Economist Intelligence Unit Limited 2012 23
  • 24. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202. Which of the following regions do you think will offer the greatest opportunities for your business in terms of revenue growth over the next 12 months? Select up to three. Can we ask why? (% respondents) North America 35 Far East (including China) 33 South-east Asia (including India) 29 Latin America 24 Middle East and North Africa 21 Eastern Europe and CIS 18 Australasia 18 Western Europe (including Scandinavia) 15 Sub-Saharan Africa 14 Central America 7 Will your company rely more or less on mergers and acquisitions as a source for growth over the coming 12 months? (% respondents) Significantly more 10 Somewhat more 25 The same as before 40 Somewhat less 7 Significantly less 6 Don’t know 12 If applicable, do you think the replacement rate of your companys oil/gas reserves will improve or decline in the next 12 months? (% respondents) Significantly improve 10 Somewhat improve 34 Stay the same 19 Somewhat decline 7 Significantly decline 0 Don’t know/not applicable 3024 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 202
  • 25. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202.Which of the following do you believe represent the main challenges for your company in the next 12 months?Select up to three.(% respondents)Rising operating costs, including insurance premiums 37Shortage of skilled professionals 33Increasing regulation 32Limited access to capital/finance 24Limited new areas for exploration 19Rising taxation/demands from states 18Competitors 18Public backlash/litigation over environmental concerns 18Increasingly limited areas of "easy" production 15Ensuring adequate safety measures—for environmental risks 9Developing operations in regions with less mature infrastructure 9Disputes over sovereignty and legal status of operations 8Developing new technologies to support operations 7The need for closer collaboration with partners 6Ensuring adequate safety measures—for personnel 5Weakening relationships between NOCs and IOCs 4Other, please specify 1To what extent do you agree or disagree with the following statements regarding the aftermath of the 2010 oil spill in theGulf of Mexico?(% respondents) Strongly agree Somewhat agree Neither agree nor disagree Somewhat disagree Strongly disagree Don’t know/Not applicableRegulatory issues have become more important 36 45 10 31 4The oil spill has had a minimal impact on overall demand for oil and gas 35 34 13 10 5 3Drilling permits have become more difficult to obtain in the last 18 months 21 33 20 6 2 19The oil and gas industry needs to develop a unified response to technology failures 38 40 12 61 3The oil industry needs to develop more rigorous safety training programmes 33 40 19 41 3The industry needs to increase investment in the development of new technologies to improve safety 34 43 17 2 3 © The Economist Intelligence Unit Limited 2012 25
  • 26. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202. Do you expect your business to invest more or less capital in the following energy types over the coming 12 months? (% respondents) Significantly more Somewhat more No change Somewhat less Significantly less Don’t know/Not applicable Oil 20 40 23 41 12 Gas 20 43 21 61 8 Biofuels 11 26 30 4 2 27 Onshore/offshore wind 10 22 29 6 3 30 Solar 10 22 26 6 3 33 Other renewable energies 12 24 28 4 2 30 In which of the following regions do you expect regulations relating to the oil and gas sectors to increase/tighten over the coming 12 months? Select all that apply. (% respondents) North America 70 Western Europe 44 Australasia 24 Far East (including China) 18 Latin America 15 Middle East and North Africa 15 South-east Asia (including India) 15 Eastern Europe and CIS 14 Central America 13 Sub-Saharan Africa 1226 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 202
  • 27. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202.Which country do you believe will offer the most favourable regulatory environment for oil and gas majors to operate in overthe next 12 months?(% respondents)United States of America 13Canada 9Brazil 8Australia 7China 5Nigeria 5Libya 5India 4Malaysia 4United Kingdom 3Iraq 3Norway 3Indonesia 2Kazakhstan 2Kuwait 1Qatar 1United Arab Emirates 1Afghanistan 1Algeria 1Angola 1Bahamas 1Colombia 1Germany 1Ireland 1Poland 1Russia 1Sudan 1Tanzania 1Trinidad and Tobago 1Turkmenistan 1Vietnam 1Other 11 © The Economist Intelligence Unit Intelligence Unit Limited 202 © The Economist Limited 2012 27 
  • 28. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202. In your areas of interest, do you expect government subsidies on balance to favour the oil and gas sector, or the renewable energy sector, over the next 12 months? Select one. (% respondents) Will favour oil and gas 20 Will favour renewable energies 45 Will favour unconventional energies 6 Will favour oil/gas, unconventional and renewable energies equally 6 Will favour neither oil/gas, renewables nor unconventional energies 2 Will discriminate against oil & gas 12 Will discriminate against renewable energies 1 Will discriminate against unconventional energies 0 Will discriminate against oil & gas, renewable energies, and unconventional energies 0 Don’t know 7 Looking at the overall picture, do you believe governments and/or NOCs policies towards IOCs over the next 12 months will be: (% respondents) Significantly more favourable 8 Partially more favourable 21 Broadly unchanged 37 Will be somewhat more restrictive 27 Significantly more restrictive 1 Don’t know 528 © The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 202
  • 29. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202.Do you expect access to new sites for oil/gas exploration to improve or worsen over the next year?(% respondents)Significantly improve 9Partly improve 30Stay the same 27Partly worsen 25Significantly worsen 2Don’t know 7Which segment of the industry do you expect to see the strongest business growth in the next 12 months?(% respondents)Upstream 58Midstream 12Downstream 14Marketing 7Other, please specify0Don’t know 9 © The Economist Intelligence Unit Limited 2012 29
  • 30. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202. Do you believe the use of service contracts – for example, to oilfield services companies – will increase or decrease over the coming 12 months? (% respondents) Significantly increase 17 Somewhat increase 48 No change 20 Somewhat decrease 7 Significantly decrease 1 Don’t know 7 How do you expect natural gas prices (as per Henry Hub or European benchmarks) to change over the next 12 months? (% respondents) Rise by 50% or more 4 Rise by 25% or more 16 Rise by 10% or more 33 Fluctuate by no more than 10% up or down 30 Drop by 10% or more 7 Drop by 25% or more 1 Drop by 50% or more 0 Don’t know 9 Do you expect downstream margins for oil and gas to be better or worse in 12 months time? (% respondents) Significantly better Somewhat better No change Somewhat worse Significantly worse Don’t know Oil 7 31 31 21 2 9 Gas 5 40 25 19 2 9 Which of the following best describes your company? (% respondents) Privately owned 38 Private-equity backed 11 Small cap 4 Mid cap 9 Large cap 23 State-owned 12 Partnership 2 Other, please specify 16 © The Economist Intelligence Unit Limited 202 30 © The Economist Intelligence Unit Limited 2012
  • 31. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202.In which country are you personally based?(% respondents)Australia 27United States of America 18India 15China 7Canada 3United Kingdom 3Nigeria 3Indonesia 2Malaysia 2Spain 1Austria 1Italy 1Netherlands 1Norway 1Brazil 1Germany 1New Zealand 1Pakistan 1Sweden 1Thailand 1Colombia 1Cyprus 1France 1South Korea 1United Arab Emirates 1Other 8 © The Economist Intelligence Unit Limited 2012 31
  • 32. Big spenders The outlook for the oil and gas industry in 2012 Big spenders The outlook for the oil and gas industry in 202. In which region are you personally based? (% respondents) Asia-Pacific 56 North America 21 Western Europe 14 Middle East and Africa 6 Latin America 2 Eastern Europe 1 What are your companys annual global revenues? (US$) $500m or less 40 $500m to $1bn 7 $1bn to $5bn 15 $5bn to $10bn 13 $10bn or more 26 What is your title? (% respondents) Board member 6 CEO/President/Managing director 17 CFO/Treasurer/Comptroller 8 CIO/Technology director 1 Other C-level executive 14 SVP/VP/Director 6 Head of business unit 8 Head of department 14 Manager 21 Other 632 © The Economist Intelligence Unit Limited 2012
  • 33. Big spenders The outlook for the oil and gas industry in 2012While every effort has been taken to verify the accuracyof this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person onthis white paper or any of the information, opinions or conclusions set out in this white paper. Cover image - © photobank.kiev.ua/Shutterstock © The Economist Intelligence Unit Limited 2012 33
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