financial news has been decidedly more bearish than bullish,
advisory firm Ernst & Young's oil and gas center says it
anticipates a steady close to the year. The oil and gas
industry is set to end 2011 strong amid great uncertainty in
the broader market, according to the firms quarterly oil
and gas update.
"I would not characterize the economy as robust and thriving
by any means, but the oil and gas industry is holding up well,"
said Marcela Donadio, Americas oil and gas leader for Ernst
& Young LLP. "New sources of energy supply and the
globalization of energy markets have created opportunity and
balance for the industry."
The recent dip in prices for oil and gas reflects increasing
supply and declining demand worldwide, in response to
manufacturing slowing and consumer confidence retrenchment.
Simultaneously, as the value of the Euro has decreased, the
value of the dollar has grown. And Libyan crude supplies have
started to return.
All of this has resulted in some relief at the pump for
consumers and a balancing of supply and demand fundamentals for
the industry, the firm said.
Physical crude markets are reasonably balanced but tight,
with global oil prices holding steady at around or upward of
On the non-OPEC side of the market, crude production showed
some increases this year, with production growth in North
American crude, primarily from US shale and from Canadian oil
sands, along with gains in Brazil and Russia, offsetting
declines in Europe.
However, spare capacity in OPEC remains low. This creates
tighter markets, with prices tending to move up sharply with
relatively small increases in demand.
The big unknown is which way demand will move, with a broad
lack of confidence in demand estimates right now and
forward-demand estimates coming down.
So far, Asia and the emerging economies have managed to hold
up their part in the demand equation, but growth in China
which has been the big demand growth driver for the past
five years is expected to slow.
That will have a negative impact on demand and cause further
weakening in commodity prices.
Natural gas production continues to boom. US gas production
is at its highest level in almost 40 years and storage is once
again at a normal level. After struggling early in the recent
decade, sustained investment and drilling activity, along with
technology advances, finally started
to pay off.
But gas demand growth has struggled with the broader economy
and remains largely at the mercy of the weather. In its latest
forecast, the US Department of Energy sees modest demand growth
continuing this year and next.
As unconventional, service-intensive projects increase, so has the demand
for equipment and services with subsequent increases in
To ensure access to needed equipment, supplies and
personnel, some large independents, including Chesapeake,
Pioneer and EOG Resources Inc., are moving to own and operate
the equipment and services they will need.
Decades ago, service functions were largely "in-house."
Upstream companies typically owned and managed the service
But as drilling processes became more specialized during the
1970s and 1980s, and operators chose to focus more on "core
competencies," those functions were increasingly spun off to an
independent oilfield services segment.
The industry is starting to see a "reintegration" of the
service function into upstream companies as a means of ensuring
access to those services and managing capital costs.
Despite the strong rise in crude oil prices, US refiners
have generally had a good year thus far, according to Ernst
& Young. Midcontinent refiners in particular, with access
to the relatively undervalued crude oils like WTI and Canadian
heavy, generally saw much stronger gains than those more
exposed to global crude oil markets, such as the coastal
However, two key issues could impact this positive momentum:
1) Additional global refining capacity continues to be
added, 2) export-oriented economies, which have generated the
bulk of demand growth for refined products, will decrease
demand in response to economic malaise in developed
These factors will increase supply pressures, drive down
demand for refined products and dilute margins, according to
Transactions and Conclusions
Third quarter oil and gas transaction activity was
once-again solid. While there were some gains over the previous
quarter, it was nowhere near the volume and value that we saw
at the end of last year.
With Kinder Morgan's $21.1 billion acquisition of El Paso
Corp. getting the fourth quarter off to a strong start, Ernst
& Young expects to see continued growth in deal volume for
the remainder of 2011 and into 2012.
In the end, the industry has evolved in such a way that it
is less impacted by the lagging economies of developed
The industry has globalized, diversified and created
additional opportunities, thereby making it better able to
protect against broader market fluctuation.