The oil and gas (O&G) industry is a high-technology business. Much of this
industrys past success is attributed to the innovative
thinking in solving problems. Speakers at the 2013
Deloittes O&G Conference, entitled Capitalizing
on Success, emphasized that more creative action is needed
by industry to handle future problems.
The North American O&G
industry is facing unexpected challenges on how to harness the
sudden surge and development of new shale plays. John England,
vice chairman and US O&G business leader for Deloitte,
set the ground work for the conference and identified five
areas that are now shaping the latest wave of O&G
O&G industry is a people business. Companies must not only
attract the needed professionals to fill positions, but they
must develop systems to train and retain these individual to
maintain their competitive edge. Previously, US companies
focused resources on overseas projects.
Results: Now, the
US industry is ill prepared for shale boom and struggling to
find workers to meet North American project demands.
The crew change is coming. Up to
50% of US energy workforce will retire over the next 5-10
years, according to the US Department of Labor. The number of
job openings in the energy industry exceeds the number of
qualified and appropriately trained applicants. Payroll
compensation has increased 43% since 2006 to attract and retain
energy projects are considered megaprojects. They are large
investments and involving multiple stakeholders to shoulder the
full cost. Likewise, these projects are more complex and incur
higher risks for the operating company, contractors and
Unlocking North Americas
newfound resources while concurrently scaling up global
development will take unprecedented levels of financing. In the
US, the Energy Information Agency (EIA) predicts that more than
630,000 new wells will be needed and an additional $5 trillion
in upstream investment through 2035 if the industry hopes to
maintain present output levels and meet future demand growth.
Globally, the total number of O&G companies with capital
budgets exceeding $1 billion (B) more than tripled to 132 in
2012, from just 40 in 2000, and those with capital expenditures
above $5 B increased fivefold from 7 in 2000 to 35 in 2012.
Financing and executing the enormity of these projects will not
be easy. International oil companies are undertaking from 3-5
megaprojects concurrently, accounting for 24%-35% of their
annual cash flow. To meet the level and breadth of these
investments, companies will need to develop more complex
financing structures to compete for financing and protect
against risings costs, price competition and volatility in
Across the industry, regulatory
uncertainty over taxation rules, state and federal regulation
of hydraulic fracturing, and environmental regulation also
hinders project planning and the attraction of investment
Regulatory and tax policy. The uncertainty in
present and future regulatory and tax policies can derail even
the best planned projects. The burden of duplicate federal and
state policy can add redundancy and more
cost to project development. Federal trade restrictions
limiting international transport and exports of O&G, such
as LNG exports and pipeline construction, will impede progress
for North American producers.
Financing and executing complex megaprojects will not be easy.
Even after financing is secured, only 22% of O&G
megaprojects are considered successful, in terms of original
investment criteria, resulting from the additional challenges
of cost overruns and schedule delays. Given the high levels of
training and technical expertise required, fierce competition
over the shrinking global talent pool is also challenging the
industry, driving payroll expenses up 43% since 2006.
According to Deloittes
latest study, The Challenge of Renaissance: Managing an
Unprecedented Wave of Oil and Gas Investment, North
America -- once viewed as a mature region -- is experiencing a
renaissance of new growth and opportunity for the upstream,
midstream and downstream. Report highlights are:
trends. The global growth mirrors the North American
experience in increasing complexity and cost. The total O&G
expenditures in 2013 will reach $330 B outside the US according
to Barclays. The future global expenditures include:
Ultra-deepwater rigs are expected
to increase 75% over the rest of the decade. Global LNG
developments face uncertainty from possible US competition.
North American energy
renaissance. Vast investment capital will be needed to
unlock previously inaccessible North American resources. Nearly
$5 trillion in upstream investment is needed in North America
through 2035 to meet future demand, including 630,000 new
wells, according to the EIA.
In Canada, unconventional
resources are critical for both liquids and natural gas growth.
Oil sand production is expected to rise from 1.7 MMbpd in 2011
to 5.6 MMbpd in 2046, requiring $229.7 B of investment over 35
years. If fully developed, unconventional natural gas would
account for 60% of Canadas production by 2030. Daily
production would have to rise from 1.3 bcfd in 2011 to 3.7 bcfd
in 2046 to meet demand.
Offshore activity continues to
rebound, post-Macondo. Approximately 37 semisubmersibles and
drill ships are registered with the Gulf of Mexico and the
number resources are expected to grow to 54 by 2014. Deepwater
is expected to attribute 3.75 MMbpd by 2020, including 18% from
Natural gas and
LNG. The high price differential between Henry Hub and
global natural gas prices continues to support North American
LNG exports. More than 30 LNG projects have been submitted to
the US Department of Energy (DOE), while eight LNG projects are
under consideration in Canada. At present, 26 LNG proposed
projects have been authorized in the US; one is authorized in
Canada. If all projects are approved, then approximately $60 B
in LNG investment in US will be needed. The Kitimat LNG and LNG
Canada projects are estimated to cost $10 B and $12 B,
In addition, midstream
megaprojects such as the $7-B Keystone XL pipeline are expected
to expand and support shale production increases.
The economic and environmental benefits of low-cost
natural gas are encouraging other uses such as an alternative
transportation fuel. Sasol is evaluating a $10-B gas to liquids
(GTL) facility, which could create 1,200 jobs along the Gulf
Coast and inject $46.2 B into the local economy.
Petrochemicals are also experiencing
new growth in grassroots and brownfield projects. To take
advantage of low-cost fuels and feedstocks, Dow Chemical, Shell
Chemical, ChevronPhillips Chemical, Sasol and Formosa Plastics
all have announced plans to build US plants. These projects will require at least a
$1.5 B capital investment per plant. Combined, these plants
would produce 7.4 MMtpy of ethylene -- a 28% increase from
present production levels. Approximately 100 additional
chemical industry investments have been announced and have an
estimated valued at $71.7 B.
The full report is available on
request at Deloittes website.