North America set for economic expansion wave, driven by oil and gas

The oil and gas (O&G) industry is a high-technology business. Much of this industry’s past success is attributed to the innovative thinking in solving problems. Speakers at the 2013 Deloitte’s 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 projects:

Talent. The 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 skilled talent.

Finance. New 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 investors.

Unlocking North America’s 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.

Capital. 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 commodity pricing.

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 capital.

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.

Uncertainty. 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 Deloitte’s 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:

Global investment 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:

  • $250 B in Australian LNG projects – 20% of the GDP
  • $150 B in Brazil
  • $145 B in Asian refining capacity
  • $100 B in Mozambique – more than 400% of the GDP
  • Planned investments in Papua New Guinea equate to 123% of GDP.

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 Canada’s 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 North America.

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, respectively.

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 Deloitte’s website.