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.
Their 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.
Oil and gas industry confidence is rising. In a survey which formed the basis of last year’s report, 76% of respondents said they were either highly or somewhat confident about the business outlook for their company over the next 12 months. Twelve months later, 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 global economic conditions deteriorate, oil and gas companies will have to scale back their spending commitments accordingly.
Increased optimism will feed through into capital spending increases. 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%. There has also been a shift in where companies see the greatest opportunities for revenue growth. Last year South-east Asia came top of the pile, with North America second, the Middle East and North Africa third and the Far East fourth. This year the rankings have changed, with North America top, the Far East second, South-east Asia third and Latin America fourth.
Rising operating costs emerge as the main barrier to growth. When questioned in detail about costs, more than 50% of respondents say that they expect an increase in wages over the next 12 months. The second-biggest concern is the rising cost of contractors, with 54% expecting costs to increase, compared with only 11% anticipating a decline.
The upstream remains the core focus for spending. A majority of respondents identify the upstream as the key area for business growth in 2012, meaning that exploration will be a major beneficiary of increased investment. Our survey shows that 41% of industry professionals expect to see increased investment in exploration activities over the year, with only 4% anticipating a decline.
Risk remains a key challenge. A combined 55% of respondents confirm that in the aftermath of the 2010 oil spill in the Gulf of Mexico, drilling permits have become harder to obtain. Even more decisively, an overwhelming majority of respondents (82%) agree that in the post-Macondo period regulatory issues have become more important. The survey shows that increasing regulation is regarded by more than 30% of respondents as the main challenge for their company over the next 12 months, exceeded only by the impact of rising operating costs and the shortage of skilled professionals.
Unconventionals have revolutionised North America’s gas sector, but progress has been much slower elsewhere. The advent of projects such as the Marcellus, Barnett, Haynesville and Fayetteville shales has created a supply glut that has affected global prices. Development has been slower elsewhere because the ‘perfect storm’ that made shale gas a scalable reality in the US is not as powerful in other geographies.
There is some scope for optimism for refiners. After a dismal few years the downstream sector is showing some signs of life, at least in the US. Refining profitability has improved in the US, where robust margins have resulted from a revival of consumption of refined products. But Asia and Europe remain in the doldrums.