Unconventional resources in the US constituted the oil and gas industry's largest source of growth in 2013—a trend that's expected to continue into 2014, Ernst & Young indicated in its US quarterly outlook.
In the next 2-3 years, the US will look to become a net exporter of gas, while dramatically reducing its dependency on oil imports.
"The surge of the US energy market really was a game changer in a relatively short time," said Deborah Byers, E&Y oil & gas leader. "And we think those changes will continue to play out in 2014."
However, capital may move away from unconventional plays with the possible freeing up of Mexico's energy sector while additional factors such as US LNG export approvals, East African LNG development, and the end of the Gazprom monopoly for Russian gas exports play important roles as well.
Oil, gas, product prices
Non-OPEC oil production drove up supply, reducing oil prices in fourth-quarter 2013 even as instability in Libya and Iraq limited some supplies. With the prospect of a rise in oil exports from Iran due to the easing of sanctions, OPEC may compensate in 2014 by limiting production.
A ban on exports in the US has given rise to further price distortions, which had been alleviated by the massive infrastructure build-out.
"We can expect to see the distortions continue in the short term, but we also believe that policymakers will address the export ban in the near future," said Marcela Donadio, oil and gas leader, E&Y Americas.
Byers said, "On the oil side, given the expected capacity growth in OPEC and the continuing growth of non-OPEC output, we're probably looking at some downward pressures on oil prices. But on the gas side, we see the market coming into more balance, offering prospects for some upward pressure on gas prices."
E&Y said gas storage levels were below normal for the first time in years due to an early cold winter, as prices reached near $4.50/MMbtu. Higher prices are expected to encourage further production, but slow the power sector's transition from coal to gas.
As crude prices eased so did product prices, causing a slight decrease in refiner margins in the fourth quarter, although margins remained historically high. Notional cracking margins on a the New York Mercantile Exchange 3-2-1 basis averaged about $15/bbl in the fourth quarter and about $23/bbl for the year, down from an average of about $30/bbl in 2012, E&Y said.
M&A transactions
As previously reported by PwC, oil and gas merger and acquisition activity in 2013 declined in the US (OGJ Online, Jan. 28, 2014), with Canada showing the same trend. Transaction value fell 37% in the US and 63% in Canada as deal volumes dropped 21% in the US and 32% in Canada.
"Transactions and divestments of oil companies show a trend to sell off downstream operations and focus on potentially more lucrative upstream plays," said Jon McCarter, oil and gas transactions leader, E&Y Americas.
"Transactions in the midstream sector showed the most buoyancy in 2013, driven by the significant midstream infrastructure needs and capital requirements. Additionally, low natural gas prices have spurred investment in gas export facilities in the US with continued interest from foreign investors.
"While we were disappointed in the level of activity in 2013, solid corporate balance sheets and significant private equity capital in oil and gas investments point to strong deal flow in 2014," McCarter stated.
