The International Monetary Fund again has lowered its outlook for economic output this year, now seeing 0.5% in economic growth worldwide. This, combined with gloomy unemployment reports and other indicators, has dimmed the outlook for oil and gas supply and demand in the near term.
In a recent research report, Deutsche Bank analyst Adam Sieminski wrote that worldwide oil demand in 2009 will contract 1.5 million b/d from a year earlier. He said slowing investment and steep decline curves in mature basins imply that there will be a decline in non-OPEC oil supply for 2009, with more decline to come in 2010.
Drilling activity has indeed contracted in the past several months, and the investment needed to ensure there’s enough supply for the market when demand growth returns is shrinking.
How bad?
An annual survey of oil and gas producers and service companies based in the US sheds light on how views have turned from just a year ago. This month accounting firm Grant Thornton LLP released its 2009 survey of upstream energy companies.
This seventh annual survey, conducted during fourth-quarter 2008, targeted senior executives of US independent oil and gas producers and service companies.
The more than 65 companies that responded to the Grant Thornton survey had average yearend 2008 total assets of $715 million and average 2008 fiscal year revenues of $432 million.
First, the outlook for employment has worsened from the previous survey. Only 35% of those surveyed expect employment levels at their companies to rise, down from 76% a year earlier. On the other hand, only 26% now anticipate difficulties hiring and retaining employees, down sharply from 85% just a year earlier.
With forecasted oil and gas prices the most important factors in capital spending decisions, the survey of company executives found that only 32% anticipated an increase in US capital expenditures in 2009, compared with 65% who anticipated a 2008 spending increase in the year-earlier survey. In addition to this dismal view of US spending, 92% of the respondents expect decreases or no change this year in capital spending outside the US.
This survey also found that the top concern of the respondents is the uncertainty of oil and gas prices, followed by the ability to obtain capital. Further, the respondents believe that incentives for increased US drilling are the best way to reduce energy prices for US consumers.
Incentives
Respondents want to see their corporate and industry leaders focused primarily on more commitment to exploration and production in the US. They also favor more efficiency in drilling through proved technology and would like to see a collaborative public and private energy policy over the next 3-5 years.
Broad Oak Energy Inc. Chairman and Chief Executive Officer David B. Braddock told the survey, “As independent E&P companies, we have no control over the price of the commodities we produce and sell, but we have complete control over the decision to continue drilling in a low-price environment. Our only course as prudent managers is to fight to reduce our [finding and development] costs enough to generate a marginal rate of return necessary to induce investment.”
Whether the industry will see more or less incentive to drill in the near term is still in question, and hinges not only on commodity prices, but also on government policies.
On Feb. 10, US Interior Secretary Ken Salazar announced a strategy to develop an offshore energy plan. The strategy, which involves gathering information about conventional and renewable offshore resources and the potential impacts of developing those resources, effectively reinstated the moratorium on oil and gas development off the East Coast and in the eastern Gulf of Mexico.
Salazar said, “This rulemaking will allow us to move from the ‘oil and gas only’ approach of the previous Administration to the comprehensive energy plan that we need.”
Reed Wood, partner-in-charge of Grant Thornton’s energy practice, says the move to reinstate the moratorium was no surprise, but he finds that many people are optimistic that some of the previously restricted areas might be opened to oil and gas development.
However, Wood notes that the economy has continued to spiral downward in the few months since the survey of upstream companies was conducted. He says that if the survey were conducted today, the outlook for E&P spending would be even bleaker.
