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Oil and Gas Reality Check 2013

A look at the top issues facing the oil and gas sector


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Last year, we proclaimed Iraq and Libya open for business, re-emphasised the impact of shale gas and expanded the focus globally, discussed Chinese NOCs’ exploration activities, and highlighted the rise of a new breed of NOCs – the energy-consuming NOCs emerging from Asia. Against the backdrop of the US emerging as an energy producing powerhouse, we discussed the diverging WTI and Brent benchmarks and the possible decoupling of oil and gas prices; noting the 11% increase in the price of oil (WTI) from November 2010 to 2011 versus the 1.3% decrease in the price of natural gas (Henry Hub). In our last report, we also returned to the talent issues, focusing on the possible shortage in Canada’s oil sands sector.

This year’s Oil and Gas Reality Check marks a different approach. Rather than simply identifying the issues that are of interest to the sector, we have focused on the five primary challenges and attempted to predict a direction which these trends will follow. Over the years, some occupied a higher position on the “concern scale” than others, but very few proved to be non-issues that have disappeared.

The 2013 Oil and Gas Reality Check focuses on assessing the industry fundamentals of each trend – the supply, demand, macroeconomic, regulatory, cost, price, and competitive behaviour factors – allowing us to draw insights and describe what may unfold over the short and the long-term.

We begin with the discoveries of unconventional oil and gas, and shale gas in particular. With new countries entering the ranks of net energy exporters, one may proclaim a global revolution is at hand with fundamental shifts in energy geopolitics due to newly found energy independence. A closer examination of the development progress of countries with major shale gas resources reveals a vastly different picture.

Countries that can commercially produce unconventional and conventional gas seek higher returns by exporting or planning to export liquefied natural gas (LNG) to Asia Pacific countries which have historically agreed to long-term purchase contracts at oil-indexed prices. The expected increase and diversity of LNG supply is spurring transition away from oil price indexation, and the rise of gas hub and hybrid price indexation.

The discoveries of new resources across various geographies coupled with the technical challenges of developing those resources are softening governments’ contract terms, fiscal takes, and other policies; all indicators of the degree of resource nationalism. As production efficiency rates and capabilities improve, will resource nationalism surge? Or, will resource nationalism in terms of government policy pale in comparison to the competitive rise of NOCs? We assess what these impacts will be to International Oil
Companies (IOCs) and other sector players, such as Oilfield Services (OFS) companies.

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