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'Little Evidence' Seen for Gas Demand Uptick in Near Term

Natural gas and oil prices are no longer connected, and strong gas supplies, the anticipation of warmer winters and a weak economy provide little evidence that prices will reconnect in the near future, according to Ernst & Young (E&Y). However, regulatory pressure to decrease carbon emissions could lift gas demand and prices, E&Y said Monday in its 4Q2009 outlook for the energy industry.

"With storage and supply at an all-time high, short-term fundamentals for natural gas are very weak," said Marcela Donadio, E&Y Americas Oil and Gas Sector leader. "However, natural gas has promising potential as the clean-burning bridge to alternative and renewable energy."

To a "large extent," oil prices continue to be higher than market fundamentals justify, the analysis, which was issued last week, noted. Donadio said, "The key question in the months ahead is, once government-delivered stimulus efforts run dry, will private and corporate dollars step in to carry on the economic recovery and create growth in energy demand? But perhaps the even bigger question is the future of energy policy in the U.S."

The downstream oil and gas segment is still feeling the economic downturn acutely, much more than the upstream segment, according to the analysis. Driving the outlook for downstream are "low demand brought about by the depressed economy, a shift to more fuel-efficient vehicles and greater biofuels use and domestic and international refining capacity increases, planned in a different economic climate."

For the near term, spending on oilfield services by the upstream players is likely to be down, said the report. However, the rig count, which bottomed in 3Q2009, appears to have turned the corner, particularly in North America.

"The strength in this sector lies in oil drilling," said the report. "Oil drilling has led the U.S. upturn. While offshore markets are relatively stronger than onshore markets, deep and ultra-deep offshore exploration and development are the strongest. Given current credit constraints, survival for some medium-to-smaller oilfield services companies may require consolidation."

Compared with the first three quarters of 2008, global oil and gas transaction activity, including mergers and acquisitions (M&A), this year to date is down about 20% in terms of deal value, and about twice that in terms of deal volume, E&Y found.

"In contrast to the fairly stagnant U.S. transactions environment, China continues to shore up its energy production capabilities, and has completed a number of major asset acquisitions in 2009. There are some indications in the U.S. and elsewhere that a new wave of oil and gas transactions is building. These deals will likely take the form of M&A, joint ventures, strategic and tactical alliances, and other forms of restructuring," said the E&Y report.

"Energy companies will be well served to continue to be nimble during these tumultuous times. The outlook for each sub-sector could change dramatically depending on a number of political and economic factors."

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