Signs of economic stability surfaced at the end of March, but the Gulf of Mexico oil spill followed less than a month later followed by "less than positive" consumer and business confidence reports, which created "considerable uncertainty for the oil and gas industry," according to a new report by Ernst & Young LLP.

The consultant's Americas Oil and Gas Center, based in Houston, on Wednesday published its third quarter outlook for the oil and gas sector.

"The energy industry is facing significant unknowns right now," said Marcela Donadio, who leads the center. "The offshore industry in the Gulf of Mexico is effectively at a standstill, awaiting the findings from the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. At the same time, we are closely watching the markets for any economic developments that could have an impact on demand growth."

North American gas fundamentals "remain weak driven by fairly weak demand and strong production growth," the report noted. "So far we have not see the kind of demand growth some organizations are expecting for the year.

"However, producers continue to invest substantially in unconventional gas plays, particularly shale, suggesting a positive long-term outlook. There remains some concern over future regulatory actions that would limit hydraulic fracturing due to potential environmental damage, particularly to water supplies."

Meanwhile, oil prices "have been remarkably constant. More modest consumption habits and weak developed economies have eased demand pressures creating consistent prices in the $70 to $80/bbl range for nearly a full year. Pending any swings in the economy, prices are expected to remain relatively stable in the short to medium term." Pressures, however, remain on refiners to maintain liquidity and cash flow.

For now, said the consultant, the oilfield service (OFS) sector is facing a "relatively weak economic environment" with upstream spending declining in 2009 and from downward pressure on utilization and dayrates. Spending is expected to increase this year and "signs of improvement are at hand" with rig utilization rates moving slightly up.

"Even though the events in the Gulf of Mexico have been difficult for the OFS sector, ultimately, we expect to see investment in equipment and resources to improve the safety and reliability of offshore and onshore operations," said Donadio. "Broadly speaking, this is expected to financially benefit the oilfield services equipment manufacturers, while bolstering more technological advances."

Merger and acquisition (M&A) activity in the energy sector in the first six months of 2010 has increased, with global deal value reaching almost $135 billion, which is 50% higher than in 2009. According to Ernst & Young, 420 deals were announced through the first two quarters, versus 334 deals during the same period in 2009.

"Energy M&A activity is starting to increase in the deal markets, and we expect that to carry through the second half of 2010, particularly in emerging markets," said Jon McCarter, Transaction Advisory Services Leader at the center. "However, the environment could change significantly with the passage of new energy policy legislation or setbacks in the global economic recovery."

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