For the most part, exploration and production (E&P) company CFOs expect demand for natural gas and oil to increase next year, but they're looking over their shoulders at international competition and wondering what U.S. lawmakers might do that could make it tougher to earn a buck in the energy patch. These are some of the findings of a survey by consultancy BDO USA LLP released Tuesday.

A majority (71%) of CFOs expect global demand for oil to increase in 2011 and 67% expect global demand for natural gas to increase. Nearly half (46%) plan to maintain the total number of oil and gas drilling rigs operated by their company next year, and another 34% plan to increase their count.

When asked what is the most important factor driving the overall growth of the U.S. oil and gas industry in 2011, 18% cited new production technologies -- nearly triple the number from 2009. However, costs are expected to rise; 66% of CFOs expect drilling and exploring costs to increase. "Most CFOs see heightened demand for oil and natural gas in 2011, but drilling companies are reluctant to increase the rig count until they see this materialize. The result will inevitably be increased drilling costs, and this was borne out in the survey," said Charles Dewhurst, a BDO partner.

And 54% of CFOs surveyed feel that "legislative changes" will be the most important factor inhibiting the growth of the U.S. oil and gas industry in 2011. In addition, 40% cited legislative changes as their greatest financial challenge in the year ahead (a 21% increase from last year).

"One message came through loud and clear in this year's survey: that legislative changes represent the biggest threat to growth in the oil and gas industry," Dewhurst said. With the mid-term election results, energy executives can anticipate an easing in the flow of new legislation impacting the industry. But will this be enough to relax the permitting process for deepwater drilling in the Gulf of Mexico?"

Many respondents to the BDO 2011 Energy Outlook Survey said they do not anticipate drilling activity in the Gulf of Mexico to reach past levels anytime soon; 38% do not expect drilling activity in the region to return to 2009 levels until 2012 or 2013, and 31% say it will be after 2013 or never.

More than half of the respondents to the survey said they are concerned about the potential elimination of tax incentives for producers.

Despite an expected increase in global energy demand, companies are staying put geographically for now; only 7% plan to expand to geographic areas outside of the U.S. in 2011.

The survey queried 100 CFOs at U.S. E&P companies via telephone during November.

Last year's survey found CFOs to be pessimistic about the credit markets (see Daily GPI, Dec. 4, 2009).

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