Higher oil and natural gas prices have not overcome market volatility enough to help energy companies improve their rates of investment through 2010, according to a new study by Cambridge Energy Research Associates (CERA).

In its study, “Harnessing the Storm,” which was unveiled in Houston during CERAWeek 2003, potential constraints to profitability for energy companies through the end of the decade were examined. CERA collaborated with Accenture in the study of 16 different companies, which represented the entire energy industry value chain.

The study suggests that companies have to anticipate and resolve key supply-chain issues because of competing growth targets; limited availability of critical infrastructure; lack of skilled workers, and inadequate access to capital.

Producers, transporters and refiners “are facing an increasingly volatile operating environment while planning huge investments at a time of looming pressures on their profitability,” said David Hobbs, Exploration and Production (E&P) Strategy Director at CERA. “Markets will provide no clearer investment signals in the coming decade, leaving companies to rely on their ability to anticipate infrastructure and capital constraints and act accordingly.”

CERA identified the challenges for the industry by interviewing executives from the major market segments in the upstream, downstream and transportation sectors. and it then performed detailed analyses of future developments and infrastructure investment requirements.

Within the upstream sector, all of the surveyed companies noted that they are targeting oil equivalent production growth rates of between 2-8% above CERA’s long-term outlook of demand growth of 1.7%. The combination of current “above average” oil prices and “high success rates of exploration in the past few years” created a situation in which non-OPEC supplies “appear set for strong growth.”

In the deepwater, CERA found that most of the success has come from technology advances that allow production to go beyond 2,500 feet. However, delays in deepwater offshore construction are “eroding returns” for the engineering and construction sector as well as E&P. “In addition, deepwater operators may not have enough drilling capacity to meet all their license requirements.”

For western-based energy companies, the “demographic challenge” is similar to that faced by many “old economy, technically based businesses,” said CERA — experienced employees are aging and exiting the industry “far faster than young employees are entering, and this loss of experience threatens gains.” To reserve this trend, companies “need to reach out to new geographies and implement policies to retain experienced employees.” Solutions “might involve more aggressive recruiting” or relocating “offshore many of the companies’ activities.”

Another constraint is capital access, especially in the upstream market, CERA found. “Unless economic growth is robust through the decade, the increase in global demand may be less than the gains in just non-OPEC productive capacity,” CERA noted.

“The study shows that there is advantage to be had,” said Paul Spence of Accenture. “Winning companies need to take their positions and pick the time to act.”

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