Global oil and natural gas executives are optimistic about the year ahead, but instead of expanding their operations, many are using the boom times to hedge against the short-term uncertainties, according to a new survey by BDO.
Nearly half (48%) of oil and gas executives “feel better about their access to capital and credit in the year ahead, with 45% citing it as the top driver of industry growth in 2013,” said the survey of 84 C-level and senior financial executives in the United States, Russia, UK, Australia and Canada. “At the same time, 31% of executives polled feel that demand for resources, strong as ever, will influence growth.” Insights were sought on growth strategies, industry consolidation, the environment, regulatory affairs and labor issues.
“Amidst this positivity, however, executives are forging ahead conservatively, suggesting a degree of anxiety about the long-term profitability of the energy industry,” said the authors. “When asked how they plan to improve profitability in the year ahead, most (56%) said they will focus on internal business processes. Australia bucks the trend, with 58% of executives indicating that they plan to pursue vertical integration through acquisitions. Nevertheless, this inward, efficiency-driven focus reveals a broader concern about becoming too expansive.”
Without exception, when asked which region would be a target for expansion, “every country surveyed overwhelmingly cites their own territory as a preferred target; very few respondents cite the resource-rich areas of the Middle East, Latin America and East Asia,” said the report.
“Industry leaders suspect that we may be at the apex of a boom-and-bust cycle,” said BDO’s Charles Dewhurst, global natural resources leader. “The oil and gas industry is largely beholden to uncertainty, and short-term fluctuations can halt current positive momentum. Environmental and regulatory concerns, commodity price volatility and geopolitical circumstances can all conspire to throw a wrench into companies plans.”
One of the most “troubling immediate concerns” for executives in the year ahead is the possibility of labor shortages, a concern that has been cited in other recent surveys and at the recent IHS CERAWeek 2013 (see Daily GPI, March 13).
“While about one-half (51%) of executives surveyed expect to increase hiring this year, 61% also anticipate difficulty hiring the skilled workforce they need,” BDO said. “As the current workforce ages and engineering schools work to train the next generation of skilled oil and gas laborers, executives worry that the human capital necessary to take advantage of the current boom may not be readily available.”
The long-term prospects for the oil and gas industry remain in flux, but the respondents said the North American shale boom likely is driving a lot of this year’s short-term optimism.
“When asked which country will lead overall oil production in the future, 39% of executives cite the United States, a 50% lead over those citing Saudi Arabia (26%), the second most frequently cited oil producer in the survey. Canadian executives are also positive about their production prospects as a result of their ability to exploit resources from oilsands, with 40% of Canadian executives expecting their country to lead oil production in the future.”
Shale production is expected to lead conventional output this year, executives said, but they also said the impact of unconventional drilling techniques, i.e. hydraulic fracturing (fracking), is “a major environmental concern.” Close to 44% of those surveyed ranked fracking as their top environmental priority this year, and with the exception of Russia. Carbon emissions and water pollution trailed fracking at 15% each.
Executives also are watching the regulatory environment closely, the survey found.
“A plurality of survey respondents (40%) place environmental policy at the top of their list of regulatory concerns,” but in a comparison of country responses, there is more nuance, said BDO.
“Though UK executives most often cite environmental regulation as their top concern, 27% — three times the study’s average of 9% — also believe that anti-corruption/anti-bribery legislation will pose an issue in the year ahead. As with our international mining survey, the underlying reason appears to be that much of the U.K.’s exploration and production activities occur beyond its borders.
“Meanwhile, the U.S. displays a particular sensitivity to corporate tax structure in the wake of ongoing fiscal policy debates, with 35% citing it as a top concern.”
The global executives are split on the most preferable way to enter a foreign market. Acquisition in the country of interest and a joint venture with a local company in the country of interest were the two most-cited options at 30% each, while independently establishing operations was a distant third with 18% citing it as their preferred method.
“Further international expansion may not be a top priority for executives at this time,” said Dewhurst. “But it does remain an arrow in the industry’s quiver should current market conditions persist. Executives need to be thinking about the best way to move forward so that they can act quickly when the opportunity presents itself.”
Respondents feel most optimistic about alternative energy methods their countries are most capable of producing. When asked which source of alternative energy would contribute most to the world’s energy needs, one-third of executives cite solar power, according to BDO.
“However, each country’s executives appear to display a preference toward sources they have a decided advantage in: 44% of Canadian executives cite solar power; the UK is evenly split between solar and wind at 33% each; the U.S. favors wind at 37%; Russia prefers biofuels at 50%; and Australian executives are split among biofuels, geothermal power, hydroelectric power and solar.”
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