TORONTO, May 13 /CNW/ - Short-term oil and gas supply and demand remains
relatively balanced, but oil prices are up due to a number of
geopolitical factors, sending ripple effects through both the Canadian
and the global markets, Ernst & Young says.
"The extreme price volatility we're seeing has been driven by a number
of factors - political upheaval in North Africa and the Middle East,
the strengthening of emerging economies and more unpredictable events
like the disaster in Japan," explains Lance Mortlock, Ernst & Young,
Canada. "Now, the markets are actually reacting to a potential supply
problem, not necessarily real-time fundamentals."
Ernst & Young's quarterly global oil and gas report finds that global
economic growth projections are being reduced, dropping to around 4%
for 2011. Here in Canada, the situation is creating both opportunities
and challenges — for oil and gas companies in particular.
"From the business perspective, higher oil prices mean Canadian
companies have the cash needed to get new projects up and running, and
propel the industry forward," explains Mortlock. "But the major price
swings we're seeing now also bring new challenges. Price volatility
makes it harder to build a business plan and stick to a strategy. In
addition, as cash makes more projects viable, we're starting to see a
shortage of skilled workers needed to keep things moving."
Additional highlights from this quarterly forecast include the
For most of 2010, crude oil prices (West Texas Intermediate (WTI))
hovered in the US$70 to US$80/barrel range. But as the global economy
grew, global oil demand recovered, and prices began to move higher in
the last quarter of 2010. The WTI price broke through the US$100/barrel
mark in early March 2011, as Libyan supplies were cut off. While a
disconnect has emerged between WTI prices and more globally traded
crude oils, continued political upheaval in the Middle East and Africa
will prolong upward pressures on oil prices. In Canada, higher prices
mean previously shelved oilsands and heavy-oil-related capital projects
are being dusted off, and coming back on stream. We're also seeing
renewed capital investment activity as projects become viable once
A combination of factors has created a more positive outlook for natural
gas. The crisis at Japan's Fukushima Daiichi nuclear power plant and
the loss of Libyan gas supply have established a "floor" for global gas
prices. In the short-term, additional liquefied natural gas will be
needed to replace the damaged nuclear generation, but the nuclear power
generation risks brought to light in Japan could also renew a push for
greater long-term use of natural gas for electricity generation in the
US and other countries. While the global natural gas outlook is
positive, Canada continues to face significant short-term challenges,
namely over-supply caused primarily by new sources of gas (such as
shale and unconventional gas). Canadian natural gas exports to the US
have been declining in recent years, and the International Energy
Agency forecasts this will continue.
Despite the strong rise in crude oil prices, refiners generally had a
good first quarter. Capacity tightened with the loss of some of Japan's
refining capability. At the same time, loss of high-quality Libyan
crude oil is creating supply problems, particularly for middle
distillates. Despite the higher cost of crude oil, average cracking
margins have moved above US$20/barrel. Refiners with access to the
relatively "undervalued" crude oils, like WTI and Canadian heavy,
generally saw stronger gains than those more exposed to global crude
oil markets. However, recent investments in additional capacity
continue to come online and could overwhelm demand growth, creating
weaker conditions for margins in the medium term.
The oilfield services segment, which is heavily dependent on upstream
spending, is encouraged by movement in offshore permitting. Since the
moratorium, the first seven deepwater permits were issued in the first
quarter of 2011 by the US Bureau of Ocean Energy Management, Regulation
Spending rose in 2008 by about 20%, but declined in 2009 by about 25%.
Spending increased by about 15 to 20% in 2010, and that pace is
expected to continue in 2011, bringing the industry back to 2008
The first quarter of 2011 marked the sixth strong quarter in a row, with
almost US$90 billion in transaction value. Notably, BP has returned as
a buyer after several quarters of primarily selling assets. In Canada,
the EnCana-Petro-China deal (still subject to review) is another prime
example. And there is still significant foreign inbound investment in
North American unconventional gas. Transaction activity, including
joint ventures, is expected to be similarly brisk throughout the
remainder of the year.
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