CALGARY, Dec. 18 /CNW/ - Increasing global demand for energy and
subsequent high prices have created a robust environment for oil and gas
producers. At the same time, high prices have had an adverse effect on the
downstream sector as the cost of raw materials impacted refining margins.
According to Ernst & Young's Global Oil & Gas Center, demand is expected
to drive industry transformation for 2008 in the following ways:
- Increased activity on the part of National Oil Companies;
- Unprecedented competition for reserves;
- Increased emphasis on enterprise-wide risk management;
- High-volume and high-priced transaction activity; and
- Expanded use of International Financial Reporting Standards.
Ernst & Young's Global Oil & Gas Center works with companies throughout
the world, helping them succeed in the ever-evolving oil and gas business.
Drawing from industry experience gained from working with our oil and gas
clients, the center's practitioners offer the following assessment of the oil
and gas industry in the year ahead.
The cost of exploration and production (E&P) continues to rise sharply.
Heightened resource nationalism and geopolitical issues are increasing costs
and decreasing access to reserves for International Oil Companies. Investment
opportunities are becoming less lucrative, and returns are decreasing. On a
positive note, access restrictions may be lifted in the Gulf of Mexico,
creating new opportunities for upstream activity. Ernst & Young anticipates
that companies will take a slower, more cautious approach to upstream spending
New midstream opportunities are emerging in support of the Canadian oil
sands, Rocky Mountain natural gas, Barnett Shale, and liquefied natural gas
(LNG). New technologies, like carbon sequestration, may prompt major changes
in the way midstream companies conduct business in the coming year.
This segment of the industry continues to walk a tight rope, balancing
capacity and margins. Global refining capacity continues to be tight, and
margins are expected to remain volatile. Ernst & Young expects that margin
averages may fall from recent highs, but remain above longer-term historical
levels until new capacity is added. Upgrades later this decade should
alleviate the strain.
Enterprise Risk Management
Despite healthy revenues in recent years, energy companies face a growing
number of business risks ranging from uncertain energy and environmental
policies, to talent shortages, and supply interruptions. In years past, these
risks were often managed independently, but there is a growing recognition of
the value to capturing and weighing all risks across the enterprise and
understanding the relationships they may have to each other and the combined
impact on the business.
Investors seeking attractive growth and high margin acquisition
opportunities will look to the oil and gas industry's significant, sustained,
and growing cash flows. Just as outside investors are investing in oil and
gas, large oil and gas companies flush with cash will look for opportunities
to enhance technology capabilities and reserve bases through acquisition.
Smaller E&P companies will be of particular interest to this investor.
In the United States, Master Limited Partnerships (MLPs) have emerged as
the dominant deal structure in oil and gas and will gain more ground in the
coming year, according to a recent Ernst & Young survey. The MLP structure,
however, is creating companies with unbalanced portfolios as specific areas or
divisions of a company are bought up and developed as stand-alone entities.
Private Equity continues to have a keen interest in energy, with a particular
focus in refining.
International Financial Reporting Standards (IFRS)
European Union countries have all adopted IRFS, almost 100 other
countries require or allow the use of IFRS, and other countries - including
the United States - are moving to do the same. If implemented by the US
Securities and Exchange Commission, IFRS could transform global financial
operations. IFRS standards, which could go into effect as early as the first
half of 2008, would streamline financial operations by creating one set of
international accounting rules. IFRS could be a watershed event for global oil
and gas companies.
Ernst & Young is constantly evaluating and assessing oil and gas industry
trends in order to better determine the impact for their clients. The oil and
gas industry is subject to many unpredictable factors. While forecasts can be
useful for planning and strategy, hindsight is the only true measure of
About Ernst & Young
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