Energy Industry Trends Review

More documents

Recommendations

Info

Rig activity Key trend—The rig market continues to look buoyant as the continued high oil price drives upstream activity. According to data from Baker Hughes, during the third quarter of 2011, the average number of rigs under operation generally witnessed steady growth (though there were declines in some markets) as compared to the same period in 2010; North America (17 percent), Europe (33 percent), Middle East (6 percent), Africa (-15 percent), Latin America (13 percent), Asia-Pacific (-10 percent). The number of oil rigs in the US exceeded 2,000 as of the beginning of November 2011 and drilling activity has finally surpassed pre-crisis lows (a year ago the rig count stood at 1,668 rigs). Gas rig activity in the United States, however, has been starting to slow over recent weeks. The number of rigs drilling for natural gas in the United States fell to 865, toward the end of November 2011, the lowest level since January 2010, down from highs of 936 just a few weeks ago. 72 Globally deepwater and ultra-deepwater rig availability remains tight, with day rates for deepwater and ultra-deepwater rigs increasing and contracts becoming longer, as the market tightens. Deepwater drilling activity continues to recover in the US Gulf of Mexico, where a hurricane-free season allowed for a continuation of the post- Macondo recovery in production, with the pace of new well completions accelerating. So far this year, the U.S. Bureau of Ocean <strong>Energy</strong> Management, Regulation and Enforcement has given approval to more than 40 drilling permits, with 13 being issued in October—nearly three times the average seen so far this year; awards are now approaching historical levels of 15 to 20 permits per month. 73 There continues to be a steady rise in orders for rigs as drillers replace old fleets and step up exploration and production activities to take advantage of high global crude oil prices. Analysts expect the world’s two largest rig builders by market share (Singapore based Keppel Corporation and Sembcorp Industries Ltd.) to continue to receive strong orders for rigs in 2011, which is likely to boost their profits over next two to three years. Both Keppel Corp. and Sembcorp 14 Marine have seen their share prices rise on the back of better-than-expected US retail sales and hopes that Europe will act soon to resolve its debt crisis. The stocks of the rig builders generally have been recovering from a recent sell-down due to concerns about a possible slowdown in orders amid a weakening global economy as oil prices stay high and there is strong demand from countries like Brazil. Sembcorp management is reportedly seeing higher enquiries for semi-submersible rigs and remains upbeat on new order intake, especially on potential rig orders from Brazil. 74 Observation As the rig market continues to tighten and rig rates rise, the outlook for the services industry and rig suppliers in particular is much improved. The industry is showing high rig utilization in most markets, with rig rates rising as demand increases. As demand for rigs and oilfield services increases in high growth markets, it is fair to say that a trend is emerging of some companies either buying rigs or increasingly looking to bring key services in-house. This is particularly true of the US onshore oil and gas market, where producers are buying onshore drilling rigs and related equipment to keep their costs in check, rather than rent from the market at increased prices amid strong demand for work in shale fields. While prices to rent rigs and costs of operating them are increasing, some analysts are noting that the rise in prices for buying a rig have risen more slowly, meaning buying a rig is more cost efficient. With a 15 to 20 percent increase in the cost of land-based drilling, North America had the highest cost escalation in the past 12 months (according to some analysts), meaning that in this environment, company can recoup the $20 million or so cost of a rig within two years. Some smaller US producers are also bringing key services like pressure pumping in-house to better control costs and access to services as oil and gas fracking activity continues to increase. 75 Companies Key trend—Most of the major oil companies have continued to generate high profits in the third quarter owing to higher oil prices—though declining production and rising costs are still much in evidence. Most of the majors reported a fall in production with new field start-ups failing to match natural declines in portfolios and significant portfolio rationalization still taking place. This quarter also saw the continued effect of unforeseen situations such as the conflict in Libya and delays in getting back to work in the Gulf of Mexico. While industry costs fell in 2009 and 2010 due to the global economic crisis, the trend appears to be on the turn, with some analysts expecting industry cost rises of 6 percent for 2012. 76 Higher oil and gas prices once again contributed to higher profits for the integrated oil majors during the third quarter of 2011, even though asset sales, geopolitical problems and maintenance turnarounds led to another decline in production. Each of the majors recorded production declines for the quarter, ranging from a less than 1 percent decline at Total to 10 percent-plus declines at BP and ConocoPhillips. Total’s relatively small production decline was due in part to increased output at Russian gas producer Novatek, in which Total took an equity stake earlier this year. BP’s third-quarter production fell 12 percent to 3.32 million barrels of oil equivalent (boe)/d, largely on the back of major turnarounds and production declines in the Gulf of Mexico. Conoco’s sharp production decline came from a variety of sources, shut-ins in Libya, asset sales and reduced output at the Peng Lai 19-3 field offshore China following an oil spill. 77 Profits were also strong at the larger oilfield services companies, that continue to benefit from the upturn in upstream activity, as well as national oil companies (NOCs) generally. However, Brazil’s NOC, Petrobras, actually reported a drop in profits this quarter of 26 percent as government price controls prevented it from capitalizing on high crude prices and its fuel costs increased. Petrobras’ profit was curbed by price controls for gasoline and diesel while a weaker local currency increased imported fuel costs. (Petrobras’ gasoline imports quadrupled this year to about 30,000 b/d.) 78
Observation Analysts are starting to look beyond the bumper profits many of the oil companies announced on the back of higher oil prices, and are now looking for evidence of how the oil majors in particular, can maintain income growth if production is falling. After six or seven quarters of strong profit growth driven by rising oil prices, it is looking doubtful as to whether companies can continue to increase earnings next year and beyond, if oil prices start to plateau or fall. Challenges for oil companies are not only limited to the upstream part of the business. While downstream profits were also strong this quarter, this environment continues to be difficult. Companies are dealing with stagnating demand in OECD markets and refining overcapacity with more new refining capacity being added especially in the Middle East and Asia. (There is significant new refining capacity coming on-stream between 2015–2017 and continued structural overcapacity, which is likely to result in continued massive closures, particularly in OECD markets.) Globally, according to data from the IEA, crude distillation capacity is expected to increase by 9.6 million b/d between 2010–2016, of which 95 percent will be located in non- OECD nations like India and China. (China alone is estimated to account for around 40 percent of oil demand growth between 2010 and 2016.) 79 The growth outlook for downstream activities in Asia is also not without its concerns. Some analysts are predicting that Asian refiners could earn as much as 20 percent less in 2012 from processing a barrel of crude into product than this year’s average, as they get squeezed between new additions to capacity and expectations of slowing global demand growth. Refiners who do not have more complex refineries could be forced to cut production with those refiners planning expansions and facing delays due to declining demand. Most refiners continue to look to China for positive news, and more specifically, to China’s gasoil demand which is increasingly driving higher margins for refiners. 80 15 Generally in the downstream sector, oil companies are increasingly focusing on what they can do to reduce costs, improve process efficiencies and how they can use technology to better manage refining portfolios. Some are choosing to deintegrate their operations, like Marathon or ConocoPhillips, and are spinning off their downstream operations into a separate company. Others, like Total, are reorganizing their downstream operations into a more integrated operation, effectively merging its refining and petrochemicals operations together. For smaller refiners, that do not have integrated operations, one solution might be to see how they can mimic what Total is doing by completely integrating refining and petrochemicals and looking for partnerships with petrochemical companies, to offset declining refining margins or to see how they can best position themselves to access high growth markets like China. 81 Demand for gasoil/diesel in China looks strong in both the short and long term. Refiners in China in October 2011 bought about 320,000 tonnes of diesel to cover domestic shortages of diesel (used for power generation during times of shortage). High Chinese demand for diesel is likely to continue to support refinery margins for producing diesel into the early months of 2012, according to industry analysts. 82 Longer term, gasoil demand in China is expected to increase to around 4.5 million b/d by early 2016, and it is likely to continue to underpin refining margins over this period. 83
Page 1 and 2: Energy Industry Trends Review Issue
Page 4 and 5: Economic Oil supply Oil price 4 Aug
Page 6 and 7: Oil supply Key trend—Global oil s
Page 8 and 9: October 2011 was also the first mon
Page 10 and 11: Libya is expected to restart gas ex
Page 12 and 13: European crude refining runs estima
Page 17 and 18: Endnotes 1 “Medium Term Oil and G
Page 20: About Accenture Accenture is a glob

Energy Industry Trends Review

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?