Energy Industry Trends Review

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Economic Oil supply Oil price 4 August 2011 September 2011 October 2011 Global gross domestic product (GDP) growth will moderate to around 4 percent through 2012, from more than 5 percent in 2010. Real GDP in the advanced economies is projected to expand at a slow pace of about 1.5 percent in 2011 and 2 percent in 2012, due to continuing financial market volatility and sovereign debt challenges for some EU countries. China’s GDP growth is forecast lower for 2012 at 9 percent, largely due to a decline in manufacturing and rising inflation. Japan’s GDP is forecast to recover in 2012 to show 2.3 percent growth. 5 Global oil supply rose by 1 million b/d to 89.3 million b/d in October 2011 from September, driven by recovering non-Organization of Petroleum Exporting Countries (OPEC) output. OPEC supply is well above year-ago levels, due to the political situation in Libya. A recovery in the non-OPEC output and some improvement in Libya and Angola supported the increase with a continued strong supply outlook for the Americas. 6 Oil demand Global oil demand is expected to rise to 89.2 million b/d in 2011 and reach 90.5 million b/d in 2012. Some of the demand boost stems from temporary factors such as seasonal heating oil tank filling, while oil-fired power generation in Japan is providing an upside to demand, as utilities switch to oil as well as gas for power generation. There are, however, increasing concerns of a slowdown in demand due to the economic situation in the Eurozone and the United States. 7 Gas supply Oil prices over the past quarter have been characterized by extreme volatility and futures price movements are currently showing 95 percent correlation with financial market movements since July. The Eurozone debt crisis and return of Libyan crude exports has led to some easing in crude prices, with some analysts now revising 2012 crude forecasts on the back of expected demand slowdowns. 8 Global gas production is expected to continue to increase and meet future demand with further exploration and development of unconventional gas notably in the United States, which is now progressing with its plans to export liquefied natural gas (LNG). Gas production is due to resume from Libya to Europe in fourth quarter 2011 which, along with high levels of gas in storage, indicate a very strong supply situation here. Gas supplies in Japan still remain tight. Gas demand Short-term gas demand continues to vary significantly by region, with significant demand still evident in Asia, notably Japan and Russia, but with Europe and North America still showing weaker demand due to milder autumn weather conditions and the continuing weak economic outlook. Longer-term demand for natural gas will continue to grow (from 3.1 trillion cubic meters [tcm] in 2009 to 4.75 tcm in 2035); an increase of 55 percent. 9 Gas price Refining M&A Gas prices for most markets are expected to increase next year over 2011, due to better demand. The US market remains an exception due to the continued robust supply situation and weak demand. Prices are under pressure in Europe as Libya gas exports are due to restart. LNG prices remain high in Asia, notably Japan, where they are almost at parity with oil prices. Global refinery crude runs were averaging 75.5 million b/d in third quarter 2011. Global refinery crude estimates for fourth quarter 2011 have been revised lower for most regions due to shutdowns and seasonal maintenance in Europe, disruptions to refinery operations and unscheduled stoppage in Asia as well as seasonal maintenance in the United States. Recent refining margins have showed some recovery in the third quarter due to an outage at Shell’s refinery in Singapore, which temporarily tightened the market. 10 Oil price and market volatility has led to a decline in oil and gas merger and acquisition (M&A) activity, now at its lowest level since 2008. North America continues to be the focus of the largest deals, with focus on the unconventional oil and gas sector still strong. A US pipeline deal for the Seaway pipeline will lead to a planned flow reversal and signals the end of the US Midwest supply glut and coming back into line with the WTI and Brent crude oil price differentials. Rig activity The rig market continues to look buoyant as the continued high oil price drives upstream activity. The number of oil rigs in the United States exceeded 2,000 as of the beginning of November 2011, and US drilling activity has finally surpassed pre-crisis highs in October. There is a trend of US producers starting to bring in-house some rig and key servicing, such as pressure pumping. 11 Companies 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. Oilfield services companies continue to show strong profits supported by high levels of upstream activity, though some independents are struggling with individual issues and exposure to poor US natural gas prices.
Economic outlook Key trend—Global GDP growth is expected to moderate to around 4 percent through 2012, from more than 5 percent in 2010. Real GDP growth in the advanced economies is projected to expand at a slow pace of only 1.5 percent in 2011 and 2 percent in 2012; the slowdown reflects crisis-hit advanced economies, notably the continuing sovereign debt and banking sector problems in the Eurozone and the continued uneven economic recovery in the United States. China’s GDP growth is forecast slightly lower for 2012 at 9 percent (compared to 9.5 percent forecast for 2011), largely due to a decline in contracting manufacturing and rising inflation. 12 The slowdown starting in 2011 reflects developments in crisis-hit advanced economies like the Eurozone, where sovereign debt and banking sector problems have proven more tenacious than expected. Real GDP growth in the major advanced economies is forecast to rise only modestly, from about three quarters of a percent in the first half of 2011 to about 1.5 percent in 2012, as the effects of temporary disturbances abate and the fundamental drivers of expansion slowly reassert themselves. Activity is expected to be more robust in a number of other advanced economies, especially in those with close ties to emerging Asia. 13 In emerging and developing economies, GDP growth is expected to fall from about 7 percent in the first half of 2011 to about 6 percent in 2012; this slowdown in growth is regarded to be mainly due to capacity constraints, policy tightening and slowing foreign demand. Inflationary pressures continue to concern emerging and developing economies with headline inflation expected to settle at about 6 percent in 2012, down from more than 7.5 percent in 2011, as energy and food prices stabilize, but demand pressures drive core inflation. Inflation is expected to stay high through the period 2011–2012 in the former Soviet Union, MENA (Middle East and North Africa) and Sub-Saharan Africa regions, 5 averaging 7 to 10 percent. Some economies are seeing noticeably higher inflation than their regional peers; for example, Argentina, India, Paraguay, Venezuela and Vietnam. 14 Observation The turmoil in the Eurozone continued this quarter, with the bailout of Greece now confirmed. With the prime ministers in Greece and Italy resigning and the centerright party winning the general election in Spain, the pace of developments continues to be dramatic. The Eurozone economy managed only modest growth in the third quarter of 2011, with a rebound in Germany and France failing to dispel fears of a looming recession across the 17-country region. However, it is evident that the third quarter has been much shielded from the financial market turbulence, with the real impact not expected to be fully felt until the next quarter and in early 2012. For example, the Organization for Economic Co-operation and Development (OECD) is also forecasting that the United Kingdom is entering a recession. It predicted that the UK economy would shrink by 0.1 percent this quarter and 0.6 percent in the first three months of 2012. As of the beginning of November, new Italian prime minister Mario Monti was ready to announce his government while new Greek prime minister Lucas Papademos will face a vote to give him a three-month mandate to implement the new austerity budget measures, and overall, the situation in Europe remains volatile. 15 The shift in focus of the Eurozone crisis has brought Italy and Spain more into the spotlight. Italy accounts for 17 percent of Eurozone GDP and 23 percent of total Eurozone debt. Italy’s gross debt as a percentage of its GDP is second only to Greece at around 121 percent, compared to 166 percent for Greece. 16 The situation in Spain continues to concern markets, as a more conservative government has won the general election there and is not expected to drive through the necessary reforms to prevent contagion there. What is surprising about the International Monetary Fund’s (IMF) 2012 forecasts is the view that the Japanese economy is estimated to grow by around 2.3 percent, (compared to growth estimates for the United States of between 1.5 and 2 percent, and the Eurozone by around 1 percent). This forecast signals that Japan is expected to start recovering from the current crisis, but also that the situation in the United States and the Eurozone is generally not expected to change. Japan is currently taking steps to make its oil supply chains more disasterresistant, due to lessons learned from serious fuel shortages in the wake of the March earthquake, when Japan’s domestic refining capacity at one point fell to about 2.7 million b/d (900,000 barrels short of daily demand). 17 This quarter also saw less positive growth news for China: with GDP growth forecast lower for 2012 at 9 percent (from 9.5 percent in 2010), largely due to a decline in manufacturing and rising inflation. Some banks like Standard Chartered Bank, for example, have revised their GDP growth forecasts for China. Standard Chartered Bank has lowered its China GDP forecast for 2012 from 10 to 8.5 percent, saying, “Inflation has remained more elevated and domestic growth momentum has slowed more gradually in 2011 than we forecast. This has delayed the turn in policy—China’s monetary policy was not loosened in third quarter 2011 as we expected … momentum has clearly been lost in manufacturing growth, and CPI (consumer price index) inflation has now peaked, we believe.” 18 Some analysts are forecasting more of a “hard” landing for China, not from its economic slowdown but, rather, from some more structural factors such as inflexible exchange rates, high property prices and pure demographics, which will see the influx of rural labor into the cities fall off and increasing social inequality, leading to potential rapid wage inflation and social unrest. 19
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Page 20: About Accenture Accenture is a glob

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