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US oil output continues to rise, but becoming world's top producer is an uphill battle

According to Ernst & Young Oil & Gas Center's quarterly outlook

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HOUSTON, Jan. 28, 2013 /PRNewswire/ -- Topping the list of the big oil and gas stories in 2012 was the dramatic surge is US oil production. In 2013, the US will remain the largest source of new oil growth worldwide aided by the shale boom, but surpassing Saudi Arabia as the globe's top oil producer by 2020 will be a challenge.

The big turnaround of US oil production brought by new light tight oil developments was fully recognized in 2012, putting to rest the long-held notion that domestic oil production was in terminal decline. The rise in domestic oil output and the expectation that US oil development will continue to grow amid high oil prices prompted some market observers to predict the US could become the world's largest oil producer, upstaging Saudi Arabia, by 2020.   

But while US oil output growth is expected to continue to be strong, it's going to be hard to rival Saudi Arabia. US oil production comes at an extremely high cost. Some anticipated increases in domestic oil production may not materialize if crude prices decline below $80 a barrel.

"Whether the US will become the world's top producer is not the most important thing to focus on," said Marcela Donadio, Americas Oil and Gas Leader for the global Ernst & Young organization. "What matters is the dramatic reversal of the US energy fortunes and the need for the US to take significant steps to ensure oil supply growth continues. Coherent energy policy, access to resources, improved infrastructure and economic stability are all key to future success."

Oil
In 2013, the global oil supply-demand balance is expected to remain uneasy amid geopolitical tensions and economic uncertainty. Oil markets could face an ugly Arab winter given the unstable political environments in Syria, Egypt and Libya. Meanwhile, Iraqi production continues to grow, currently topping 3 million barrels of oil a day, taking the No. 2 spot among OPEC producers from Iran. The Iraqi increases put significant pressure on OPEC members to cut back their production in order to make room for Iraq's new output.

The long overdue, super-giant Kashagan project offshore Kazakhstan is expected to start production by mid-year and contribute to the rising global oil supplies from non-OPEC sources. In the US, despite a substantial build-out of the oil transportation infrastructure this year, bottlenecks in the Midwest are expected to continue the pressure on US and Canadian oil prices.

Gas
Last year, US natural gas prices averaged below $3/MMBtu for the first time since the late 1990s amid a glut of production, leaving many if not most natural gas producers in a bind. Small gas producers are expected to continue struggling this year with questions remaining about their ability to survive. Low natural gas prices, however, will continue driving a renaissance in the US petrochemical and manufacturing sectors as they lower feedstock costs. US natural gas exports will remain a controversial issue this year as supporters and adversaries escalate political tensions around how much exports could impact domestic natural gas prices.

Downstream
Profit margins for the US refining business were up across the board in 2012, with Midwest refineries having another stellar year thanks to access to cheaper WTI and Canadian crudes. While expected to diminish somewhat, the structural imbalances in the US Midcontinent are expected to continue this year, prolonging the advantage of regional refiners that have access to cheaper oil supplies.

Globally, refiners had a good year in 2012, but their performance was nowhere near the profitability seen in the US. Going forward, the consensus view is that the economics for refiners outside the US will remain challenging as more refining capacity comes online and plants continue to process relatively more expensive crudes. 

Oilfield services
Last year was not a bad year for oilfield services companies as rig counts held up and global upstream spending cautiously increased. The US rig count was slightly off as gas-directed drilling slowed and was not fully offset by new oil- and liquids-directed drilling. Oilfield service cost pressures slowed somewhat due to efficiency gains, while labor pressures rose. Offshore, there still are a large number of new-builds coming into the market, that are expected to keep a lid on day rates, utilization and profit margins.

Transactions
Annual transaction activity in terms of total reported deal value was up 20% in 2012 compared with a year earlier, topping $400 billion, the highest ever reported value. However, activity in terms of deal volume or the number of deals was down slightly for the year. A full $60 billion of the total transaction value involved Russia's oil giant Rosneft, which struck deals with AAR and BP for the TNK-BP joint venture. Asian outbound oil and gas acquisitions had another strong year in 2012, and the acquisition pace looks to continue in 2013.

About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

For more information, please visit www.ey.com.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. This news release has been issued by Ernst & Young LLP, a client-serving member firm of Ernst & Young Global Limited located in the US.

How Ernst & Young's Global Oil & Gas Center can help your business

The oil and gas industry is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. Ernst & Young's Global Oil & Gas Center supports over 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors.

The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key industry issues. With our deep industry focus, we can help your organization drive down costs and compete more effectively to achieve its potential. For more information, please visit www.ey.com/oilandgas.

Contact:
Erin Dillard
713-513-9503
Erin.Dillard@fleishman.com

SOURCE Ernst & Young



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