Ernst & Young Q1 2010 Oil and Gas Outlook

HOUSTON, Jan. 20 /PRNewswire/ -- Energy market sentiment remains relatively positive amid rising economic expectations, according to Ernst & Young's Americas Oil and Gas Center (www.ey.com/us/oilandgas). While global economic growth has turned positive, the recovery is however, slow and fragile.

Natural gas

Natural gas is abundant and reliable. As recent headlines have shown, companies are making strategic acquisitions, particularly for long-term North American unconventional gas. In addition, a recent shallow water discovery off the coast of Louisiana may pave the way for additional exploration in this area. However, the short-term fundamentals for gas remain relatively weak. Until very recently, strong supply, largely from growth in unconventional gas, particularly shale gas, in the face of sluggish demand and high storage levels, kept natural gas prices depressed. But demand and prices have picked up strongly with the colder weather.

"As Copenhagen demonstrated, environmental concerns and the focus on carbon management are clearly going to affect the future of this industry. In addition, there is still uncertainty around the future of energy policy," said Marcela Donadio, Ernst & Young LLP, Americas Oil and Gas Sector Leader. "This has opened the door for natural gas. Recent transactions indicate that gas development is seen as a long-term hedge against prospective carbon emission regulations."

Oil

In spite of the industry's largest demand decline in almost 30 years, oil demand is showing some signs of improvement, especially in developing economies. The developed economies are experiencing a more modest economic recovery. Additionally, there is some anticipation that the economic recovery will be an "oil-less" recovery, meaning that the developed economies will not return to previous high levels of fossil fuel consumption due to gains in energy efficiency, substitution and behavioral change.

Upward cost pressures are starting to relent, paving the way for growth, and potentially improving margins for producers.

Downstream (see data charts at: www.ey.com/US/en/Newsroom/News-releases/Ernst-and-Young-Q1-2010-oil-and-gas-outlook)

The downstream sector remains under pressure. Refiners are likely to continue to be squeezed by upward crude price pressures and very limited demand pressures. At the same time, refining expansions, planned during times of high demand growth and strong economics, are coming online – implying extremely weak margins over the next few years. Depressed light/heavy spreads are further punishing complex/sophisticated refiners.

Oilfield services

Expectations for oilfield services in 2010 are mixed. The global rig recovery began in the third quarter of last year, and those numbers continue to improve. While some downward pricing pressures remain for the oilfield services sector as a whole, Ernst & Young expects to see some early progress in the sub-sectors that deal with consumable goods, such as bits, pumps and tubular goods. Most companies slashed inventories for these consumables during the recession and are slowly rebuilding, which is a positive sign for the broader sector.

Offshore markets are mixed, with the ultra-deep markets staying strong and shallower jack-up markets still very weak. Survival in the sector may involve consolidation; therefore, additional mergers in the sector are expected in the next year or so. While there has been some slight improvement, the credit market constraints continue to be particularly important for medium-to-smaller companies.

Transactions

ExxonMobil's $41 billion acquisition of XTO and the "mega-merger," of Suncor and Petro-Canada resulted in an increase in total transaction value in 2009 compared to 2008. Excluding those deals, however, activity for the year was down substantially. Global financial markets remain depressed and credit is still relatively tight, although there are signs of loosening.

"In 2010, well funded and capitalized companies will have the opportunity to fill strategic needs. We will continue to see both "offensive" and "defensive" deals in the sector in the near-term, but as the economy and other oil and gas industry metrics improve, we will hopefully see a shift away from a defensive focus to a more offensive approach," said Jon McCarter, Ernst & Young LLP, Transaction Advisory Services Leader for Ernst & Young's Americas Oil & Gas Center.

Despite some uncertainty with regard to the strength of the economic recovery and the shape and impact of forth-coming policy decisions, the oil and gas industry should be able to sustain its recovery.

For more information, please join Ernst & Young's Oil and Gas Quarterly Insights Webcast on Thursday, January 21 at 11:30 a.m. EST.  To register, visit http://webcast.ey.com/thoughtcenter/ -under Industry Topics: Oil & gas

About Ernst & Young's Americas Oil & Gas Center

The oil and gas industry is faced with complex issues and constant change. Volatile prices, business consolidation, difficult operating environments, ever-increasing customer demand, continuously evolving regulatory environments and the reliability of supply all present significant challenges.  The Ernst & Young Americas Oil & Gas Center can draw upon a network of energy professionals in the Americas and around the world to work closely with clients to facilitate the development of coordinated approaches to managing risk, improving performance and increasing operational effectiveness. The Center works to anticipate market trends, identify the implications of and develop points of view on relevant industry issues. Our deep energy industry focus helps Ernst & Young make a difference.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 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.

SOURCE Ernst & Young LLP