America today has enough affordable natural gas production to meet rising and changing sources of demand, and the United States also will be self-sufficient in oil in 5-10 years, according to oil and gas decision-makers who participated in a new Deloitte survey titled, “2014 Oil & Gas Survey: The Next Chapter of the Energy Renaissance.”
Compared with the Deloitte 2012 Oil & Gas Survey, there has been a 150% increase in the number of respondents who think the US is or will be self-sufficient in oil within the next five years (20%). The vast majority (90%) believe the US now has enough affordable domestic natural gas production to meet rising and changing sources of demand. The rosy production outlook may have contributed to a general sense of industry optimism, with 80% of respondents believing the US energy situation has improved versus five years ago and is headed in the right direction.
It is noteworthy that the survey was conducted in late October, prior to the nearly 15% decline in global crude prices, Republican sweep of the midterm elections and ban on hydraulic fracturing within the city limits of Denton, Texas.
“The recent shake-ups in prices, politics and regulations provide a compelling backdrop to evaluate the responses provided in the survey; as the industry tests the waters with respect to shale’s resilience during a cycle of low prices, only 15% of respondents at the time expressed that they were very or extremely concerned about a possible price collapse,” explained John England, vice chairman and US Oil & Gas leader for Deloitte LLP. “The industry is watching politics and prices closely especially when it comes to exports – an issue seen as crucial for continued success, with 83% of respondents indicating that exports are important for the long-term viability of unconventional oil and gas production in the US.”
Additional concerns weighing on the minds of industry executives were related to costs. Those who believed oil and gas capital spending would rise remained fairly constant with more than half (56%) expecting more capital spending in 2015. Expectations for mergers and acquisitions activity showed that half of the respondents expect an increase in M&A activity over the next year. As it pertains to downstream, over 80% of the respondents believe that profitability will strengthen or remain the same even as the industry continues to deliver very strong results. These responses related to downstream profitability and M&A activity will likely have become even more optimistic since the survey was conducted, in light of the oil price decline.
“The survey revealed continued positive momentum regarding the optimization of US shale. Shale development remains the lynchpin of the North American Energy Renaissance, and improving extraction technologies and methods as well as improved midstream infrastructure are fueling the growth of production,” added England.
Sixty-six percent of respondents believe that technological advancements in shale extraction have improved the economics of shale. Nearly half (44%) point to the smaller environmental footprint of shale as a significant improvement, while 39% believe fresh water recycling has improved.
Can new majority lighten regulatory load?
Despite growing optimism over shale innovation, potential federal regulations was the greatest concern among respondents (65%) – nearly double the next greatest concern, cost margins (38%). In fact, 48% of respondents were very or extremely concerned about new EPA regulations that could negatively impact the economics of shale, and this concern may continue to grow in a low-price environment. The responses indicate that regulations once established and known by the industry can be easily incorporated into standard operating procedures, however regulatory uncertainty can interfere with the ability of industry to plan and can potentially prevent new projects from moving forward.
“The impact of the midterm elections on slowing down potential federal regulations and acceleration of major infrastructure projects is still unclear. At the surface, Republican control of the legislative agenda would appear to amplify the sense of industry optimism, but there remain ample opportunities for continued gridlock since GOP’s margin of victory in the Senate does not leave them with a large enough majority to avert the threat of a Democratic filibuster that can keep legislation locked in procedural limbo,” continued England.
The Mexico factor
Although most respondents believe the Mexican energy reform will primarily benefit supermajors and large independents, 39% believe opening Mexico will strengthen US competitiveness. Two-thirds of respondents believe that the liberalization of Mexico’s oil and gas industry is at least somewhat critical to help North America achieve energy self-sufficiency.
“Whereas many in the industry have been focused on the oil and natural gas production onshore and offshore Mexico, one under-reported huge opportunity is in the build out of midstream infrastructure, which is a good opportunity in the short term, but exploration and production is a much larger opportunity in the longer term. Additionally, US natural gas production for the electrification of half of Mexico, which right now relies on oil-based products is another area of strategic consideration,” concluded Jorge Castilla, partner, Deloitte Consulting Mexico LLP. “From a capital spending and environmental perspective, this demand-side opportunity is arguably as large, or even larger, than the upstream potential.”
Deloitte conducted the survey in late October and canvassed more than 250 oil and gas professionals from a decision-making demographic: respondents were 48 years old on average and had an average of 20 years’ experience in the industry.