13 Things to Watch in Oil & Gas in 2013

So how does it stand with the oil and gas outlook in 2013?  As we enter the New Year we can expect 2013 to be rich with news flow for the oil and gas industry.  But what news should we seek out and what will be the main trends and prospects in 2013?  Here I identify 13 things to watch in 2013.  Each of them has the potential to have a significant impact on our industry in their own right.

Please feel free to leave a note on your thoughts for 2013 in the comments section.

1.  Unconventional oil in the U.S.:  the IEAs World Energy Outlook calls for surge in U.S. oil production, driven largely by developments in tight oil.  The IEA predicts that by 2020 the U.S. will become the world’s largest oil producer, and may even export by 2030.  The short term impact will be to depress U.S. oil prices – WTI is already trading at a discount to Brent and oil exports are not permitted by law.  Much of this new oil production carries associated gas which would put further pressure on already depressed U.S. gas prices.

2.  Oil supplies from Iraq:  as Iraq continues to revitalise its oil sector the focus will be on how close it gets to reaching its ambitious production target of 12mmbd by 2017.  Iraq benefits from huge resources and low production costs, but challenges remain.  Key news flow in 2013 includes:  (i)  the passage of the draft Hydrocarbon Law; (ii) relations between Baghdad and foreign investors, especially those seeking to also invest in the Kurdistan Region; and (iii)  exports from the Kurdistan Region, initially by truck and then pipeline, if agreement is reached with Turkey.

3.  The world economy:  oil demand is linked strongly to economic growth.  2012 saw lower growth in China, India and Brazil and uncertainty surrounds the handling of the “fiscal cliff” in the U.S. and the Euro crisis.  The impact of austerity measures in the U.S. and in the E.U. will negatively impact economic growth and therefore will be a drag on oil price.  Oil markets are likely to remain highly sensitive to economic growth indicators through 2013.

4.  Hydrates technology:  Japan has been leading studies since 1995 into production of natural gas from hydrate resources.  They are to do the world’s first production test from hydrates in 2013.  These hydrates are found in deep water and present a huge resource.  The gas hydrate resource is bigger than all the oil, gas and coal conventional reserves available today.

5.  A weakening U.S. dollar:  long-time observers of oil price note that as the U.S. dollar weakens the oil price (expressed in dollars per barrel) almost always goes up.  2012 saw relative dollar weakness and we watch to see how the U.S. government’s and law makers’ efforts to manage the fiscal cliff impact sentiment towards the dollar.

6.  Shale gas in China:  Shale gas could have a much bigger impact in China than in the U.S.  China’s resources are potentially much bigger than those in the U.S., according to U.S. Geological Survey.  The problem is that China needs outside help (such as that provided by current joint venture partners BP and Shell) to better understand the potential and to exploit the resource.  A further issue is that much of the shale gas is located in the desert and water supply for fracking operations is challenging.  If international technology is applied successfully, 2013 could see China make significant strides in realising its shale gas potential.

7.  Small cap. E&P stocks:  2012 was poor for small cap. E&P and investors will be seeking better in 2013.  Slowly the environment is turning more favourable and we have seen a return of risk appetite in the market.  Many analysts now talk of “The Great Rotation” which calls for a move back into equities generally.  The environment is ripe for E&P consolidation due to high growth in emerging markets and strategies to expand geographic reach, particularly by large companies seeking growth.  The North Sea is a case in point:  smaller companies may combine to provide the scale and resources (particularly cash) that projects in the region typically require.

8.  LNG as a transportation fuel:  Liquefied Natural Gas (LNG) has penetrated the transportation market much more deeply and much more quickly than anyone had anticipated.  The next push is in developing bunkering to allow for greater use of LNG as a fuel for shipping.  Bunkering could double global LNG consumption in 10 years.  The U.S. has just put down orders for two LNG fuelled container ships and is investigating new LNG bunkering facilities.  China’s Yellow River ships have already been converted to LNG, as have Shell’s ships on the Rhine.

9.  Super-major growth prospects:  many have noted for some time that the super-majors have been struggling to grow, with year on year production declines and reserves replacement at less than 100% typical.  Consequently, these companies have shown poor investment performance, with declining PE ratios and declining price to book values relative to the market.  There are also concerns about dividend growth.  The investment case for super-majors is not clear and this debate is set to become main stream in 2013.

10.  Increased refining capacity:  Asian refining capacity is ramping up – new capacity of 750mbd (mostly in China) is expected in early 2013 and a total of 2.4mmbd is expected to be added to global refining capacity by the end of 2013.  If this capacity translates into demand for oil then this will lead to significant support for oil prices.  Observers will be watching these projects carefully.

11. The Middle East and Geopolitics:  To date the focus of oil markets has been on the so-called Arab Spring, with supply concerns from countries such as Libya, Egypt and Syria.  While the Arab Spring is likely to remain at the forefront of traders’ minds in the short term, it’s Iran’s external relations that have the greatest potential to upset markets.  U.S. sanctions on Iran are set to intensify in 2013.  The clamour for clarification from Iran over its nuclear ambitions will grow and the country will come under increased scrutiny.  This issue is likely to rise quickly to the top of Barack Obama’s foreign policy agenda.

12.  Service companies’ business model:  capital spending is increasing and industry inflation is growing.  Such conditions usually mean higher margins for service companies, but this is not guaranteed.  Labour shortages, equipment over-supply, tighter regulations, aggressive customers and increasing input prices are applying downward pressure to profits.  Many service companies are turning to direct investments in oil and gas projects.  They hope that broadening their business model will improve growth prospects.

13.  Environment and renewables:  sustained up to now by government subsidies, growth in renewables will come under pressure as governments fight to reduce their debt.  As the government debt crises has escalated the environment has fallen down the political agenda.  The public too is seeking to cut back subsidies to renewables.  That is true in both the U.K. and Germany – both leaders on the environment.

What oil and gas themes will you be following in 2013?  Please leave your comments at the end of this article.

Comments

  1. Johan Bottema says:

    Public opinion on HSE through social media becomes more and more important to focus on.
    Growth of resource base ; getting people with competence in an expanding business that does not look attractive to young people.
    Expanding car market in far east. More cars produced in India / Japan / China then in rest of world. They need fuel.
    Track progression of green car technology and estimate future market demand.

  2. Anonymous says:

    Collaborate & Encourage strategic Suppliers, Contractors to be a Win-Win Partners by creating a climate of a long-term Service Level Agreements.
    Optimize the Inventory. Look for Lessons Learnt.
    Retain the Home Grown Talent by aligning them into main stream.
    Encourage concepts and Ideas such as 5 S and get the Best On-time and Quality Deliverables.
    Develop next generation Resources with a commitment of reforming and reachout at an early stages of near completion of their academics.

  3. Optimize the Inventory.
    Retain the Home Grown Talent by aligning them into main stream.
    Encourage & Engage the Workforce with concepts and Ideas such as 5 S and be assured of “On-time with Quality Deliverables”.
    Develop next generation Team with a commitment of reforming and reachout at an early stages of near completion of their academics.
    Collaborate & Encourage Suppliers, Contractors to be a Win-Win Partners by creating a climate for a long-term Service Level Agreements..

  4. Andrey Zolotavin says:

    Long term supply contracts are vital to market stability.
    Main struggle is to get experts , who will run and operate these resources. Already visible significant human force shortage, which can be partially mitigated by collaborative technologies

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