Challenges in store for the energy industry

As the energy industry lurches from one crisis to another, producers have encountered never-ending problems. And few firm resolutions appear to be on the horizon

In the past three years, oil producers have grappled with one industry-changing crisis after another.
It started in 2008 with the record run-up in crude prices to US$147 per barrel in July that year, followed by the most sustained fall in prices in the history of the industry as fuel demand dried up with the onset of the global downturn.
At the same time, capital for new energy projects became much more difficult to raise because of a combination of constrained cash flow and the world financial crisis that triggered the economic collapse.
Widespread fears that oil price volatility would continue to make life difficult for the world's energy producers proved unfounded this year.
Oil and gas companies have instead found themselves facing other fundamental difficulties and, on the flip side, substantial new opportunities, that in hindsight may have even more far-reaching consequences for the industry and the balance of global oil supply and demand.
Last week in London, oil and financial experts gathered from around the world to discuss the outstanding trends and developments that continue to test oil and gas producers.
Here are four main "game-changers" they identified.

Seismic shift changes industry’s dynamics

BP's huge oil spill in the Gulf of Mexico occurred just as international oil companies were turning to large deepwater oil reservoirs as their most promising option for boosting output and reserves.
Until recent years, such deposits were off-limits because the precision technology for positioning and aligning the various components needed to drill a well beneath more than a kilometre of water from a wave-tossed floating platform was not sufficiently developed.
Further technical challenges include controlling the stream of hot crude that would gush to the surface when suddenly released from the high-pressure environment of a reservoir trapped deep underground.
It would also have to pass through the contrasting low-temperature zone of the deep marine environment.
The rush by oil companies to conquer this new frontier inevitably carried the risk of a major accident, which finally occurred on April 20 this year at BP's Macondo oil well.
It unleashed the biggest oil spill in US history before the runaway well was finally brought under control three months later.
Now governments and regulators, especially in the US, are intent on catching up with the industry.
For its part, the industry is scared of the potential for overcompensation with measures that could again put deepwater reservoirs out of reach to most producers if the new direct and indirect costs of regulatory compliance become excessive.
"The world has changed and it's not just about the Gulf of Mexico. There's a new paradigm," Jim Pierce, the managing director and chairman, energy and infrastructure practices, of the insurance broker Marsh, told the Oil & Money Conference in London last week.
"There is now an increased risk in doing business in developed nations," he observed.
"There is political risk in doing business in every country, and the US is no exception. Oil companies must factor in government actions following an event."
Something else likely to change fundamentally in the post-Macondo environment is the relationship between oil producers and oilfield services companies.
"I think there will be a lot more formality and accountability in the relationship between the oil companies and services companies, which also means they will have to work more closely together," said Andrew Gould, the chairman and chief executive of the large oilfield services group Schlumberger, based in the US.
"The biggest effect on cost will be time."

The shale gas revolution

The surge of gas production from US shale formations in the past three years has been termed a "revolution" by industry insiders.
It demonstrated the potential for steady and determined advances in drilling technology to unleash resources that could not previously be tapped, on a scale that has rocked world markets.
In the space of a few years, the US has gone from being one of the world's biggest gas importers to self-sufficiency in the fuel that powers much of its industry and power sector. It could even become a net exporter of gas, delegates at the Oil & Money conference heard last week.
The big question now is whether the US shale gas success story can be replicated in other parts of the world, especially in Europe, China and India, three large markets with indigenous shale gas potential that are currently short of gas.
There are plenty of sceptics, particularly regarding Europe, where high population densities and environmental activism pose severe challenges to shale gas development. Nonetheless, some gas producers, as well as governments in certain needy European states, are determined to move ahead.
"I firmly believe it's going to work in Europe," said Wolf Regener, the president and chief executive of BNK Petroleum, a US company that is pursuing shale gas projects in Germany and Poland. "There will be bumps along the way, but I don't think they are insurmountable."
BNK has identified a number of gas prospects in Europe that resemble US shale beds that have been developed successfully, he said.
Oksana Gryshchenko, an adviser to Ukraine's ministry of fuel and energy, said the eastern European country, which currently depends heavily on gas imports from neighbouring Russia, was "open for business" to any company interested in extracting gas from its shale deposits.
"The position of Ukraine is we cannot afford to wait for another 10 to 20 years to see how shale gas development plays out. We would like companies to actually start drilling to see what happens," she said. "The Ukraine government is willing to provide tax incentives to encourage this."

Iraq: the last conventional outpost on land

The OPEC founder is a potential game changer, both for the global oil industry and world energy markets, because it is the last major repository of conventional onshore oil reserves that are relatively unexploited.
The obvious reason for that is Iraq's post-1970s history, a litany of war and misrule that has gutted its infrastructure and economy. Now the international spotlight is focused on Iraq's reconstruction efforts, particularly its potential to emerge as a powerhouse oil exporter, rivalling Saudi Arabia, Russia and Iran.
In time, that should be possible. But an expert panel addressing the Oil & Money Conference expressed the unanimous view that the Iraqi oil ministry's ambitious oil development target was wishful thinking.
The official plan calls for Iraq to nearly quintuple its current oil output capacity of about 2.5 million barrels per day (bpd) to 12 million bpd by 2017. Abdalla el Badri, the secretary general of OPEC who is supportive of Iraq's redevelopment ambitions, nevertheless agreed that it could not immediately surmount the obstacles standing in the way of a significant rise in its oil output and export capacity.
That would not happen until 2014 at the earliest, he said in Vienna on Friday.

Biggest shift in oil demand is from West to East

The West-to-East shift in oil demand and economic growth is perhaps the most profound change of all for oil companies and oil-exporting countries. It has major implications for global trading patterns and international political relations.
One aspect of the global oil and gas industry in flux as a result is the relationship between international oil companies (IOCs) and the national oil companies (NOCs) that represent not only the interests of the world's major resource holders, many of them located in the Gulf region, but also increasingly the largest Asian energy consumers such as China and India.
IOCs still play "a very important role from a technical point of view", because they operate more than half the world's oil projects, Claudio Descalzi, the chief operating officer for exploration and production of Italy's Eni, told the Oil & Money Conference. But oil output by the major western-based companies is still at about the same level it was seven years ago. "It's a clear signal that the model of co-operation [between IOCs and resource holders] is not working any more.
"Reserves are not the problem," he said. "The real issue is can we co-operate in an effective way with the host countries?"