Seismic Shifts The Outlook For Oil and Gas Industry 2013

SEISMIC
SHIFTS
The outlook for the
oil and gas industry
in 2013
Oil & Gas
www.gl-nobledenton.com
2 GL Noble Denton www.gl-nobledenton.com
SEISMIC SHIFTS: THE OUTLOOK FOR THE OIL AND GAS INDUSTRY IN 2013
Seismic Shifts: The outlook for the oil and gas industry
in 2013 is the third in a series of an annual industry
benchmarks commissioned by GL Noble Denton, the
independent technical advisor to the sector. It provides a
timely snapshot of industry sentiment, confdence, priorities
and fears, based on a wide-ranging survey of more than
400 senior industry professionals and executives, along
with numerous in-depth interviews with a range of experts,
business leaders and analysts. The research was carried
out on behalf of GL Noble Denton by Longitude Research.
The fndings and views expressed within the report do not
necessarily refect the views of GL Noble Denton.
RICHARD BAILEY
Executive
Vice President,
Asia Pacifc
GL Noble Denton
RENATO BERTAN
CEO Barria Energia
MOSS DAEMI
Executive Vice
President, Middle
East and Africa
GL Noble Denton
MIKE DALY
Executive
Vice President,
Exploration BP
ANDY INGLIS
CEO, Integrated
Energy Services
Petrofac
GARY INGRAM
Vice President,
Business
development
Talisman Energy
MAJID JAFAR
CEO Crescent
Petroleum
COLIN JOHNSTON
Vice President,
Commercial
Engineering
Helix ESG
MARTIN LAYFIELD
Vice President,
Gas Consulting
GL Noble Denton
JUSTIN LOWE
Oil and Gas
Specialist
PA Consulting
CHARLES LUCAS-
CLEMENTS
Director of Strategy
Xcite Energy
GREG MATHER
Deepwater
Consultant
Mather Consultants
VIKRAM MEHTA
Former Chairman
Shell Group, India
BRUCE MISAMORE
Former CFO
Yukos Oil Company
THIERRY PILENKO
Chairman and CEO
Technip
STEVE ROBERTSON,
Director
Douglas-Westwood
PHILIPPE SAUQUET
CEO, Gas & Power
Total
PAUL SHRIEVE
Senior Vice
President, Technical
Assurance
GL Noble Denton
ARTHUR STODDART
Executive Vice
President, Americas
GL Noble Denton
We would like to extend our thanks to all participants, and in particular to the following interviewees
for sharing their time and insights with us (listed alphabetically, by surname):
During November and December 2012, we surveyed 428
senior professionals and executives across the global oil
and gas sector. About two-thirds (63%) operate in both oil
and gas, while the rest focus primarily on either oil or gas.
The companies surveyed spanned a range of sizes: 28%
have annual revenue of US$500m or less, while 19% have
annual revenue in excess of US$10bn. Most respondents
companies (46%) are publicly listed, with the remainder
either privately held (36%), state-owned (12%) or operating
as a joint venture. Respondents represent a range of
functions within the industry, with nearly four in ten (37%)
at directorial level or higher.
ABOUT THE RESEARCH
428
professionals and
executives across
the global oil and
gas sector.
63%
operate in both
oil and gas.
28%
have annual
revenue of
US$500m or less.
19%
have annual
revenue in excess
of US$10bn.
46%
of companies
surveyed are
publicly listed.
37%
of people
surveyed are at
directorial level
or higher.
www.gl-nobledenton.com 3 GL Noble Denton
4 Executive Summary
6 The outlook for 2013: Confdence in
the face of uncertainty
9 Investment trends: Rising pressures
The six best investment destinations,
and the six toughest
Tectonic shifts: the changing global
fuel picture
16 Innovation and the rise of technology
2013 technology snapshot
20 Regulation and other risks
Resource nationalism the
eternal threat
CONTENTS
The oil and gas industry has changed almost beyond recognition in recent
years. As global energy demands continue rising and easy oil becomes
less readily available, weve been compelled to explore new frontiers
and pioneer technologies that unlock resources considered completely
inaccessible just a decade ago.
In 2013, the industry faces a new reality. Increasingly challenging operating environments
mean companies face tighter margins, greater overheads, higher risks, more rigorous
regulation and tougher contract terms in a sector that is fast approaching a skills meltdown.
But, despite all these diffculties, there is much for oil and gas professionals to be optimistic
about. The dash for gas has gripped the sector; strong oil prices are propelling us through
economic uncertainty; and spending on innovation is set to increase.
Seismic Shifts serves to make sense of the new oil and gas landscape that is emerging in
2013. For the third year running, this research seeks to chart the priorities and concerns of
more than 400 senior professionals and executives across the sector; many of whom are
GL Noble Dentons clients. Its fndings reveal beyond doubt that companies will have to think
smarter to achieve the levels of safety, integrity and performance that will be required to breed
success in 2013. We look forward to playing a role in that and developing our services to meet
the industrys evolving needs.
Pekka Paasivaara
Member of the Executive Board, GL Group
FOREWORD
Robust confdence in the industrys
long-term prospects outweighs
immediate concerns over demand.
Notwithstanding various worries,
our research reveals that the industry
remains optimistic about the year
ahead. Nearly nine in ten (89%) of
those surveyed said they remained
confdent about the industrys prospects
in 2013, up from 82% in 2012 and
76% in 2011. The outlook is hardly
trouble-free, but this confdence
indicates that the industry will continue
to invest during the year ahead. About
half (51%) of frms expect to increase
their overall capital investment this year,
while just 8% plan to cut back. Overall,
in the search for growth, respondents
indicate they will rely more on organic
growth (cited by 41% overall) and
sharply less on expansion via mergers
and acquisitions (14%, down from 35%
in 2012).
Deep economic uncertainty tops
the list of worries for 2013, with
forecasts of reduced growth
increasingly becoming long-term
expectations. With various economic
forecasters, such as the Organisation
for Economic Co-operation and
Development (OECD), cutting growth
forecasts for the year ahead, the clearest
picture is one of deep uncertainty over
the medium term. This is especially true
within Europe, where deep concern
As we begin 2013, it is already clear that seismic shifts are underway within the global oil
and gas industry. Topping the list is the rapidly increasing oil and gas production within the
US, with imports expected to fall to their lowest level in a quarter-century by next year, while
deep uncertainty remains over the prospects for the global economy. All this has widespread
ramifcations for the industry, as our research highlights. The key fndings are as follows:
remains over the outlook for the euro
zone. Given this, 46% of respondents
fagged economic uncertainty as the
principal force likely to affect the sector
in 2013. Of all regions, such worries
are particularly acute within Asia
Pacifc, where six in ten of those polled
expressed concern.
Low natural-gas prices are a clear
cause for concern, even as bullish
oil-price forecasts help to propel
the industry. Owing to the change
in US production, the dynamics of the
global gas market have fundamentally
shifted. More than one-quarter
(27%) of those polled think that
pricing challenges, including low gas
prices, will be a key force affecting
the sector, the fourth-greatest worry
overall. This is especially the case given
clear investment into both natural
and unconventional gas, which are,
respectively, the frst- and third-largest
priorities for investment for the year
ahead. In contrast, despite worries
over demand uncertainty, oil prices are
expected to remain robust during 2013
the industry collectively forecasts a
price of a little over US$100 per barrel
given that extraction is more technically
challenging each year.
Iran and Nigeria are seen as the
toughest investment destinations
for 2013, while the US is now
regarded as the most favourable.
Given the persistent risk of military
intervention, industry professionals rate
Iran as the joint-toughest country for
investment in 2013, along with Nigeria,
where uncertainty over an upcoming
petroleum bill, persistent corruption and
security risks all weigh on investors. By
contrast, the US tops the list of most
attractive locations, ahead of Brazil in
second place. More generally, 42% of
respondents point to North America
as the region they think will hold the
EXECUTIVE SUMMARY
2013

8
9
%
20
1
2

8
2
% 20
1
1

7
6
%
HOW
CONFIDENT ARE
YOU ABOUT THE OIL
AND GAS SECTOR
IN THE COMING
YEAR?
greatest growth opportunities. Latin
America has surged in popularity as an
investment destination, rising from ffth
place in 2011 to second overall for 2013.
Long-running fears over skills
shortages will become an acute
barrier to growth in 2013, further
adding to cost pressures. Concerns
about the industrys shortage of skilled
labour were high enough to make skills
shortages a top-fve issue among those
polled in 2011. Since then, worries have
risen steadily: in this year's research,
55% of respondents cite skills shortages
as their number-one barrier to growth,
well ahead of the 38% who pointed
to increased costs, in second place. The
only exception was in Asia Pacifc, where
the industry is more worried about costs
than skills shortages, in part owing to
the regions demographic advantage
over Europe and North America.
The regulatory burden remains a
costly impediment to growth, even
as many oil and gas leaders adjust
to the new normal on industry
oversight. The fears of 2010s Macondo
oil spill have yet to fully fade: nearly half
(46%) of those polled believe that the
consequences are still rippling through
the industry. About half (49%) expect
to increase spending on compliance
in 2013 the single highest area. This
is most evident in North America,
where nearly six in ten (59%) expect
to increase spending, nearly twice the
rate of Europe (32%). This comes with
a degree of frustration: three in ten
agree that many new regulations have
been rushed into place, without being
properly thought through (rising to 37%
in North America). Just one in ten think
otherwise. Yet there are also signs that
the industry is adjusting to the new
reality: 57% say that they have taken
lessons from the spill and changed their
operating practices as a result.
Contract negotiations will get
tougher during 2013, with greater
risks for contractors. Ever since a new
breed of internationalising national
oil companies (NOCs) was identifed
in the 2011 edition of this research,
the dynamics between governments,
state-led oil majors and international
oil companies (IOCs) have proven
increasingly testy. The Arab Spring has
further challenged this, with newly
empowered governments keen to strike
a hard bargain with foreign majors.
Pricing and contract terms will get
tougher in 2013 according to 47% of
respondents. Even more (49%) think
that contractors will bear higher overall
risks from projects.
Technology-led innovation is
increasingly important to increased
performance. As projects become
more technically challenging, and
as skills gaps persist, technology will
be increasingly called upon to plug
the gaps, according to the research.
Nearly one in ten frms (9%) say that
innovation-led organic growth will be
their main strategy for expansion in
2013, while 37% expect to increase
their spending in research and
development (R&D), and innovation.
The fears of 2010s Macondo oil spill have yet to fully
fade: nearly half (46%) of those polled believe that the
consequences are still rippling through the industry. About
half (49%) expect to increase spending on compliance in
2013 the single highest area
The global economys uncertain outlook may be weighing on
business more widely, but senior oil and gas professionals from
around the world remain confdent about their sectors prospects
for 2013. Despite a heightened risk profle, increasingly tough
regulation and fscal terms, weak gas prices, and ever more
challenging exploration frontiers, our research fnds confdence to
have risen since 2012. This marks the third year-on-year increase
in this research series, as worries over the 2010 Macondo disaster
continue to fade even if the implications continue to unfold.
Overall, nearly nine in ten (89%) of the industry professionals
polled for this study are confdent about 2013 overall, up from
76% in 2011 and 82% in 2012.
> How confdent are
you about the overall
outlook for the oil and
gas industry during
2013, as well as the
prospects for your
business, and likelihood
of hitting revenue and
proft targets?
M HIGHLY CONFIDENT OR
SOMEWHAT CONFIDENT
M NEITHER CONFIDENT NOR
PESSIMISTIC
M SOMEWHAT PESSIMISTIC
M HIGHLY PESSIMISTIC
M DONT KNOW
OVERALL
CONFIDENCE
ABOUT THE OIL
AND GAS SECTOR
2013
CONFIDENCE
ABOUT THE
OVERALL PROSPECTS
FOR YOUR BUSINESS
2013
CONFIDENCE
ABOUT
HITTING YOUR
REVENUE TARGETS
2013
CONFIDENCE
ABOUT ACHIEVING
PROFIT TARGETS
2013
CONFIDENCE
ABOUT THE
OVERALL PROSPECTS
FOR YOUR BUSINESS
2012
CONFIDENCE
ABOUT THE
OVERALL PROSPECTS
FOR YOUR BUSINESS
2011
THE OUTLOOK FOR 2013:
CONFIDENCE IN THE FACE
OF UNCERTAINTY
KEY
FINDINGS
Even with greater uncertainty
over the global economy,
confdence in the global oil and
gas industry continues to rise.
While gas prices are expected
to remain depressed, the
industry is bullish on oil prices
remaining above US$100.
D
espite this overall confdence in the
industry, oil and gas professionals do not
expect 2013 to be easy going. Confdence
about achieving revenue and proft targets is
far lower than overall business sentiment about
the industry in 2013, at 72%, but still accurately
refects an industry that is broadly positive about
its prospects. As Thierry Pilenko, Chairman
and CEO of Technip, an oil and gas contractor,
explains, the breadth of opportunities outweighs
the near-term macroeconomic concerns: As
far as the industry is concerned, the overall
investment climate is well-oriented for 2013. The
industry is progressively moving to new frontiers,
such as deeper water, pre-salt felds, foating LNG,
harsher environments like the Arctic, and new
areas like East Africa, as frms seek to renew their
reserves and reach their production targets.
Overall, what is apparent from the research is that
the oil and gas industry is likely to look towards
pursuing organic growth in 2013, rather than
mergers and acquisitions (M&A). About one in
three (35%) said their company would rely more
on M&A for growth in 2012; this year, just 14%
think the same. Instead, the biggest proportion of
respondents (41%) will look towards either direct
organic growth, or innovation-led growth.
PRICE STABILITY?
Despite the bullish overall sentiment, the
industry is not immune to the wider economy.
The weakening global economic recovery was
selected by respondents as the single biggest
force likely to affect the industry this year. Nearly
half (46%) fagged this concern, with worries
highest in the Asia Pacifc region, where six in
ten respondents highlighted this. But, despite
such concerns, there is little fear right now of the
collapse in oil prices that typically accompanies
weak demand, with the average price expected
to remain a little over US$100 during 2013,
according to our research. I would describe oil
prices as good to soft, argues Charles Lucas-
Clements, Director of Strategy at Xcite Energy,
a North Sea-focused oil company. There are so
many dampening factors around that could drag
How confdent are you about the overall outlook for the oil and gas industry during 2013?
M HIGHLY CONFIDENT OR SOMEWHAT CONFIDENT M NEITHER CONFIDENT NOR PESSIMISTIC
M SOMEWHAT PESSIMISTIC M HIGHLY PESSIMISTIC M DONT KNOW
NORTH
AMERICA
EUROPE
ASIA
PACIFIC
OVERALL
RESULTS
~
SOUTH
AMERICA
polled for this research believe prices will fuctuate
by no more than 10% during 2013 (see above).
If this is borne out, it will make it more diffcult
to justify certain projects. Cheap US gas will have
downstream impacts, argues Mr Bertan: It will
force a boom in sections of the US economy that
depend on natural gas, so power plants that run
on natural gas are now getting fuel at a very
low cost. This will provide enormous incentives
in US economic sectors, which will then grow
and demand more gas. Gas prices will eventually
increase because of this growing demand trend.
Related to this, investment in pipeline
infrastructure will be needed to transport
unconventional gas from where it is to where
its needed. Its absolutely clear that if you are
going to exploit unconventional gas you have to
build in the delivery infrastructure and that means
pipelines. So the market will grow in 2013 it has
to, says Arthur Stoddart, Executive Vice President
for the Americas at GL Noble Denton.
it down, but then there are also tensions keeping
it up every time it does drag down, he says.
More importantly, this higher price forecast also
refects the fact that operators are increasingly
moving into tougher environments. Existing
felds will naturally decline, because reservoirs
deplete over time, so the challenges will be to
fnd oil not only to meet the increase in the
demand, but also to offset the decline in existing
felds, says Renato Bertan, CEO of Brazils
Barra Energia, an independent Brazilian oil and
gas company. I dont see a slowing down of
investment, I think well see a steady growth in
the level of investment.
However, while confdence in oil prices remains
strong, this is less evident with respect to gas.
Given the transition in the US market and
the potential to exploit new unconventional
discoveries elsewhere, gas prices are expected
to remain relatively static; the majority of those
V By how much do you expect the average spot price for natural gas (as per Henry Hub or European
benchmarks) to change by December 2013?
RISE BY
50% OR
MORE
2.8%
RISE BY
25% OR
MORE
12.2%
RISE BY 10%
OR MORE
18.7%
W
FLUCTUATE BY
NO MORE THAN 10%
UP OR DOWN
38.2%
V
DROP BY 10%
OR MORE
8.1%
V
DROP BY
25% OR
MORE
1.6%
V
DROP BY
50% OR
MORE
0.0%
?
DONT KNOW
18.3%
www.gl-nobledenton.com 9 GL Noble Denton www.gl-nobledenton.com
F
or some key industry players,
tougher conditions could also
lead to a fall in spending in 2013,
as indications from oilfeld services
majors, Halliburton and Schlumberger,
suggest. In a late-2012 operational
update, Schlumberger said it could be
impacted by contractual delays and
seasonal slowdowns in its operations in
Europe, Africa and the CIS countries, as
well as weak land-based drilling activity
in the US and western Canada.
For those who are bumping up
spending, a challenge still remains
in fnding the right people, skills and
experience to deploy this. For the frst
time in three consecutive years of this
research, skills shortages now tops the
list of key barriers for the year ahead,
displacing the industrys perennial
worries over rising input costs. Cited by
54% of respondents, this is sharply up
on last year, where just 34% selected
it, and an even steeper rise from its
being a ffth-ranked worry in 2011. In
turn, this becomes another pressure
that bumps up costs. Elsewhere,
tougher regulation is also raising costs.
Nearly half of respondents expect to
invest more on compliance issues in
INVESTMENT TRENDS:
RISING PRESSURES
Despite uncertainty surrounding the global economy, the oil and gas
industrys long-term planning continues to ensure that investment
remains robust, although the rate of growth is forecast to be lower
than it was in 2012. Half of respondents expect to increase their
capital investment in 2013, down from 63% a year earlier. The
likelihood of increased spending is strongest in North America,
with 60% of respondents expecting overall capital expenditure to
rise, compared with a low of 44% in Europe. However, tougher
questions are now being asked regarding the expected returns from
this spending, compared to historic rates. Overall, about half of
respondents admit to being under far greater pressure on this than
before, rising to nearly two-thirds in Asia Pacifc (63%).
Which of the following aspects of
your business do you expect to increase
or decrease over course of 2013?
OVERALL
CAPITAL
INVESTMENT
2013
OVERALL
CAPITAL
INVESTMENT
2012
OVERALL
CAPITAL
INVESTMENT
2011
OVERALL
HEADCOUNT
INTENSITY OF
EXPLORATION
ACTIVITY
AVERAGE
EXPLORATION
COSTS
AVERAGE
PROJECT
DURATION
TRANS-
MISSION AND
DISTRIBUTION
COSTS
M INCREASE
M STAY THE SAME
M DECREASE
M DONT KNOW / NOT APPLICABLE
KEY
FINDINGS
The industrys spending outlook
remains robust for 2013.
North America is the top
investment destination, while
Latin America has risen to
second place for 2013.
But, pressure continues to
mount: compliance challenges,
a push for better returns, and a
lack of skills are all weighing on
investment plans.
~
2013, substantially higher than the
next biggest and related issue,
health and safety, where 40% expect
to spend more. This issue is most
prominent in North America, where
nearly six in ten (58%) of those polled
say they will have to spend more
on compliance, not least owing to
increased government scrutiny in the
wake of the Macondo oil spill (see
'Regulation and other risks', p20).
In Europe, where regulation has
already been a prominent feature
for the industry for some time, one
in three (32%) expect to spend
more on compliance than before.
Risk management is also gaining in
importance (see left).
In terms of the investment focus by
energy type, gas is expected to absorb
a greater proportion of spending.
Nearly 50% expect overall investment
in conventional gas to increase in
2013, while 31% expect the same
for unconventional gas. Despite
operator worries over price levels,
the emergence of vast conventional
gas resources could deliver more
predictable long-term supply sources.
LNG will continue to grow and grow
in my view, says a senior gas company
professional. Its a very fexible
fuel source and the market itself is
becoming more and more fexible,
much deeper and reliable, and theres
more gas available in the world every
day. Were going to get exports from
the US, so gas is going to continue
to rise as a percentage of the global
energy mix.
LOOKING TO
THE AMERICAS
This, in turn, highlights one of
the key themes for the sector: the
pace of development in the US
with regards to shale gas. Already,
industry professionals consider North
America to hold the greatest growth
opportunities. During 2012, the US
announced its biggest-ever increase in
oil production, while the International
Energy Agency (IEA) reckons the US
How do you expect investment in the following aspects of your
business to change during 2013?
How do you expect overall investment by your business in the
following energy types to change during 2013, as compared to 2012?
MARKETING AND SALES
RESEARCH AND DEVELOPMENT / INNOVATION
BACK OFFICE AND ADMINISTRATION
PRODUCTION AND OPERATIONS
EXPLORATION
RISK MANAGEMENT
PROCUREMENT / SOURCING
SUPPLY CHAIN
HEALTH AND SAFETY
COMPLIANCE AND REGULATION
TRANSMISSION AND DISTRIBUTION
OIL
NATURAL GAS
UNCONVENTIONAL GAS
SOLAR
WIND
OTHER ALTERNATIVE/RENEWABLE ENERGIES
BIOFUELS
M INCREASE M STAY THE SAME M DECREASE
M DONT KNOW / NOT APPLICABLE
=10%
35% thought so in Asia Pacifc and
42% in Europe.
We would need agreement between
supplier and consumer, explains
Philippe Sauquet, CEO of Total Gas &
Power. If it is a strong request from
the consumer or for a certain project,
such as one in the US, which would
be most obvious, that might work. If
some Asian buyers were really insisting
on Henry Hub-based prices, plus
allowing us to cover the costs, then,
yes, we might accept to sell on this
basis. But, for us, it will be a limited
fraction of the market.
However, with most major
hydrocarbon producers looking to
markets like China and India for
demand, there could be more pressure
on prices. The gas price in the US
[at the end of 2012] is below US$3/
mBtu, whereas the gas price at which
India imports its gas is over US$12.
So there is already a huge gap that
has emerged and that gap will
narrow, says Vikram Mehta, recently
retired Chairman of the Shell Group
of companies in India. He predicts
the price of gas to India will start to
reduce, offering an opportunity for
India to secure long-term competitive
supply deals with countries that are
going to be looking to place their
volumes in India, China and elsewhere.
NEW FRONTIERS:
WHERE EXPLORATION
IS HEADED
Unconventionals aside, the oil and
gas industrys exploration continues
to grow in all major basins, including
mature ones such as the North
Sea. Discoveries have been made
in previously unexplored areas of
Asia Pacifc, while parts of Africa are
emerging rapidly and will hold the
attention of the industry in 2013.
Indeed, some 18% of companies
expect to look to diversify exploration
into new geographic regions as their
main source of growth, second only to
organic growth (31%).
And, while unconventional gas
remains a headline theme for 2013,
it may be decades before gas truly
becomes a globally traded commodity.
For now, oil-indexed gas prices are
likely to persist in many places, despite
44% of respondents agreeing that
oil and gas prices will continue to
decouple. However, this masks strong
regional variances: in the US, where
the potential is highest, 60% of those
polled agree with this; by contrast, just
will be in a position to rid itself of its
dependence on foreign oil within a
decade. This will leave the vast majority
of Middle Eastern oil headed for China
and the rest of Asia over the long
term a major shift in the geological
balance (see 'Tectonic shifts: The
changing global fuel picture', p12).
There has also been a striking shift
in Latin America. Ranked just ffth in
2011 as a source of growth (selected
by 23%), before edging up to fourth
in 2012 (26%), respondents now
regard the region as the second-best
growth opportunity overall (40%), only
narrowly behind North America (see
right). In particular, Brazil was singled
out as the second-most favourable
country for investment in 2013.
Importantly, despite signifcant
unconventional natural-gas reserves
available outside the US, the industry
is not convinced that the US model is
easily replicable elsewhere. China has
made the biggest effort, with both
China National Offshore Oil Corporation
(CNOOC) and Sinopec making strategic
investments in North American shale-
gas assets in order to unlock the
knowledge they'll need if they are to
exploit Chinas own potential reserves.
The UK governments decision last
December to allow the resumption
of shale fracking confrms persistent
interest in the possibilities of
unconventional developments in that
country, which looks to set itself apart
from the rest of Europe. However,
industry experts cite supply-chain
constraints, uncertainty over long-
term production levels and political
issues as the biggest obstacles to
any countrys hopes of copying
the US template. Aside from the
physical challenges, but purely from
a supply-chain perspective, its going
to be a real challenge to get the
unconventional business up to speed
in the initial timeframe, says Steve
Robertson, Director at Douglas-
Westwood, an oil consultant.
V Which specifc regions do you
anticipate will hold the greatest
growth opportunities for your
business during 2013?
NORTH
AMERICA
42.2%
LATIN
AMERICA
40%
MIDDLE
EAST
30.9%
29.5% 29.1% 30.2%
AUSTRALASIA FAR EAST
(INCLUDING CHINA)
SOUTH EAST ASIA
(INCLUDING INDIA)
11.3%
25.8%
5.8%
17.8%
21.8%
15.6%
WESTERN EUROPE
(INCLUDING
SCANDINAVIA)
NORTH
AFRICA
SUB-SAHARAN
AFRICA
EASTERN EUROPE
(INCLUDING
RUSSIA)
COMMONWEALTH
OF INDEPENDENT
STATES (CIS)
CENTRAL
AMERICA
~
TECTONIC SHIFTS: THE CHANGING
GLOBAL FUEL PICTURE
T
he shifting tectonic
plates of the global
oil and gas market
are triggering sharp
divides across regions.
Asias robust demand is
leading it to consume
more than its traditional
resource base, the Middle
East, can feasibly supply.
More troubling, Saudi
Arabia, OPECs largest
producer, is set to become
a more signifcant
consumer of its own oil,
inevitably leaving less
available for export.
This demand spike
is underpinned by
rising populations
and increased
industrialisation, all
boosted by cheap
subsidised energy. In
the Gulf Cooperation
Council (GCC) states,
of which Saudi Arabia
is one, primary energy
consumption rose by
an annual average of
5% between 2001-10,
nearly doubling from
about 200m tonnes of
oil equivalent (mtoe)
to almost 380 mtoe,
evenly divided between
oil and gas(1). By 2020,
that fgure is expected
to nearly double
again, to 660 mtoe.
This trend will take its
toll on the global fuel
picture. By 2009, Saudi
had already become
the worlds sixth-largest
oil consumer. It now
consumes roughly one-
third of what it produces.
Demand has gone
up 500% in the last 30
years in the Middle East
and North Africa, and
there are doubts being
raised about countries
like Saudi Arabia being
able to sustain itself as
an exporter, says Majid
Jafar, CEO of UAE-based
oil company, Crescent
Petroleum. We need
to better manage our
demand. We are sitting
on huge potential
resources; 40% of the
worlds gas is located here
and yet every country
in the region barring
Qatar has a gas defcit.
Indeed, a poll of oil
and gas professionals
conducted by GL Noble
Denton at last years
ADIPEC Exhibition and
Conference in Abu
Dhabi, found that 81%
1
Cambridge University, Judge Business School, 2012.
2
2012 World Energy Outlook, International Energy Agency.
of participants expect the
development of new gas-
recovery projects to meet
the UAEs rising demand
for the commodity
and make the country
energy self-suffcient
by 2030. Emirati
governments have made
huge investments to
address this issue, and
the result of this poll
shows that industry
professionals think these
will reduce the countrys
reliance on imported
natural gas through the
Dolphin subsea pipeline
from Qatar, explains
Moss Daemi, GL Noble
Dentons Executive Vice
President for the Middle
East and Africa (MEA).
But, this is not
the only striking
trend transforming
energy markets. The
International Energy
Agencys latest energy
outlook notes that the
extraordinary growth in
US oil and gas output
will mean a sea change
in global energy fows,
with the country
forecast to become a
net exporter of natural
gas by 2020. Already, US
oil production rose by
760,000 b/d in 2012(2),
the largest increase in
annual output since
commercial production
began in 1859. Increased
drilling in the various
tight shale formations is
on course to push crude
oil production above 7m
b/d in 2013 for the frst
time since 1992, according
to the US governments
Energy Information
Administration.
These combined shifts
will have geopolitical
implications, says Colin
Johnston, Vice President:
Commercial Engineering
at Helix Energy Solutions
Group, an offshore-
services company. In my
opinion, long-term, it
is going to be the likes
of Canada and Brazil
that will supply oil to
the US and therefore
the USs focus will shift
away from the Middle
East. Asia will draw on
what the Middle East
produces, but, in terms of
global supply, this could
completely change the
geopolitical situation.
Most favourable
investment
destinations:
Toughest investment
destinations:
US (19%) Nigeria (11%)
Brazil (13%) Iran (11%)
Australia (8%) Russia (9%)
Norway (5%) Iraq (9%)
Canada (5%) Afghanistan (8%)
UK (5%) Venezuela (7%)
THE TOP 6 BEST AND TOUGHEST
INVESTMENT DESTINATIONS Which countries
will offer the most favourable overall conditions for
investment during 2013, and which the riskiest?
For those looking to fnalise their spending plans,
these are where the industrys leaders are happiest
investing or where theyre worrying the most.
TOUGH TRADING: THE
CHALLENGES AHEAD
Uncertainty surrounding the global economy in 2013 will
remain a key concern for the oil and gas industry, even
despite oil prices above US$100/b. Our research reveals a
sense of disquiet about the state of the global economy
and the ensuing impact on demand, particularly within
Europe. Overall, nearly half (46%) of respondents by far
the largest share cited this as the single biggest issue
affecting the industry in the year ahead.
Which of the following forces will have the greatest positive or negative impact on the overall oil and gas industry
during 2013, in your view?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
KEY FINDINGS
Uncertainty over demand and rising costs are
considered the two greatest forces affecting
the oil and gas sector in 2013.
In terms of specifc barriers to growth, costs
are the second-highest challenge overall,
while skills shortages top the list.
This cost infation is, in turn, acting as a major
driver of increased capital expenditure.
~
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R
Which do you expect to be the biggest
barriers to growth for your business?
(top 5 answers in each year)
2012
2011
2013
1
SKILLS SHORTAGES
54.8%
2
INCREASED
OVERALL
OPERATING COSTS
38%
3
DIFFICULTIES IN
RESOURCING
PROJECTS
26.8%
4
PRICING
CHALLENGES (EG,
FALLING GAS PRICES
MAKING PROJECTS
UNECONOMIC)
26.5%
5
TOUGHER
COMPETITION FROM
INTERNATIONAL RIVALS
24%
4
LIMITED ACCESS
TO CAPITAL/
FINANCE
24%
1
RISING OPERATING
COSTS, INCLUDING
INSURANCE
PREMIUMS
37%
5
LIMITED NEW
AREAS FOR
EXPLORATION
19%
2
SHORTAGE
OF SKILLED
PROFESSIONALS
33%
3
INCREASING
REGULATION
32%
1
RISING OPERATING
COSTS, INCLUDING
INSURANCE
PREMIUMS
36%
2
INCREASING
REGULATION
30%
3
COMPETITORS
28%
5
SHORTAGE OF
SKILLED LABOUR
25%
4
LIMITED ACCESS
TO CAPITAL/
FINANCE
25%
5- to 10-year time horizon. And, within that
span of time, I dont see anything but continued
growth, says Mr Mather.

RISING COSTS
AND RISING CAPEX
Underneath the weak demand is another
challenge for the industry: rising operating costs,
across labour, materials, asset rates and
maintenance. One in three (33%) of respondents
cited this as being the biggest force impacting
their business in 2013, the second-highest
overall. In Asia Pacifc, in particular, this is
seen as the biggest pressure in the year ahead.
The mounting cost of operations is largely
down to an increase in the complexity of oil
and gas projects, a surge in insurance premiums
and the acute lack of suitably qualifed
professionals across the region, says Richard
Bailey, Executive Vice President for Asia Pacifc at
GL Noble Denton.
As was the case last year, costs are a key worry for
the industry. When asked to identify the specifc
barriers to growth in 2013, rising operating costs
was selected by 38% of respondents, and second
only to an interrelated issue: skill shortages (55%).
This cost pressure is most acute in Asia Pacifc,
where 56% of those polled cited this as a barrier,
and far more of a worry there than skills (42%).
Related to this, pricing challenges, such as falling
gas prices rendering projects uneconomic, is also a
signifcant concern (selected by 27%).
In turn, sustained cost infation, affecting
materials, equipment, staffng and services, will
prove a major driver of rising capital expenditure.
More than half (51%) of those polled believe that
overall capital investment will increase over the
course of 2013. Fewer than one in ten anticipates
any decline.
Evidence of such cost pressures is apparent in a
range of ways. Various industry indexes suggest
that the costs of both building and operating
upstream oil and gas facilities have reached record
highs. Furthermore, increasingly capital-intensive
unconventional projects will absorb a growing
amount of corporate budgets. The US Eagle Ford
shale play, for example, is expected to involve
capex spending of US$28bn in 2013 alone.
S
uch attitudes refect a broader perception
that macroeconomic uncertainties the
ongoing euro zone crisis, the tentative
US recovery and evidence of slowing growth in
China could persist for far longer than originally
conceived. This risk appears all too real. After fve
years of crisis, the OECD says the risk of a new
major contraction cannot be ruled out.
Such worries have seeped into corporate
boardrooms. So far, demand for oil has remained
robust enough to keep the oil price well above
the costs of the development projects. However, a
signifcant reduction of the rate of growth in Asia
or a recession in Europe could impact the oil price
and delay development projects, says Technips
Mr Pilenko.
Given Europes perceived weaknesses, oil and
gas companies with global footprints are simply
focusing elsewhere. Our clients are global, very
few of them are affected by the euro zone crisis
and they all plan to increase spending in 2013,
particularly upstream. Our own investment plan is
based on long-term considerations and industry
needs, and the euro zone economic situation
has minimum impact on it, argues Mr Pilenko.
Moreover, Asia is still growing, not as much as
in the recent past, but demand for oil and gas
in Asia is more than offsetting the slowdown in
Western countries, he says.
But, despite the weak outlook for 2013, many
think this will have only a marginal impact on the
sector, relative to the longer-term trends shaping
the industry. There are momentary responses
to some of the things that the traders do that
affect the price of oil, but the thing that drives
everything is the long-term stress on the supply
of oil and gas in the world, says Greg Mather,
a deepwater industry consultant. This supply has
remained tight, despite a weak global economy,
owing to sustained growth in demand from
emerging markets.
Although there may be delays to some
investments, many of these projects have
long time horizons that are not infuenced by
macroeconomic fundamentals. The time that it
takes to fnd and develop deepwater resources,
and build the rigs and the equipment, is in the
T
he price of getting new
pieces of technology wrong
is huge, and its for that
reason that no one seems to want
to go frst in using them nowadays,
explains a director from one well-
known Asian shipbuilding company.
You can calculate and simulate the
risks of a new technology as much
as you like during its development
but, until it is in service, the risk
of using it remains unknown.
Nevertheless, technology is clearly
a major enabler for the industry.
Floating LNG, or FLNG a means
of extracting gas from small and
isolated reserves provides a
perfect example. Shells US$12bn
Prelude project, situated in offshore
Australia, is expected to be the frst
such implementation of the FLNG
technology a vast facility due to
come online in 2016.
Similarly, diversifcation into new
geographic areas, such as the Arctic,
will provide the second-highest source
of growth, after organic growth,
according to this year's research, and
technology will implicitly play a role in
enabling that.
Even now, there is an expectation that
innovation will begin to feed into the
ecosystem of the oil and gas industry.
The industry used to be accused of
being technology averse and always
staying with how things are, says
Helix ESGs Colin Johnston. Although,
The oil and gas industry faces a tough balancing act.
Sustained advances in technology are offering game-
changing improvements in performance, but these have
to be weighed against the possibility of deploying new
developments too rapidly and risking potential failure. As
a result, research participants believe it will take time for
technology to deliver its full potential. Fewer than one in
ten (9%) identify innovation-led organic growth, such as
new extraction technologies or transmission and distribution
systems, as their main source of growth in 2013.
INNOVATION AND THE
RISE OF TECHNOLOGY
V Which of the following strategies do you expect to be your main source of
growth in 2013?
M MERGERS AND ACQUISITIONS
M DIVERSIFICATION INTO NEW PRODUCT/
SERVICE AREAS (EG, ALTERNATIVE FUELS)
M DIVERSIFICATION AND/OR EXPLORATION
INTO NEW GEOGRAPHIC AREAS (EG, ARCTIC)
M ORGANIC GROWTH (EG, INVESTMENT
IN ACREAGE, INCREASES IN PRODUCTION,
RECRUITMENT DRIVE)
M INNOVATION-LED ORGANIC GROWTH (EG,
NEW EXTRACTION OR TRANSMISSION AND
DISTRIBUTION TECHNOLOGIES)
M NOT APPLICABLE, WE'RE NOT FORECASTING
GROWTH DURING 2013
M OTHER
KEY
FINDINGS
Increasingly challenging extraction
environments are continuing to make
technological innovation a key industry facet.
Greater cooperation between IOCs and
NOCs will often be fostered by a need for the
latter to access technologies, in exchange for
access to reserves for the former.
The industrys skills shortage is a key drag on
further exploitation of technology, even as
innovation is being sought to help address
the widening talent gap.
1
4
%

1
1
.
1
%

1
8
.
5
%

3
1
.
7
%

8
.
9
%

1
1
.
1
%

4
.1%
offcially, nothing has changed, I think
technology development is more across
the board in terms of the equipment
thats used. Its become more of a drip-
feed type of development.
Across the industry, there is certainly
recognition of the need to keep
developing technology. Just 6% of
those polled expect to cut spending on
R&D. And while the highest proportion
of companies (44%) expects budgets
to remain fat during 2013, nearly four
in ten (37%) expect to spend more on
this. Many recognise the need for this:
for example, about one in fve (19%) of
the senior executives (those at a vice-
president level or higher) polled for this
study identify technological limitations
as a barrier to growth in the year ahead.
The sectors greater reliance on
technological innovation, not least
as reserves become progressively
more challenging to tap, holds
other implications as well. For one,
it will shift relationships between oil
companies and service operators,
and between NOCs and IOCs. Those
NOCs that lack the required technical
capabilities will have to seek out IOCs
if they are to gain access to advanced
technologies, especially when targeting
resource plays such as shale and tight
oil, and ultra-deepwater and Arctic
offshore reserves.
The opening of Russias oil and gas
market is a clear example of this. In
April 2012, Rosneft, the state-backed
Russian oil company, announced a
strategic partnership with ExxonMobil,
granting the latter access to three
untapped felds in the Russian Arctic,
with reserves estimated at 85bn barrels
of oil equivalent. The deal delivered to
the Russian partner Exxons technical
expertise in developing these diffcult
felds. The only reason they are dealing
with ExxonMobil is because they
dont have the technology to develop
the Arctic fringe, and Rosneft has
no offshore platform experience and
particularly not in Arctic conditions,
explains Bruce Misamore, former CFO at
Russias Yukos Oil Company.
While there are some exceptions to
this Brazils Petrobras has honed
its R&D skills towards pre-salt ultra-
deep reservoirs, which it hopes will
ultimately enable it to access more
diverse reserves elsewhere it is likely
that 2013 will see more collaboration
between NOCs and IOCs as they swap
reserves for technology.
In some respects, though, it is the
smaller niche oil companies who may
be best-placed to exploit technological
opportunities in shale. Small and mid-
cap companies were among the main
V How do you expect investment in the following aspects of your business to change during 2013?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
M INCREASE
M STAY THE SAME
M DECREASE
M DON'T KNOW / NOT APPLICABLE
~
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G

A
N
D

S
A
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E
S
R
E
S
E
A
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C
H

A
N
D

D
E
V
E
L
O
P
M
E
N
T

/

I
N
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O
V
A
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I
O
N
B
A
C
K

O
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F
I
C
E

A
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D

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K

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A
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E
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E
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/

S
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U
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C
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E
A
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T
H

A
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S
A
F
E
T
Y
C
O
M
P
L
I
A
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C
E

A
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R
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U
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N
drivers of the US unconventional boom;
their smaller size and decentralised
management structures have helped
enable quicker, in-the-feld decision-
making. On the downside, they face a
clear challenge in coming up with the
necessary fnancial muscle to exploit
opportunities fully.
HELP NEEDED
But, beyond actual levels of spending
on innovation, there is a more pressing
underlying challenge: people. As many
respondents acknowledge, there
are insuffcient numbers of suitably
qualifed engineers and scientists
coming through the talent pipeline as
an ageing workforce retires.
With production more likely to come
from thousands of smaller felds than a
few super-large felds, late-life enhance
oil recovery (EOR) management is
becoming highly labour-intensive. Its a
little like medieval medicine: you need a
lot of people to do the diagnostics. As a
result of these trends, we are starting to
see changes in behaviour and business
models in our sector, says Andy Inglis,
Chief Executive for Integrated Energy
Services at oil and gas services company,
Petrofac. Companies are looking very
hard at their own internal technical
talent and developing programmes to
build on and grow talent, rather than
buy it from the market.
One of the biggest challenges is that
everyone is fshing in the same pond,
as Mr Johnston puts it. There is a
dearth when you search for experienced
deepwater people. Everyone is after
the same people. I think what everyone
banks on is that the big companies will
recruit the new entrants to the business
and train them up and then that will
expand the workforce as others head
off into the small companies.
Still, in some respects, technology is also
being tapped to help out. Applications
such as digital oilfelds an umbrella
term for technology-centric solutions
that allow companies to leverage limited
resources enable drilling operators
to make better use of the existing
labour resource, as just one example.
You can have one senior experienced
drilling engineer overseeing, say, 12
to 15 drilling programmes at any one
time, rather than having to spend
a week fying out to one rig, spend
24 hours there and not see anything
interesting while he is there, explains
Justin Lowe, an oil and gas specialist
at PA Consulting. We are seeing a
lot of people using that, and bringing
that data back into collaborative work
environments, particularly on the drilling
side. That also gives an opportunity for
training up the next generation, because
they can actually fast-track some of that
knowledge gain, says Mr Lowe.
T
he global oil and gas industry has a vast
number of innovation projects underway, from
deepwater drilling through to breakthroughs
in chemical conversions. However, based on
interviews with various experts and executives
for this report, a number of specifc technologies
look set to go mainstream during 2013.
First, one of the most commonly used technological
advancements will likely involve using real-time drilling
information to improve safety and ensure optimum
results in tough environments. According to executives
at Schlumberger, an oilfeld services frm, such
technologies can result in substantial improvements
in performance. In essence, by applying signifcant
computing power, companies can re-image the seismic
model around a well, while drilling. This allows them
to narrow the depth uncertainty of different zones in
the well, while also predicting the formation pressure
up to 500m in front of the drill bit. In turn, the drilling
programme is modifed to refect these predictions, all
in real time.
Another key technology will be high-pressure well
design, rigs and riser systems that are able to deal
with huge wells that have to be drilled, and sub-sea
production systems to deal with the high pressures.
Technology can improve access to resources in existing
felds through feld redevelopment. In particular, the
ability to drill effectively through pressure-depleted
zones is an area highlighted by many. To this end
stress cage technology, with an additive to drilling
fuid strengthening a well bore and suppressing fracture
propagation, is an ever more important mechanism in
liberating a large resource base, explains Mike Daly,
Executive Vice President at BPs exploration division.
Related to this, technology is also helping to open up
mature felds for development. This is important: of the
80m b/d currently produced, more than 50m come from
felds more than a decade old. An increasing number
of middle-aged deepwater felds are coming to some
sort of mid-late maturity. The original development
plans for these were based on initial recovery factors
in the 20%-30% range but are now being pushed up.
This is the really important thing, as we start to go
from 20-30% to 40-50% recovery factor in these giant
deepwater felds, explains Mr Daly.
As part of this, the exploration frontier of high pressure
and high temperatures (HPHT) is a clear priority for
IOCs, particularly in areas like the Gulf of Mexico and
the Caspian Sea, where large volumes of sediment
have been dumped onto basins. In November 2012,
BP announced the award of the frst contracts for
its Project 20K initiative, which aims to develop
new technology to help the industry gain access to
deepwater oil and gas resources currently beyond
reach. That means working in HPHT reservoirs with
pressures of up to 20,000 pounds per square inch (psi),
and where temperatures can be as high as 175C.
BP says this frontier has the potential to unlock an
estimated 10-20bn barrels of oil sediment over the
next two decades.
Of course, the industrys innovation is hardly restricted
to the upstream sector alone. Advances in pipeline
technology, for example, are helping operators to
overcome challenges in risk management during the
construction, operation and maintenance of assets.
GL Noble Denton is working alongside some of the
worlds leading pipeline operators to build cost
effective solutions to address these issues and meet
stringent national emissions targets across the world.
Current innovations include a smart device to speed
up the time it takes for operators to survey, measure
and record pipeline corrosion; a new technique that
will cut the environmental impact of transmission
operations by providing an alternative to gas
venting; and new, mobile phone-accessible pinhole
cameras that will remotely monitor high-risk activities
surrounding transmission pipelines.
Arguably, the downstream sector is the most stable
in terms of the technical challenges faced by the oil
and gas industry, says Martin Layfeld, Vice President
for Gas Consulting at GL Noble Denton. But, an
increasing dependence on gas as a cleaner energy
source is putting pressure on operators to cope with
increasing supply through their pipe networks safely
and cost effectively. In some countries, such the UK,
governments have put incentive schemes in place to
make sure operators are developing the technologies
required to achieve this.
An increasing dependence on gas as a cleaner
energy source is putting pressure on operators
to cope with increasing supply through their
pipe networks safely and cost effectively. In
some countries, such the UK, governments
have put incentive schemes in place to make
sure operators are developing the technologies
required to achieve this.
2013S TECHNOLOGY SNAPSHOT
B
ack in 2010, a slowdown in the permit
application and approval process for the US
Gulf of Mexico was the chief immediate
impact of the Macondo disaster. But this still casts
a pall on the industry, with production in the Gulf
during 2012 estimated to be almost 25% below
the 2009 peak of 1.8m boe/d. Indeed, nearly
half of those polled (46%) believe the impact
and consequences of the spill are still being felt,
suggesting it remains a prime consideration for
companies. As Xcite Energys Mr Lucas-Clements
puts it: We get the Macondo shadow affecting
the whole sector, but there is a tendency for
the government to generalise policy as the only
practical way to implement these changes.
Publicly or not, many others agree: three in ten
of those polled believe many new rules have
been rushed into place, and not properly thought
through. Only 10% disagree. Inevitably, given that
it is the epicentre of the regulatory crackdown,
respondents from North America feel the greatest
overall pressure on this issue. There, closer to four
in ten (37%) think policymakers are rushing rules
into place. Similarly, 39% in North America cite
V To what extent do you agree or disagree with the following?
M AGREE M NEUTRAL M DISAGREE M DONT KNOW / NOT APPLICABLE
2
0
%

2
5
.
4
%

4
6
.
2
%

8
.5
%

5
6
.
9
%

2
6
.
9
%

6
.
9
%

9
.2
%
Few other companies are as well versed in risk as those
seeking to operate in the oil and gas industry. However,
despite a healthy appetite for risk on the frontiers of
exploration, respondents are increasingly conscious of risks
elsewhere. Overall, 55% believe the outlook for 2013 to be
somewhat or far riskier than it was last year. Just one in ten
thinks otherwise. Much of this concern centres on tightening
regulations, increasing bureaucracy and tougher terms.
Indeed, nearly two-thirds said the regulatory outlook in their
frms key markets continues to get tougher.
REGULATION AND
OTHER RISKS
More than half of oil and gas professionals
think the outlook for the year ahead is
riskier, not least as the regulatory outlook
toughens up.
Spending on regulatory compliance
continues to surge in the wake of Macondo,
even though many regard the new rules as
rushed and not properly considered.
Tougher contract terms are expected
to be a prominent feature of
negotiations during 2013.

6
5
.
4
%

2
3
.
5
%

5
%

6
.2%
2
9
.
6
%

4
6
.
9
%

1
0
.
4
%

1
0
.4
%
THE
IMPACT AND
CONSEQUENCES
OFTHE 2010 MACONDO
OIL SPILL ON THE
INDUSTRY HAVE NOW
LARGELY FADED
THE OIL AND
GAS INDUSTRY
HAS LEARNT LESSONS
FROM THE MACONDO
OIL SPILL AND
CHANGED PRACTICES
AS A RESULT
THE REGULATORY
OUTLOOK IN OUR
FIRMS KEY MARKETS
CONTINUES TO GET
TOUGHER
A LOT
OF THE NEW
REGULATION BEING
INTRODUCED IN OUR
FIRMS KEY MARKETS
HAS BEEN RUSHED INTO
PLACE AND IS NOT
WELL THOUGHT
THROUGH
V To what extent do you agree or disagree with the following?
M AGREE M NEUTRAL M DISAGREE M DONT KNOW / NOT APPLICABLE
weigh on their investment decisions this year. For
example, uncertainty over government infuence
such as in windfall taxes was mentioned by
nearly 20% of respondents. Growing resource
nationalism (see box for more details) and concern
over environmental risks also fgure prominently,
with close to four in ten (38%) of those polled
for this study feeling that government of NOC
policies towards IOCs would get more restrictive
during 2013. Unsurprisingly, then, the same
proportion say they will increase spending on risk
management during 2013.
Downstream, further challenges are evident
across the industry. In India, says Mr Mehta,
the former Chairman of Shell India, the country
faces a challenge to improve the effciency
of its manufacturing facilities, in particular its
refneries. Many of our refneries operate at
cost that is sub-optimal. We have to restructure,
revamp the operating systems in these refneries
to reduce cost and make refning structured
system more competitive, he says. For
example, you will fnd situations where one
company has invested in a large tank farm,
but then a second company invests in another
tank farm adjacent to it. The reason is that
both companies want to have control over their
own supply and distribution network, but the
consequence of having investment side by side
is that both frms operate under capacity.
REGULATORY ACTIVISM
This sense of a broader, state-led shift
towards increased regulatory activism is
also shared by others. The US, a bastion
of capitalism is increasingly becoming one
of the most diffcult places in the world to
this growing regulatory burden as a key barrier to
growth, markedly higher than in other regions.
Furthermore, as Mr Lucas-Clements notes, the
regulatory backlash has led to issues elsewhere.
Theres a continuous programme of change
post-Macondo which has to be dealt with. The
regulators bring in things to cover what they think
is a risk, and it causes changes further down the
line, which you have to spend a lot of time dealing
with, he says. For example, while Xcite Energy
operates in shallow waters in the North Sea, the
opposite extreme from the deepwater Macondo
well, the fact that the oil it extracts has to be
pumped to the surface means that the company is
still constantly challenged on its operations. If you
say it cant happen, you still have to assume it can.
The thinking is sometimes illogical but Im not sure
you can put the genie back in the box, so we have
to go through the process anyway as you have to
be safe, beyond doubt, says Mr Lucas-Clements.
However, despite such worries, there are signs
that the industry as a whole is learning to live
with the increased regulatory burden. Nearly six
in ten (57%) contend that they have learned
lessons from the Macondo spill and changed
their operating practices as a result. At the same
time, fully half of those polled say that their frm
plans to increase spending on compliance and
regulation during 2013, while four in ten (41%)
generally agree that spending on increased
safety and environment protections, as well as
compliance, would be headed north.
But, even as the industry adjusts to its new
normal in terms of operating conditions, there
remains a strong sense that such issues will
How do you expect investment in the following aspects of your business to change during 2013?
M INCREASE M DECREASE M STAY THE SAME M DONT KNOW / NOT APPLICABLE
~

3
7
.
6
%

4
5
.
8
%

3
.
7
%

1
2
.
9
%

4
0
.
3
%

4
9
.
5
%

2
.
4
%

7
.8
%

4
9
.
2
%

4
0
.
7
%

2
.
4
%

7
.8
%
A
RISK MANAGEMENT HEALTH AND SAFETY COMPLIANCE AND
REGULATION
v
v
v
v
v
contract issues will become far more prevalent
and about the same proportion believe that
contractors will bear higher overall risks from
projects, as contract terms are toughened up.
This much is evident from nearly half of
survey respondents (48%), who expect that
oil and gas operators will consolidate their
supply chains more intensively in 2013. This
refects one of the longer-term impacts from
Macondo, which is requiring operators to show
that they have paid full attention to due-
diligence issues when selecting suppliers.
Operating in high-risk environments has
traditionally forced oil and gas majors to share
the risk involved, says Paul Shrieve, Senior
Vice President for Technical Assurance at GL
Noble Denton. But now, as he explains, these
companies are consolidating their portfolios
of technical advisors and suppliers, whittling
down the hundreds of frms that were employed
on an ad-hoc basis to a far smaller group of
partners, typically operating under a master
framework agreement. This means companies
must become much more coordinated in the
way they procure third parties, in order to
protect their risk profles, says Mr Shrieve.
operate, which intuitively shouldnt be the
case, says Mr Misamore. Regulation is
primarily driven by environmentalism to try
to stop the growth of hydrocarbon resources
and I think, unfortunately, at least for the
next four years, that will continue.
Alongside politically motivated increases in the
regulatory burden, there is also a recognition
that oil companies risk profles are being shaped
by industry fundamentals. New reserves will be
located in more diffcult geologies, involving
signifcantly increased risks compared to the
easy oil of previous generations. Along with this,
the size and complexity of projects is increasing,
bringing an attendant increase in the risk-
management requirement. In turn, management
teams are being tasked with adapting to the
ups and downs of new market situations. This
challenge can of course be transformed into
a competitive advantage, at least for those
companies able to best adapt to such conditions.
TOUGH FISCAL
TERMS BECKON
Elsewhere, contract risks appear to be a more
common challenge during 2013. Nearly half
(47%) of those polled say that pricing and
This much is evident from nearly half of survey respondents (48%), who expect that oil and gas
operators will consolidate their supply chains more intensively in 2013. This refects one of the
longer-term impacts from Macondo, which is requiring operators to show that they have paid
full attention to due-diligence issues when selecting suppliers.
99% of 2m barrels. However, that realisation
of lost opportunity is sometimes not there.
Ultimately, the ebb and fow of contractual terms
will track supply and demand, says one participant:
If you look at East Africa, for example, which is
going to be a tremendously exciting area over the
next decades, it used to be dirt cheap to pick up
offshore licences because nobody wanted them.
Now, Kenya is talking about increasing the cost of
their licences and rental fees because its now an
area where they want to get the big boys in.
ATTRACTING INVESTMENT
There are also challenges elsewhere in the
industry. Interviewees expressed a need for
investment to encourage the creation of pipeline
infrastructure, in both oil and gas, to ensure
that upstream developments are matched by an
expansion in requisite downstream networks.
Gas-pipeline infrastructure is essential to shift
the demand from oil to gas. There is more gas
available in India than oil, but there has to be
much greater investment in the pipeline systems,
argues Mr Mehta.
This requires investment across the entire value
chain. The basic point is that, unlike oil, you
cant just focus on one segment of that value
chain with gas. You have to make the investments
across the chain if you really want to accelerate
the usage of gas, he adds. In India, Gujarat has
created a network of pipelines across the state.
As a result, 70% of energy consumed there is
actually gas. So, you can see the radical shift in
the pattern of consumption as a result of just this
one set of investments, adds Mr Mehta.
Overall, IOCs will also have to evolve more effective
ways of expanding downstream infrastructure in
the gas sector. Gas is very much in demand for
the power sector and for industry, explains Mr
Jafar. Unfortunately, what have not caught up
with that demand are the right policy responses
in the form of ensuring pricing regimes that
create enough incentives for both the upstream
development and the investment in infrastructure,
he says. This links back to the ineffcient pricing
regimes, given the higher costs of developing gas
infrastructure, such as pipelines and processing.
Part of the problem, of course, is the downstream
market, where the pricing is often still heavily
subsidised in the Middle East region and below the
international market price. That is a huge economic
opportunity cost to these countries, says Mr Jafar.
In the case of inspection services, as an example,
the focus is shifting from price to quality.
Companies need evidence that their providers
employ a robust global operating model with
supporting procedures, instructions, templates
and technology-delivery platform, explains Mr
Shrieve. Emphasis is placed on the quality and
competency of personnel and the management
and delivery of a right-frst-time report.
This rationalisation in turn helps support providers
in making the necessary investments in their
businesses, in either people or processes, given
that the probability of gaining work as one of a
small number of suppliers is much higher than
being one of up to 100 others at times. And
by having rationalised the number of providers,
Mr Shrieve notes that oil companies in turn help
complete their frst level of assurance that their
global businesses use only approved suppliers.
One side-impact from this trend has been to
make it more diffcult for smaller companies to
secure work on large ventures with high capital
expenditure. For the mom and pop outfts, it is
an extra burden and they will struggle to satisfy
the criteria for doing work for the big operators.
Clearly, its a good thing, but it is an extra expense
that will mitigate against smaller companies
and will mean that the big, professional, well-
managed companies that can afford to, will
prosper, says GL Noble Dentons Mr Stoddart.
The smaller outfts, which may not have the
same track record and process experience, need
to fght very hard to stay in the game, agrees Mr
Bailey, of the same company.
Tough terms are also a given for those frms
eyeing opportunities in major oil-producing areas
like Iraq and Libya, which are seeking to attract
IOCs to drive long-term expansions in oil and
gas-production capacity. However, governments
could suffer the consequences of trying to apply
overly unattractive terms. What is important
is the structure of the contract that it gives the
incentive of the investor to put their money,
their capital, their best people and technology
on the job to maximise production. Then the
state maximises its possible returns from that
production, says Mr Jafar. These fxed dollar-
per-barrel contracts have not really delivered and
in a US$100 a barrel world, oil and companies
have other opportunities to think about. At
the end of the day, the government needs to
think that 95% of 10m barrels is better that ~
Resource nationalism,
one of the most extreme
risks for oil and gas
frms making long-
term investments, is a
risk that shows little
sign of fading away. In
April 2012, Argentinas
government announced
plans to nationalise YPF,
the countrys largest
oil and gas producer,
which was majority held
by Spains Repsol. It
subsequently carried out
its threat, providing an
example of one of the
largest expropriation
of an oil company asset
since Russias Yukos was
bankrupted and its assets
dismantled in 2003.
As with other areas
of corporate risk, the
likelihood of government
intervention will refect
the price of resources.
In the high-oil-price
environment, resource
holders aim to capture
more upside, devising
contractual mechanisms
to achieve this. But, in
the most extreme cases,
as with Argentinas move
against YPF, they will take
unilateral action to seize
assets. The expropriation
has triggered a battle
for legal compensation
by Repsol, which is also
taking action against
US major, Chevron, for
seeking an alliance with
YPF to tap the Vaca
Muerta shale deposits in
Argentina.
Resource nationalism
is here to stay, believes
Bruce Misamore, the
former CFO of Yukos
Oil Company. I think
the long-term trend has
defnitely been towards
nationalisation, he says,
citing examples from
Russia to Argentina.
But, while a clear threat,
resource nationalism
sometimes goes the
opposite way. Mexico
hitherto one of the
worlds most closed
oil and gas sectors is
preparing wide-ranging
reforms in its energy
sector in early 2013, which
could increase the role
of foreign and private
operators. As part of this,
state oil company, PEMEX,
responding to a long-term
decline in oil production,
is expected to improve
its service contracts
commercial attractiveness.
Nevertheless, for
companies trying to
deal with this, coping
strategies are needed.
One approach, taken by
ExxonMobil and Statoil,
is to seek to tap the
resource holders or NOCs
for investment in acreage
positions outside the
country, which provides
an insurance policy should
their interests in the host
country be targeted.
For example, Russias
state-controlled Rosneft
and ExxonMobil have
signed an agreement to
develop Russias tight oil
formations after agreeing
a strategic alliance
cooperation deal in 2011.
Rosneft signed a similar
deal with Norways Statoil,
which is investing in
Russias Barents Sea. And,
for the biggest majors,
there is also the option
of simply trying to tough
it out with their vast
resources.
RESOURCE NATIONALISM
THE ETERNAL THREAT
NOTES
NOTES
glnobledenton@gl-group.com
www.gl-nobledenton.com
We dont believe in wasting resources so this brochure is
printed on fully recycled paper using environmentally sound
methods. Weve tried to use every bit of paper and any
waste is fully recycled. Were doing our bit - are you?
For more information on recycling visit recyclenow.com.
This brochure is printed on recycled material.
Ref: OSS001
About GL Noble Denton
GL Noble Denton, part of the GL Group,
is a global independent technical advisor
to the oil and gas industry. With a presence
in over 80 countries, the company applies
global best practice in safety, integrity and
performance across the lifecycle of its clients'
on- and offshore operations.

Seismic Shifts The Outlook For Oil and Gas Industry 2013

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