BRUSSELS--(BDO, nearly half (48 percent) of oil and gas executives feel better about their access to capital and credit in the year ahead, with 45 percent citing it as the top driver of industry growth in 2013. At the same time, 31 percent of executives polled feel that demand for resources, strong as ever, will influence growth.)--International oil and gas executives are feeling optimistic about the year ahead, yet rather than take the opportunity to grow their businesses and expand operations, companies are using the boom to hedge against the short-term uncertainties of the global oil and gas industry. According to a new study by leading international accounting and consulting organisation
“The oil and gas industry is largely beholden to uncertainty, and short-term fluctuations can halt current positive momentum. Environmental and regulatory concerns, commodity price volatility and geopolitical circumstances can all conspire to throw a wrench into companies’ plans.”
The survey of 84 C-Level and senior financial executives at oil and gas companies in the United States (U.S.), Russia, United Kingdom (U.K.), Australia and Canada sought their insights on growth strategies, industry consolidation, the environment, regulatory affairs and labour issues.
Amidst this positivity, however, executives are forging ahead conservatively, suggesting a degree of anxiety about the long-term profitability of the energy industry. When asked how they plan to improve profitability in the year ahead, a majority (56 percent) of executives say they will focus on internal business processes. Australia bucks the trend, with 58 percent of executives indicating that they plan to pursue vertical integration through acquisitions. Nevertheless, this inward, efficiency-driven focus reveals a broader concern about becoming too expansive. Indeed, without exception, when asked which region would be a target for expansion, every country surveyed overwhelmingly cites their own territory as a preferred target; very few respondents cite the resource-rich areas of the Middle East, Latin America and East Asia.
“Industry leaders suspect that we may be at the apex of a boom-and-bust cycle,” says Charles Dewhurst, Global Natural Resources Leader, Natural Resources industry group at BDO. “The oil and gas industry is largely beholden to uncertainty, and short-term fluctuations can halt current positive momentum. Environmental and regulatory concerns, commodity price volatility and geopolitical circumstances can all conspire to throw a wrench into companies’ plans.”
One of the most troubling immediate concerns for executives in the year ahead is the possibility of labour shortages. While about one-half (51 percent) of executives surveyed expect to increase hiring this year, 61 percent also anticipate difficulty hiring the skilled workforce they need. As the current workforce ages and engineering schools work to train the next generation of skilled oil and gas labourers, executives worry that the human capital necessary to take advantage of the current boom may not be readily available.
Shale underlying this year’s industry boost
While the long-term prospects of the oil and gas industry remain in flux, the survey indicates that the North American shale boom is likely driving much of this year’s short-term optimism. When asked which country will lead overall oil production in the future, 39 percent of executives cite the United States, a 50 percent lead over those citing Saudi Arabia (26 percent), the second most-frequently cited oil producer in the survey. Canadian executives are also positive about their own production prospects as a result of their ability to exploit resources from oil sands: 40 percent of Canadian executives expect their own country to lead oil production in the future.
With shale expected to lead production this year, executives also cite the impact of its corresponding technology—hydraulic fracturing (fracking)—as a major environmental concern. A plurality (44 percent) of executives rank fracking as their top concern this year, and with the exception of Russia, executives in every country rate it as their number one environmental priority. In contrast, often-discussed carbon emissions and water pollution trail fracking at 15 percent apiece.
Oil and gas execs split on regulatory concerns
Oil and gas executives are also closely watching the regulatory environment. As an industry rife with risk, oil and gas companies are subject to substantial scrutiny. In the wake of a number of recent environmental accidents, including the Deepwater Horizon spill in 2010 and an oil rig grounding off the coast of Alaska in January 2013, oil and gas executives know that their operations are under an international microscope.
A plurality of survey respondents (40 percent) place environmental policy at the top of their list of regulatory concerns, but comparing country-by-country responses yields more nuance. Though U.K. executives most often cite environmental regulation as their top concern, 27 percent—three times the study’s average of 9 percent—also believe that anti-corruption/anti-bribery legislation will pose an issue in the year ahead. As with our international mining survey, the underlying reason appears to be that much of the U.K.’s exploration and production activities occur beyond its borders. Meanwhile, the U.S. displays a particular sensitivity to corporate tax structure in the wake of ongoing fiscal policy debates, with 35 percent citing it as a top concern.
|Anti-bribery / corruption legislation||9%||8%||0%||27%||0%||20%|
|Corporate tax structure||26%||15%||17%||18%||35%||40%|
|Labour and employment issues||11%||31%||17%||0%||4%||0%|
Other key findings from the survey include:
Oil and gas executives are split on the most preferable way to
enter a foreign market. Acquisition in the country of interest and
a joint venture with a local company in the country of interest are
two most-cited options at 30 percent each, and independently
establishing operations comes in a distant third with 18 percent of
executives citing it as their preferred method.
“Further international expansion may not be a top priority for executives at this time,” says Dewhurst. “But it does remain an arrow in the industry’s quiver should current market conditions persist. Executives need to be thinking about the best way to move forward so that they can act quickly when the opportunity presents itself.”
- Executives feel most optimistic about alternative energy methods their countries are most capable of producing. When asked which source of alternative energy would contribute most to the world’s energy needs, one-third of executives cite solar power. However, each country’s executives appear to display a preference toward sources they have a decided advantage in: 44 percent of Canadian executives cite solar power, the U.K. is evenly split between solar and wind at 33 percent each, the U.S. favours wind at 37 percent, Russia prefers biofuels at 50 percent, and Australian executives are split between biofuels, geothermal power, hydroelectric power and solar (notably, no one from Australia believes that wind power will be a major contributor to future energy needs).
- All Russian respondents concerned about resource nationalism. Resource nationalism appears to have a fairly limited impact for most countries surveyed, with 53 percent saying it has no impact at all. However, over the past 12 years, Russia has seen a growing re-nationalisation of its oil and gas industry. Reinforcing this trend, BP sold its stake in joint Anglo-Russian venture TNK-BP to Rosneft in a move that will render Rosneft responsible for almost half of Russia’s oil production. As a result, 75 percent of Russian executives say resource nationalism will significantly impact their operations this year, and 25 percent say it will have a moderate effect.
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The combined fee income of all the BDO Member Firms, including the members of their exclusive alliances, was $6.02 billion in 2012. The global network provides advisory services in 138 countries, with almost 55,000 people working out of 1,204 offices worldwide.
This is the initial international BDO Natural Resources Study with emphasis on the oil and gas industry. The research was conducted among senior management executives representing a broad mix of companies and geographic areas. Topic coverage was highly diverse including, but not limited to: key drivers of growth for the global oil and gas industry, access to capital and credit, strategies for enhancing profitability, impact of regulations, key targets for geographic expansion and the identification of important threats facing the global oil and gas industry.
This multi-country executive survey was designed and managed by Market Measurement, Inc. in close consultation with BDO. Questionnaire content was in the native language of each country.
The study findings are based upon attitudes, behaviours and perceptions among 84 oil and gas executives with similar levels of representation in the study data across the U.S., Australia, Canada, Russia and the United Kingdom. Study participants were identified through major trade and professional associations, subscribers to industry publications and similar sources. Additional characteristics of this important research initiative include:
- Job titles: More than one-third (39 percent) are the chairman, CEO, president or managing director of the organization, and the survey saw a slightly more robust level of representation from CFOs/controllers/directors of finance (44 percent).
- Geographic coverage: Almost three-quarters (73 percent) have international operations.
- Sales revenue: Almost one-half (43 percent) of the participating companies report annual worldwide revenues in excess of $50 million.