Oil and Gas Executives Seek to Solidify Gains
By Charles Dewhurst
Nearly half of international oil and gas executives feel better about their access to capital and credit in the year ahead, according to new research conducted by BDO, which is an international network of independent member firms. The initial international BDO Natural Resources Study emphasized the oil and gas industry.
An additional 45 percent of these surveyed cited this access as the top driver of industry growth in 2013. In addition, nearly one-third (31 percent) of executives polled feel that demand for resources, strong as ever, will influence growth.
Yet rather than take the opportunity to grow their businesses by expanding international operations, companies are using the current boom to hedge against the short-term uncertainties of the global oil and gas industry. Executives are instead forging ahead conservatively, suggesting a degree of anxiety about the industry’s long-term profitability. 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.
Only 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. 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.
The BDO study of 84 C-Level and senior financial executives at oil and gas companies in the United States (U.S.), Russia, the United Kingdom (U.K.), Australia and Canada sought insights on growth strategies, industry consolidation, the environment, regulatory affairs and labor issues and was conducted through February 2013.
Shale Underlying This Year’s Industry Boost
While the long-term prospects of the international 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: 40 percent of Canadian executives expect their own country to lead oil production in the future. As Canadian companies work to perfect the technology to extract and transport crude oil from their oil sands — one of the largest areas of proved reserves in the world — the country stands poised to become a net energy exporter. Though lingering issues surrounding the environmental impact of transporting the oil to U.S. refineries remain, Canadian executives have reason to feel optimistic about their energy production prospects.
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 (whose executives are split evenly between CO2 emissions, water pollution and ecosystem disruption), executives in every country rate it as their No.1 environmental priority. In contrast, often-discussed carbon emissions and water pollution trail fracking at 15 percent apiece.
Environmental Policy Tops Executives’ Regulatory Concerns
Oil and gas executives are closely watching the regulatory environment. 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.
Numerous 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. The underlying reason appears to be that much of the U.K.’s exploration and production activities occur beyond its borders.
Meanwhile, in the wake of ongoing fiscal policy discussions in the United States, U.S. executives display a particular sensitivity to regulatory changes. Well over half (59 percent) indicate that legislative changes will inhibit the growth of the oil and gas industry in 2013, and 70 percent expect more restrictive governmental regulations to be the top threat to their company. Thirty-five percent of U.S. executives cite corporate tax structure as a primary domestic regulatory concern moving forward.
Labor Shortages Loom
One of the most immediate concerns for executives in the year ahead is the possibility of labor 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. This is not a new trend, but one that is intensifying; when asked if their ability to hire new employees had affected their business in 2012, 42 percent indicated that they had experienced either significant or moderate impact.
As the current workforce ages out and engineering schools work to train the next generation of skilled oil and gas engineers, executives worry that the human capital necessary to take advantage of the current boom may not be readily available. Some countries are taking steps to close the gap by employing new technologies to take the place of skilled personnel. Russia leads this charge, with 80 percent of executives surveyed expecting the substitution of technology for labor to have a positive impact on their business this year. The United States shares in their optimism; 57 percent expect positive results this year, as well.
Mergers and Acquisitions Top the List of Strategies to Increase Value for Stakeholders
Though executives may not be aggressively eyeing international expansion opportunities, they are still seeking ways to increase stakeholder value in the year ahead using other expansion strategies. Forty-four percent of executives believe that mergers and acquisitions will be the key means to this end, with Australia (50 percent), the U.K. (80 percent) and Russia (67 percent) all citing it as their top strategy. U.S. and Canadian executives, however, intend to institute cost-reduction programs instead, buttressing their plans to improve internal business processes. Forty percent of Canadian executives and 38 percent of U.S. executives cite this as their primary value-add strategy in the year ahead.
Executives Feel Most Optimistic About Alternative Energy Methods
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 United States favors 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.
Charles Dewhurst is the global leader for the international natural resources group at BDO International and leader of the natural resources practice at BDO USA LLP.