ANNUAL REVIEW

Oil & Gas 2016

October 2016  |  SECTOR ANALYSIS

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Oil & gas is an industry that has seen its fair share of ups and downs over recent years – a commodity business seemingly embroiled in a constant cycle of adversarial challenge underpinned by a ‘boom to bust and back again’ mentality. Certainly, volatility and dramatic change have done much to shape the industry landscape over the past 12 months or so, with plummeting oil prices doing much to plunge a substantial number of operators into distress.

 

UNITED STATES

Jennifer A. Morrissey

Dentons US LLP

“Volatility and dramatic change have shaped the US energy landscape. Plummeting oil prices have sent a substantial portion of the industry into distress, requiring many oil & gas companies to file for bankruptcy protection. Nevertheless, the majority of companies that have filed for bankruptcy are still operating, and the US remains the world’s top producer of petroleum and natural gas. Rig counts are down, but careful selection of profitable locations, such as the Permian Basin, has allowed operators to continue producing even at today’s low prices. Technological advances have kept natural gas abundant and cheap.”

 

MEXICO

Rogelio Lopez-Velarde

Dentons Lopez Velarde

“Despite the low prices of oil worldwide, and what that has represented in terms of a slowdown of the sector on a global basis, Mexico has continued its pace in opening up the energy sector following the 2014 reform and overhaul of the industry. The National Hydrocarbons Commission (CNH) has continued the launch of bids to award blocks for exploration and production, both onshore and offshore, and including shallow and deep water, conventional and unconventional resources. So far the efforts have been successful, with a number of companies participating. Round one will soon be completed, and round two is already actively underway.”

 

BRAZIL

Anderson Dutra

KPMG

“Optimisation, cost reduction, M&A and restructuring, in order to improve operational synergy, have been key trends. After going through the anticipation of ‘the golden age’ around the pre-salt reservoirs, the Brazilian oil & gas industry is restructuring, particularly now that we have had a significant change in the country’s government – former president Dilma Rousseff has been impeached and the new president Michel Temer has taken office. Right now there are a series of steps being undertaken to try to hasten investment in the sector – which was one of the most promising sectors in the country, representing almost 13 percent of GDP – and to recover an area that has also been affected by the political and financial crisis in the country.”

 

SPAIN

Juan I. González Ruiz

Uría Menéndez SLP

“Spain has been affected by the political impasse originating in the general elections held in December 2015. Ten months later, and after new elections were held in June 2016, we continue without a government and the threat of new elections looms on the horizon. In a highly regulated legal environment as that of oil & gas in Spain, a lack of government means that new projects and politically sensitive transactions are suspended. Nevertheless, low oil prices have put a great deal of pressure on Repsol, and to a lesser degree Cepsa. Repsol has divested and disposed of certain businesses – such as Spanish LPG, and oil refining and LPG in Peru and Ecuador – and has been forced to dispose of its stake in CLH and reduce its stake in Gas Natural. Cepsa is reported to be interested in selling its stake in Medgaz.”

 

PORTUGAL

Rui Pena

CMS Rui Pena & Arnaut

“Portuguese imports of crude oil and natural gas increased in 2015 compared to the previous year, thus increasing Portugal’s energy dependency from 22.4 percent in 2014 to 78.3 percent in 2015 and putting an end to a trend of reduction of foreign oil dependency that had begun in 2005. This was mostly due to a decrease of the weight of renewables in the electricity generation mix, especially hydroelectric generation, which saw a year-on-year decrease of almost 22 percent. Portugal also experienced a re-launch of onshore and offshore oil & gas prospecting in the Lusitânica basin, as well as in the deep offshore just off the west coast of Algarve.”

 

NETHERLANDS

Eric Wesselman

KPMG Advisory NV

“The key trend seems to be innovation and collaboration to outsmart the globalising industry. Historically, Dutch companies have proven to be quite successful in innovating their products and production techniques, putting our Dutch offshore industry in a world league leading position. The Dutch offshore industry does not compete on price, but on quality and the capability to create solutions that can operate in very complex and harsh environments. Now that investments in large capital projects are declining, we see that our industry is reinventing itself and finding new ways to new markets to sustain its success. Other trends are the business focus on growth in new markets – specifically in Asia – combined with fierce internal cost reduction and cost optimisation programmes. It seems cash is king in the industry at the moment.”

 

ITALY

Cristina Martorana

Orrick

“In the context of the liberalisation of the gas market inside the EU through Directive 2009/73 CE, among others, Italy only began implementing a policy in this respect in 2000, pursuant to Legislative Decree 164/2000. Since then, no significant changes in gas market regulation have been carried out, but there is a positive commitment from the Italian government and regulatory authority AEEGSI to promote a competitive system based on a call for tenders for gas distribution concessions, one of the final segments of the gas industry chain. In fact, local districts, called ATEM, are starting to call for tenders in this respect. Another promising sector is the transportation of gas. In particular, thanks to LNG technology and gas compression, it is possible to transport gas through other ways, such as camion, train and ship, instead of pipelines.”

 

JAPAN

Mina Sekiguchi

KPMG

“Low oil prices have triggered majors and regional NOCs to reconsider their asset portfolio in the Asia Pacific region. Not only are some selling down their equity stakes, some development projects are being postponed, some abandoned. Those that could possibly be abandoned are the ones with more technical difficulties and will likely by the most time and cost consuming before completion. Some majors have their global business service centres in Asia. In pursuit of further cost reduction under the current oil prices, some major players are considering taking advantage of robotics or digital labour in their back office operations. At the time, when the industry is facing the new paradigm of ‘the lower, the longer’ scenario, oil & gas companies, which have been relatively profitable in the past, may drastically change their way of doing businesses very quickly.”

                                                                                                                            

SINGAPORE

Darren Murphy

Jones Day

“The oil & gas sector in Southeast Asia has been impacted not only by regional developments but also by global trends. Large parts of the sector operate in a truly global market, with issues such as excess supply, faltering world demand, increasing environmental regulation and developments in renewables being of primary importance. At the regional level, Southeast Asia is facing challenges from falling production, turning once significant energy exporters into net importers, and having to deal with many maturing fields. At a business level, a feature of the region is the continued rise of the national oil companies, which now have decades of experience and are expanding their influence in their domestic markets as well as internationally.”

 

AUSTRALIA

Jonathan Smith

KPMG

“Clearly, the defining trend has been the decline in oil prices. Remember that it was only in June 2014 that oil was trading at around US$107 per barrel, which is not that long ago. Since that time, it plummeted to around $26 per barrel, before bumping back to around $45. That is a huge drop in prices in a relatively short space of time. The last time the industry went through a serious down-cycle like this was way back in 1986, so it is unknown territory for many of those operating in the oil & gas sector today. The industry is now wondering: “What does the new normal look like?”

 

NIGERIA

Olufemi Abegunde

Deloitte

“The oil & gas sector serves as the Nigerian economy’s main external source of funds, upon which a significant share of government budgets and expenditures are hinged in its annual appropriations, and no doubt it is facing very challenging times. The key underlying challenges of the sector were even more precipitated by the over two-thirds decline in price from the high of over $100 per barrel in 2014 to current levels of about $40 per barrel. The industry’s challenges can be segmented into externally driven factors and country specific issues. The global decline in price has been caused by a combination of global politics; Iran’s entry into the supply system and the pre-existing supply gluts, as well as the continued supply from key OPEC members and non OPEC members and the lifting of export restrictions by the US, have resulted in the price decline.”

 

GHANA

Atsu Agbemabiase

A & A Consulting Limited

“The newly discovered Tweneboa, Enyera and Ntomme (TEN) oil fields, which were being explored by Tullow Oil and its partners, successfully started commercial production of oil on 18 August 2016. The new TEN fields are expected to produce up to 76,000 barrels of oil per day and approximately 15 million standard cubic feet of gas when fully operational. This development has breathed new life and impetus into Ghana’s relatively new oil industry, which was going through some challenges, especially on the back of falling global oil prices. Oil production from the TEN fields is expected to not only boost oil revenue, but also produce a substantial amount of the oil & gas required for power generation in Ghana. It must also be noted that the TEN fields, which are subject to an ongoing boundary dispute between Ghana and its neighbour Ivory Coast, are still being adjudicated before the International Tribunal of the Law of the Sea. It is expected that a definite ruling within the next year will finally settle this dispute.”

 

SOUTH AFRICA

Roy Waligora

KPMG

“South Africa still faces an ongoing energy crisis balancing supply and demand. To address this, the last 12 to 18 months have seen the country obtain 6377 MW of renewable energy and connected 44 projects with 2021 MW capacity to the national grid, with private investment in the initiative exceeding R194 billion through the successful Independent Power Producer Procurement Programme. However, the Department of Energy (DoE) has recognised the need to support the base-load energy mix with gas and cogeneration. In the absence of significant proven gas reserves, importing liquefied natural gas (LNG) has become a trend to support the development of power generation capacity.”


CONTRIBUTORS

A & A Consulting Limited

CMS Rui Pena & Arnaut

Deloitte

Dentons Lopez Velarde

Dentons US LLP

Jones Day

KPMG

KPMG Advisory NV

Orrick

Uría Menéndez SLP


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