Markets at the beginning of 2009 were still influenced by the credit crisis and ongoing investor insecurity. Governments were looking internally at how to support the failing financial system and restore confidence with fiscal rescue packages for banks and investment funds. Given the extent of the crisis, the rate of recovery in the second half of 2009 was perhaps surprising, with an economic turnaround in Asia and most European countries moving out of technical recessions by the end of 2009.
Oil pricing
The Brent crude price early in 2009 reached a low of USD 40 per barrel, recovering to USD 75 per barrel at the end of 2009. The critical factor that influenced the turnaround in the oil price was the strength of world economic recovery. The application of fiscal spending policies from the United States and China, particularly in the manufacturing and heavy industry sectors, led to stronger than expected recovery in the third and fourth quarter.
On the demand side the recovery of the economy assisted with stronger than expected demand from North America and Asia, notably from China and India.
Gas pricing
Historically, the gas price has been strongly linked to the oil price, however gas prices did not follow the same upward curve of oil prices in the past year due to a combination of factors: large discoveries of shale gas in the United States, where gas costs around half of oil in terms of heating value, and the coming onstream of large LNG projects just as demand shrank due to the global recession.
Towards the end of 2009 a cold start to winter and concerns about European supply channels contributed to a slight recovery of the gas price.
Investment trends
The trend of oil companies reducing investment in marginal projects continued, with technically unconventional projects being delayed or cancelled and budgets being decreased across the board. Oil companies concentrated on their core business of conventional hydrocarbon extraction, and investment shifted from marginal areas to high yield low-cost areas. The mid term effect for the major companies of the contraction of investment in 2009 is likely to be difficulty in retaining reserves replacement ratios as capital budget restrictions on investments in incremental production and the lack of development of unconventional projects will restrict reserves and production levels.
The net result of the economic recovery towards the end of 2009 was an increase in the oil price to USD 75 per barrel. When the oil price reached USD 70 to USD 80 per barrel in 2008, many companies invested in alternative energy and unconventional projects such as Canadian oil sands or shale, which became more economically viable. It is reasonable to suggest that if the higher oil price is sustained for the next year, investment in alternative sources of energy will gradually resume.
Evidence is available of the significant market pickup in the latter half of 2009, with rig utilisation rates approaching levels seen before the credit crisis, a good indication that the oil and gas business has rebounded strongly.
The more conservative approach to finance in businesses has also been reflected in dividend payout policies, with companies not paying out dividends in order to keep cash reserves where possible. We expect to see a larger number of mergers and consolidations towards the latter half of 2010, with companies acquiring resources to keep the reserves replacement ratio healthy and production numbers up.
Operating environment
The increase in the oil price is particularly important given the gradual increase in operating costs. When the oil price decreased there was only a marginal decrease in costs so profit margins were still constricted.
Other pressures include changes in the contractual environment, with the application of service contracts in new areas such as Iraq, and moves from governments to change current production sharing contracts to alter the split between government and oil companies – generally to the advantage of the host government.
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Average Daily Rig Numbers
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Future growth
As easily accessible or economically viable reserves become scarcer, the relationship between oil companies, National Oil Companies and governments becomes more important as it defines access to those reserves – but it is also important to note that as a result of a more competitive environment and the scarcity of opportunity the value of those reserves and therefore the value of the industry as a whole has increased. The past year has shown that the oil and gas industry is not dependent on western demand to the same degree as in the past - demand from emerging markets has fuelled the increase of the oil price to almost pre crisis levels. Future growth of demand in markets such as China, and the steps that are being taken to increase supply sources will ensure the growth of the industry for years to come.