Age of Plenty Predicted for Natural Gas in U.S. According to Deloitte Survey
23 December 2009


The United States is entering an age of plenty for natural gas, according to a survey of oil and gas professionals conducted by the Deloitte Center for Energy Solutions.

'The survey numbers are striking,' said Gary Adams, vice chairman and leader of Deloitte's oil and gas practice. 'The overwhelming majority of survey respondents, 84 percent, say the best days for the natural gas industry are still ahead of us, despite today's low prices.'

Current industry thinking would attribute this enthusiasm about natural gas to a surge in production from unconventional formations, such as shale and coal bed methane, and to the expectation that climate change legislation will increase the demand for gas-powered electricity generation.

Adams notes the survey confirms the increasingly common perception among many energy pundits that America's energy future will become more closely aligned with natural gas than we thought just a few years ago. In contrast, oil will continue to be a dominant fuel source for transportation for many years to come, but difficulties are expected to continue when it comes to finding and producing the fuel in the future, mainly because oil is increasingly found in challenging environments such as deep water and arctic regions, or in reserves controlled by national oil interests.

'While most analysts agree that oil will remain vital for transportation, the current belief in a vibrant future for domestic natural gas - driven by significant technological advances in the production of gases from unconventional fuel sources - stands in contrast to the industry's thinking just a few years ago, which indicated that natural gas supplies in the United States would not grow dramatically,' said Adams.

The survey further supports the optimism about a natural gas future by looking at several key perceptions
• While oil is expected to remain the single most widely used energy source in the United States for some time, its usage is expected to decline over time. The number of respondents that expect oil to remain the most widely used overall energy source in the United States drops 16 points over the next five years - sinking to 41 percent who believe oil will dominate in 2015 from 57 percent who currently think oil is the most widely used overall energy source.
• In contrast, expectations that natural gas will be the most widely used fuel source by 2015 double over the next five years, rising to almost one quarter (24 percent) who believe it will dominate in 2015 from one in 10 respondents who see natural gas as the currently dominant fuel source. Current industry thinking would indicate that much of the rising demand for natural gas will be for power generation.
• Additionally, almost one in 10 respondents expects unconventional natural gas to be the main source of energy in five years - as well as an additional 4 percent who think it will be liquid natural gas (LNG) - further elevating the status of natural gas in respondents' views as a critical energy source.
• When it comes to fossil fuel production, 85 percent of respondents believe the domestic production of natural gas will increase in the next five years, compared to only 45 percent who think American oil production will increase during the same time period.
• A higher percentage of survey respondents believe oil prices will increase versus respondents that think natural gas prices will increase. More than half (51 percent) believe the price of oil will greatly increase over the next five years. In contrast, only 32 percent of respondents foresee the price of natural gas greatly increasing in the same time period, probably due to the abundant supply of natural gas versus increasingly constrained oil supplies.

Climate Change Legislation Expected to Pass; Industry and Consumers to Feel Impact
Survey respondents also were in accord regarding climate change legislation, anticipating some form of the legislation would pass within two years, but that it would penalize oil and gas companies, and increase fuel prices for consumers.

'According to our survey,' said Adams, 'a solid majority of respondents, 60 percent, think that some form of the climate change legislation currently under discussion in Congress will be finalized and passed within the next two years. A mere 14 percent think Congress will never pass such legislation.'

While oil and gas professionals are split on whether or not climate change legislation will reduce greenhouse gas emissions, they are united in their opinions that it will push consumer prices higher and penalize oil and gas companies:
• More than 90 percent of respondents believe climate change legislation will lead to higher gasoline and natural gas prices for consumers.
• Three quarters (75 percent) of all respondents expect climate change legislation will lead to significantly lower profits for oil and gas companies and 68 percent say it will lead to more layoffs in the industry.
• Most oil and gas professionals (76 percent) believe that climate change legislation is not likely to create more jobs for Americans.

'All of this speaks to a general concern about the effectiveness of governmental energy policies among oil and gas professionals,' said Adams. 'The survey reveals that most oil and gas professionals, 76 percent, think the energy industry is heading in the wrong direction and a similar amount, 63 percent, say it is in worse shape now than it was even a year ago.'

Despite Concerns about Layoffs and Expense Cutting, Respondents are Optimistic about Exploration and Production Revenues
When the survey looked at recession-related business issues, it found that concerns about layoffs and expense cutting persisted among oil and gas professionals:
• Almost one in two oil and gas professionals expects that layoffs in the industry will increase over the next year.
• Most oil and gas professionals say their companies are reducing operating expenses (75 percent) and many say their companies are reducing overall capital expenditures (56%) in response to the recession.

Despite these concerns, respondents do not expect revenues to shrink in the various oil and gas industry sectors in the next year, with the exception of the refining sector:
• 76 percent expect revenues to grow at national oil companies
• 76 percent expect revenues to grow at international oil companies
• 67 percent expect revenues to grow at independent exploration and production companies
• 61 percent expect revenues to grow at supply and service companies
• 58 percent expect revenues to grow at outside energy consultancies
• 35 percent expect revenues to grow at refining companies

The survey also shows that, contrary to speculation by many analysts about mergers and acquisitions in the energy sector, most oil and gas professionals do not currently see such activity at their own companies. When asked how their individual companies are responding to current oil and gas prices, only 14 percent say their company is pursuing a merger or acquisition.

'What we are seeing here is an underlying confidence in the sustainability of the oil and gas industry,' said Adams. 'Oil and gas companies have survived severe volatility over the past decades, and despite the current recession, these companies have sophisticated, adaptable business models and believe they can post healthy revenues well into the future.'

Energy Independence will be Hard to Achieve in the Near Term
A final area of interest in the survey concerned energy independence. Oil and gas professionals are more or less evenly split on whether or not the United States can realistically achieve energy independence with 53 percent saying the United States can achieve independence while 46 percent say it cannot. Among the half that believes it is possible, most do not expect it for at least 15 years.

Concerns about independence from foreign oil are further complicated by climate change legislation. The majority of oil and gas professionals (62 percent) think climate change legislation will worsen the United States' dependence on foreign nations for oil.

Adams believes the survey responses reinforce the idea that oil and gas professionals are clearly looking to the future and that they see their industry as a vital part of the bridge to alternative energy and renewables. 'Oil and gas will continue to be critical to meeting energy demand for many years to come, with natural gas playing an increasingly important role in our energy future. The oil and gas industry is healthy, innovative and enthusiastic about the opportunities before it,' he added.

Source: Jon Rucket - jrucket@deloitte.com