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SPRING 2013

International Oil & Gas Executives Seek to Solidify Gains in Boom Year International oil and gas executives are feeling optimistic about the year ahead.

A

ccording to our inaugural International Natural Resources Study, 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. In addition, nearly one-third (31 percent) of executives polled feel that demand for

resources, strong as ever, will influence growth. From December 2012 through March 2013, we surveyed 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 for their insights on growth strategies, industry consolidation, the environment, regulatory affairs and labour issues.

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This is the BDO 2013 International Natural Resources Study, with an emphasis on the oil & 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. The survey was independently managed by Market Measurement, Inc., a market research consulting firm who fielded the survey during December 2012 through February 2013. For more information on BDO’s service offerings to this industry vertical, please contact one of the regional service leaders below:

Contact: Sherif Andrawes, Australia +61 8 6382 4763 Sherif.Andrawes@bdo.com.au Charles Dewhurst, United States +1 713-986-3127 CDewhurst@bdo.com Scott Knight, United Kingdom +44 (0)20 7486 5888 Scott.Knight@bdo.co.uk Lorraine Walker, Canada +1 403-213-2592 LWalker@bdo.ca Vladislav Poguliaev, Russia +7 495 797 5665 x4400 V.Poguliaev@bdo.ru


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BDO 2013 International Natural Resources Study: Oil & Gas

Factors Driving Global Industry Growth 7%

7%

11% 45%

30%

Access to capital or credit Demand for resources New production technologies Increased commodity prices Geographical expansion

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. 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-andbust cycle. 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.” – Charles Dewhurst, Global Natural Resources Leader, Natural Resources industry group at BDO u  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 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 number one environmental priority. In contrast, oftendiscussed carbon emissions and water pollution trail fracking at 15 percent apiece.

Who Will Lead Future World Oil Production?

TOTAL Australia

60%

Canada

50%

U.K.

40%

U.S. Russia

30% 20% 10% 0%

United States

Saudi Arabia

Russia

Brazil

Canada

Iraq

Iran

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BDO 2013 International Natural Resources Study: Oil & Gas

“New resources inevitably demand innovations in how we exploit them. But new technologies always bring risk and unintended consequences. Operators and regulatory bodies must work in conjunction, rather than against each other, to find the most responsible ways to take advantage of burgeoning opportunities.” – Lorraine Walker, Oil & Gas practice leader at BDO Canada

Top Domestic Regulatory Concerns 9%

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. 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. The underlying reason appears to be that much of the U.K.’s exploration and production activities occur beyond its borders, which aligns with findings from our international mining study. 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

surveyed expecting the substitution of technology for labour 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.

11% 40% 14%

26%

Environmental policy Corporate tax structure Other Labour and employment issues Anti-bribery / corruption legislation

u  Environmental policy tops executives’ regulatory concerns

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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.

“Over the past few years, demand for resources has placed extreme pressure on a shrinking, aging workforce. But oil and gas companies are refocusing their efforts on making the industry attractive to top engineering students worldwide, and in the coming years we may see the labour shortage abate.” – Sherif Andrawes, chairman and leader of the Natural Resources Industry Group at BDO Australia

u  Labour shortages loom 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. This 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 labourers, 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 labourers. Russia leads this charge, with 80 percent of executives

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BDO 2013 International Natural Resources Study: Oil & Gas

u  Mergers and

u  Oil & gas executives

acquisitions top the list of strategies to increase value for stakeholders

are split on the most preferable way to enter a foreign market

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 costreduction programmes 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.

When asked how they would prefer to enter a foreign market, 30 percent of executives cite acquisition in the country of interest, and an equal number point to a joint venture with a local company in the country of interest. Canada (63 percent) and the U.K. (54 percent) overwhelmingly favour the former, while the United States (41 percent) and Russia (67 percent) prefer the latter. Australian executives split their preferences fairly evenly across a variety of methods, ranging from establishing a subsidiary in the country of interest to issuing a direct license application to an existing structure.

“I am surprised by the findings of our survey. Executives need to be alert for new areas of expansion to stay ahead of the curve. A company that is not constantly looking for new assets to add to the portfolio is at risk of moving backwards.” – Scott Knight, head of the Natural Resources practice at BDO United Kingdom

What Is Your Most Preferable Way to Enter a Foreign Market? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

TOTAL

Australia

Canada

U.K.

U.S.

Russia

Joint venture with the government

5%

0%

0%

0%

12%

0%

Subsidiary in the country of interest

7%

20%

0%

8%

6%

0%

Direct license application to existing structure

10%

30%

0%

15%

6%

0%

Independently establishing operations

18%

10%

13%

8%

29%

0%

Joint venture with a local company

30%

10%

25%

15%

41%

67%

Acquisition in the country of interest

30%

30%

63%

54%

6%

33%

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BDO 2013 International Natural Resources Study: Oil & Gas

u  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 United States 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.

u  Resource nationalism a growing concern in Russia 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.

Top Alternative Energy Methods by Country

5

Other Geothermal

TOTAL

Biofuels Hydroelectric Wind

Australia

Solar

Canada

U.K.

U.S.

Russia 0%

10%

20%

“Nationalised resources are a fact of life for companies operating alongside state-owned entities. Finding effective ways to maintain a competitive edge and profitability in such unique market conditions is a top-of-mind concern for these executives.” – Vladislav Poguliaev, Natural Resources sector leader at BDO Russia

30%

40%

50%

Overall, the global oil and gas industry is poised for a strong 2013. But executives know that leaner times may follow, and they are making careful decisions to gird their companies against future volatility. Technology advancements, workforce dynamics and the shifting geopolitical landscape will continue to radically transform the industry. Executives must remain diligent about mitigating the impact of these evolving risks, and must be realistic about the sustainability of their operations.

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Methodology statement

BDO International Natural Resources BDO’s international natural resources professionals combine deep industry knowledge and technical expertise to help you navigate this tumultuous landscape both at home and abroad. Our experienced partners and directors are trusted advisors to oil & gas, mining and alternative energy companies. When you need guidance on complex matters, including mergers and acquisitions, revenue recognition or reserve estimations, our professionals provide swift resolution of technical issues and questions through partner-led client service teams, direct access to technical leaders and the resources of our global network in more than 120 countries.

About the international BDO network BDO refers to one or more members of BDO International Limited, which form part of the international BDO network of independent member firms (the ‘BDO network’). Service provision within the BDO network is coordinated by Brussels Worldwide Services BVBA, a limited liability company incorporated in Belgium with its statutory seat in Brussels. Each of BDO International Limited (the governing entity of the BDO network), Brussels Worldwide Services BVBA and the member firms is a separate legal entity and has no liability for another such entity’s acts or omissions. Nothing in the arrangements or rules of the BDO network shall constitute or imply an agency relationship or a partnership between BDO International Limited, Brussels Worldwide Services BVBA and/or the member firms of the BDO network. BDO is the brand name for the BDO network and for each of the BDO member firms. 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. © 2013 BDO. All rights reserved.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

This is the BDO 2013 International Natural Resources Study, with an emphasis on the oil & 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 United States, 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: • J ob titles: More than one-third (39 percent) are the chairman, CEO, president or managing director of the organisation, 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.

BDO International 2013 Natural Resources Study: Oil and Gas  

This is the initial BDO International Natural Resources Study, with emphasis on the oil and gas industry.

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