Legislation Inhibits Petroleum Industry Growth, Forcing Firms To Re-strategize

January 2011 Vol. 238 No. 1

A study by BDO USA, LLP found that 54% of chief financial officers at oil and gas E&P companies feel “legislative changes” will be the leading factor inhibiting growth of the U.S. oil and gas industry in 2011. In addition, 40% cite “legislative changes” as the greatest financial challenge in the year ahead.

The legislative/regulatory environment was a major cause of delays or terminations of exploration or processing projects in the past year. Among respondents who experienced a project delay or termination, 61% cited “federal or state environmental regulations,” 58% cited “legislative changes” and 39% cited the moratorium on drilling activity.

“One message came through loud and clear in this year’s survey – that legislative changes represent the biggest threat to growth in the oil and gas industry,” said Charles Dewhurst, partner and national leader of the Natural Resources industry practice at BDO. “With the mid-term election results, energy executives can anticipate an easing in the flow of new legislation impacting the industry. But will this be enough to relax the permitting process for deepwater drilling in the Gulf of Mexico?”

Many respondents do not anticipate a quick fix to drilling activity in the Gulf of Mexico – 38% do not expect drilling activity in the region to return to 2009 levels until 2012 or 2013, and 31% say it will be after 2013 or never.

Industry is taking measures to meet growing demand: A majority (71%) of CFOs expects global demand for oil to increase in 2011 and 67% expect global demand for natural gas to increase. Nearly half (46%) plan to maintain  the total number of oil and gas drilling rigs operated by their company next year, and another 34% plan to increase their count. When asked what is the most important factor driving the overall growth of the U.S. oil and gas industry in 2011, 18% of CFOs cited new production technologies – nearly triple the number from 2009. However, costs are expected to rise – 66% expect drilling and exploring costs to increase. 

“Most CFOs see heightened demand for oil and natural gas in 2011, but drilling companies are reluctant to increase the rig count until they see this materialize. The result will inevitably be increased drilling costs and this was borne out in the survey.”

Concerns about international competition continue: 57% are concerned President Obama’s proposals to eliminate certain tax incentives for American oil and natural gas producers will cause increased dependence on foreign oil and natural gas, and send investment dollars and jobs overseas. Despite an expected increase in global demand, firms are staying put geographically for now; only 7% plan to expand to new geographic areas outside of the U.S. in 2011.

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