Energy-market sentiment remains relatively positive amid rising economic expectations, according to Ernst & Young’s Americas Oil and Gas Center. Global economic growth has turned positive, but the recovery is slow and fragile. The center analyzes trends and issues affecting the energy industry.

Natural gas is abundant and reliable, and companies are making strategic acquisitions, particularly for long-term North American unconventional gas, according to the center. A recent shallow-water discovery off the coast of Louisiana by McMoRan Exploration Co., New Orleans, may pave the way for additional exploration in this area. Short-term fundamentals for gas remain relatively weak, however.

Until recently, strong supply, largely from growth in unconventional gas, particularly shale gas, coupled with sluggish demand and high storage levels, has kept gas prices depressed. Demand and prices have picked up strongly with the colder weather, note the center’s researchers.

Ernst & Young Americas oil and gas sector leader Marcela Donadio says, "As Copenhagen demonstrated, environmental concerns and the focus on carbon management are clearly going to affect the future of this industry. In addition, there is still uncertainty around the future of energy policy.

"This has opened the door for natural gas. Recent transactions indicate that gas development is seen as a long-term hedge against prospective carbon-emission regulations."

Despite the industry’s largest oil-demand decline in almost 30 years, oil demand is showing some signs of improvement, especially in developing economies. Developed economies are experiencing a more modest economic recovery.

Additionally, there is some anticipation that the economic recovery will be an "oil-less" recovery, meaning that the developed economies will not return to previous high levels of fossil-fuel consumption due to gains in energy efficiency, substitution and behavioral change.

Upward cost pressures are starting to relent, paving the way for growth, and potentially improving margins for producers.

Oilfield services expectations for 2010 are mixed, according to the center’s research. The global rig recovery began in third-quarter 2009, and those numbers continue to improve. While some downward pricing pressures remain for the oilfield services sector as a whole, Ernst & Young expects to see some early progress in the subsectors that deal with consumable goods, such as bits, pumps and tubular goods. Most companies slashed inventories for these consumables during the recession and are slowly rebuilding, which is a positive sign for the broader sector.

Offshore markets present a mixed picture, with the ultradeep markets staying strong and shallower jackup markets still very weak. Survival may involve consolidation; therefore, additional mergers in the sector are expected in the next year or so. While there has been some slight improvement, the credit-market constraints continue to be particularly important for medium and smaller companies.

In terms of M & A, ExxonMobil’s $41-billion acquisition of XTO and the merger of Suncor and Petro-Canada resulted in an increase in total transaction value in 2009 compared to 2008. Excluding those deals, however, activity for the year was down substantially. Global financial markets remain depressed and credit is still relatively tight, although there are some signs of loosening.

"In 2010, well-funded and capitalized companies will have the opportunity to fill strategic needs. We will continue to see both ‘offensive’ and ‘defensive’ deals in the sector in the near-term, but as the economy and other oil and gas industry metrics improve, we will hopefully see a shift away from a defensive focus to a more offensive approach," says Jon McCarter, Ernst & Young transaction advisory services leader.

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