oil and gas reality check 2015

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Price fluctuations unlikely to impact global (and Australian) oil and gas industry trajectory

16 July 2015: The cyclicality of the oil and gas industry, including recent price plunges, is unlikely to impact the long term trajectory of the sector.

However current fluctuations may speed up a number of global industry trends, according to the latest annual instalment of Deloitte’s Oil and Gas Reality Check report.

The 2015 edition of the global report highlights six key issues/trends:

  1. Shift in supply-demand fundamentals – Fluctuating industry dynamics are fuelling a power play between traditional and new oil suppliers
  2. New trading patterns emerging – As oil and gas supply and demand fundamentals continue to evolve, new global trade patterns are emerging
  3. OPEC: under pressure – OPEC currently supplies approximately 32% of the world’s crude oil, however, its market share will fall by 5% by 2018 as the supply of US tight oil picks up
  4. LNG prices: a buyer’s market – The price of LNG was once a model for stability, but it is less so now. Until prices stabilise, natural gas will trade in more geographically proximate regions 
  5. Investing in innovation: the cost of complexity – Capital spending is likely to fall off in the near term, however megaprojects will still be required to meet long-term global energy demand 
  6. National and integrated oil companies: evolving dynamics – It is currently hard to foresee a future where IOCs don’t play a pivotal role in oil and gas exploration and production.

Deloitte Australia Consulting partner, and national oil and gas leader, Mike Lynn, said the report presents the findings of a global team of Deloitte oil and gas experts, supplemented by expert perspectives from clients and industry executives.

“The global oil and gas industry has been built on long-term investments, and has successfully emerged from cyclical downturns in the past,” he said.

“Another year has certainly brought further changes to industry fundamentals, including expansion and contraction on a number of fronts.

“Macroeconomic conditions, demand-supply balance, regulatory constructs, cost of inputs, commodity prices, competitive behaviour, the impact of geopolitics, and the related use of energy as a diplomatic tool are all coming into play, and impacting different countries and markets, in different ways.”

Three of the trends are particularly relevant for an Australian LNG sector about to turn the taps on a number of mega-projects, making the country a new and significant global gas exporter.

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Shift in supply-demand fundamentals

The global centre of demand for hydrocarbons has shifted from the US to Asia, and most new supply of oil and gas will be absorbed by demand in Asia, on Australia’s doorstep and our core LNG export market.

“Asia is central to Australia’s LNG future as our operators shape-shift this year from construction to marketing and trading,” Lynn said.

“A question remains over where to locate the trading function. Singapore is angling to be the dominant centre for the region, but China is also likely to emphasise Shanghai as its trading hub.

“Australia’s LNG trade should hedge its bets and retain a foot in both locations.”

LNG prices: a buyer’s market

Around 60 million tonnes of additional LNG supply will come just from Australia in the next 24 months, just as buyers are challenging some of the long held basics of pricing and contracting.

According to Lynn: “Australia’s LNG projects are generally tied to the legacy model that includes long-term contracts and prices indexed to oil.

“But Australia simply isn’t competitive in its current state and things need to change. Local operators need to respond to changing customer demands and focus on margin improvement by targeting cost and productivity gains if they are to achieve their full potential.”

Investing in innovation: the cost of complexity

Getting costs and productivity corrected to match the new price environment is a competitive imperative.

“Our LNG sector, and including suppliers and contractors, needs to have a cost and productivity profile that is cost competitive and economically viable at US$50 per barrel,” Lynn said.

“But improvements are only going to come via a focus on innovations across people, data and organisation and where the sector does away with its traditional ‘go it alone’ attitude and collaborates at every opportunity.”

About Deloitte

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Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 200,000 professionals, all committed to becoming the standard of excellence.

About Deloitte Australia
In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms, and winner of both the Australian Financial Review/CFO Audit Firm of the Year and Accounting Firm of the Year awards 2013, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 6,000 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. Formore information, please visit Deloitte’s web site at www.deloitte.com.au.

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