big spenders: the outlook for the oil and gas industry in 2012

1

Big spenders The outlook for the oil and gas industry in 2012

© The Economist Intelligence Unit Limited 2012

The outlook for the oil and gas industry in 2012

Big spendersA report from the Economist Intelligence Unit

Commissioned by

2


© The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 2012

About this report

Big Spenders: the outlook for the oil and gas industry in 2012 is an Economist Intelligence Unit report which analyses the oil and gas industry outlook from the point of view of top-level operators, including CEOs and other board-level executives and policymakers. The report has been commissioned by GL Noble Denton.

The Economist Intelligence Unit bears sole responsibility for the content of this report. Our editorial team executed the survey, conducted the interviews and wrote the report. The findings and views expressed do not necessarily reflect the views of GL Noble Denton.

Our research drew on two main initiatives:

A global survey of senior executives was conducted in October and November 2011. In total, 185 executives took part, representing a cross-section of firms in the oil and gas industry. These executives were very senior: one in three respondents were CEOs or managing directors. They represented firms ranging in size from less than US$500m in revenue (76 executives) to more than US$500m (109).

A series of interviews was carried out with leading industry figures between October and December 2011. Interviewees and other contributors are listed here.

We would like to thank all those who participated in the research.

Interviewees and other contributors:Thomas Ahlbrandt*, former vice president of exploration, Falcon Oil & GasMarc Albers*, senior vice president, ExxonMobilThomas P Barney, chief economist, Marathon Petroleum Corp Steve Chazen*, chief executive, Occidental PetroleumJean-François Cirelli*, vice chairman and president, GDF SuezFereidun Fesharaki*, chief executive, FG EnergyHamid Gayibov, managing director, Xenon CapitalAndrew Gould*, chairman, SchlumbergerSimon Henry, chief financial officer, Shell Jaap Huijskes, executive board member responsible for exploration and production (E&P), OMVBill Day, corporate communications manager, ValeroBill Klesse, CEO, ValeroDavid Knox, chief executive officer, SantosHelge Lund, chief executive, Statoil John Richels*, chief executive officer, Devon EnergyChristof Ruehl, chief economist, BP Carl Sheldon, chief executive officer, Abu Dhabi National Energy CorpJon Tait, head of global attraction, BPDonald C Templin, senior vice president and chief financial officer, Marathon Petroleum CorpMehdi Varzi, president, Varzi EnergyGonzalo Velasco, communications manager, Repsol

*Comments from these executives were obtained from conferences and company conference calls.

3



Contents

About this report 2

Executive summary 4

The oil and gas industry barometer 6Key findings from the Economist Intelligence Unit’s survey of oil and gas industry professionals

Investment prospects 9A look at the industry’s investment plans for the year ahead

Risky business 11After a tumultuous couple of years for the sector, how are attitudes to risk evolving?

A new energy politics? 13Implications from a year of turmoil in the Arab world

In focus 15Is unconventional gas really the game changer industry players think it is?

Refining 18 A focus on downstream investment prospects

Skills 20What are companies doing to plug the skills gap?

1

2

3

4

5

6

7

4



Oil and gas industry confidence is rising. In a 2011 report by the Economist Intelligence Unit, commissioned by GL Noble Denton, 76% of our survey respondents said they were either highly or somewhat confident about the business outlook for their company over the next 12 months. This time around, that figure has grown to 82%. Backing this up, we find a large rise in the share of respondents who describe themselves as highly confident about the next 12 months. Only 8% of respondents describe themselves as pessimistic about the outlook for 2012.

This optimism does not mean that executives are sanguine about the industry’s prospects, however. Rising costs and increasing regulation are both big concerns. Moreover, the outlook for the global economy remains deeply uncertain and, if economic conditions deteriorate, oil and gas companies will have to scale back their spending commitments accordingly.

Executive summary

5



Increased optimism will feed through into capital spending increases. According to our survey, nearly two-thirds (63%) of respondents are planning to invest either somewhat or substantially more over the next 12 months, whereas in last year’s survey that figure was just 49%. There has also been a shift in where companies see the greatest opportunities for revenue growth. Last year South-east Asia came top of the pile, with North America second, the Middle East and North Africa third and the Far East fourth. This year the rankings have changed, with North America top, the Far East second, South-east Asia third and Latin America fourth.

Rising operating costs emerge as the main barrier to growth. When questioned in detail about costs, more than 50% of respondents say that they expect an increase in wages over the next 12 months. The second-biggest concern is the rising cost of contractors, with 54% expecting costs to increase, compared with only 11% anticipating a decline.

The upstream remains the core focus for spending. A majority of respondents identify the upstream as the key area for business growth in 2012, meaning that exploration will be a major beneficiary of increased investment. Our survey shows that 41% of industry professionals expect to see increased investment in exploration activities over the year, with only 4% anticipating a decline.

Risk remains a key challenge. A combined 55% of respondents confirm that in the aftermath of the 2010 oil spill in the Gulf of Mexico, drilling permits have

become harder to obtain. Even more decisively, an overwhelming majority of respondents (82%) agree that in the post-Macondo period regulatory issues have become more important. The survey shows that increasing regulation is regarded by more than 30% of respondents as the main challenge for their company over the next 12 months, exceeded only by the impact of rising operating costs and the shortage of skilled professionals.

Unconventionals have revolutionised North America’s gas sector, but progress has been much slower elsewhere. The advent of projects such as the Marcellus, Barnett, Haynesville and Fayetteville shales has created a supply glut that has affected global prices. Development has been slower elsewhere because the “perfect storm” that made shale gas a scalable reality in the US is not as powerful in other geographies.

There is some scope for optimism for refiners. After a dismal few years the downstream sector is showing some signs of life, at least in the US. Refining profitability has improved in the US, where robust margins have resulted from a revival of consumption of refined products. But Asia and Europe remain in the doldrums.

Skills shortages are becoming more acute. According to our survey, this will be one of the major barriers to growth over the next 12 months. Last year skills issues came fifth on our list of barriers and were only identified as a top-three issue by 25% of respondents. This year the issue has risen to second on the list and has been identified as a key barrier by 34% of respondents.

Key findings

6



The oil and gas industry barometerFindings from the Economist Intelligence Unit’s survey of oil and gas industry professionals

• Optimism is high across the industry.

• The biggest challenges are rising costs for both labour and contractors.

• Skills shortages are a growing concern and regulation has remained a key issue.

• The Far East (including China, Japan and Korea) has emerged as the key area for revenue growth, leapfrogging three places from last year’s survey.

• In the aftermath of the 2010 Gulf of Mexico oil spill, executives are pessimistic about the regulatory impact.

Key points

1

How confident are you about the business outlook for your company

in the next 12 months? (% respondents)

Source: Economist Intelligence Unit

34%

42%

16%

7%1%

Highly confident

Somewhat confident

Neither confident nor pessimistic

Somewhat pessimistic

Highly pessimistic

42%20122011

40%

10%

7%1%

Highly confident

Somewhat confident



Highly pessimistic

Figures for 2011 were collected at the end of 2010.Figures for 2012 were collected at the end of 2011.

Figure 1 This second Economist Intelligence Unit oil and gas barometer shows that industry confidence is rising. In last year’s survey 76% of respondents said they were either highly or somewhat confident about the business outlook for their company over the next 12 months; in this year’s survey, that figure has grown to 82%.

As figure 1 shows, most of the increase is attributable to a large rise in the share of respondents who describe themselves as highly confident about the next 12 months. Only 8% of respondents say they are pessimistic about the outlook for the coming year.

Optimism is high across the industry, but confidence levels vary significantly between regions. In North America 90% of respondents describe themselves as highly or somewhat confident, in Asia-Pacific the figure falls to 81%, and in Europe it drops to 70% (see figure 2).

Increased optimism looks set to feed an expansion in capital expenditure during 2012. According to our survey, nearly two-thirds (63%) of respondents are planning to invest either somewhat or substantially more over the next 12 months, whereas in last year’s survey that figure was just 49% (see figure 3).

Our poll also shows that there has been a shift in where companies see the greatest opportunities for revenue growth. Last year South-east Asia (including India) came top of the pile, with North America second, the Middle East and North Africa third and the Far East (including China, Japan and Korea) fourth. This year the rankings have changed, with North America top, the Far East second, South-east Asia third and Latin America fourth (see figure 4 for the full rankings).

There has also been some rebalancing in expectations about which part of

7



the industry is likely to be the strongest source of business growth over the next 12 months. Upstream activities were the most popular choice for this question last year, and they have become even more heavily favoured this year, with the share of people selecting this option rising from 42% to 56%. Downstream activities are also expected to provide a stronger source of growth than last year, rising from 10% to 14%. Meanwhile, marketing has declined significantly, falling from 22% to 8%. Continued challengesOf course, growing optimism about the future does not mean that companies are sanguine about the challenges they are likely to confront. For the second year running, rising operating costs come out as the top barrier to growth in the industry (see figure 6). When questioned in detail about costs, more than 50% of respondents said that they expect an increase in wages over the next 12 months. The next-biggest concern is the rising cost of contractors, with 54% expecting costs to increase, compared with only 11% anticipating a decline.

One of the issues businesses seem to be getting more concerned about is a shortage of skills. Last year, skills issues came fifth on the list of barriers, and it was only identified as a top-three issue by 25% of respondents. This year 34% of respondents think skills shortages are going to be a big problem, placing the issue second in importance, behind rising operating costs. Similarly, access to finance

appears to be a growing concern for the industry, rising from 7th to 4th in the list of top 10 issues.

Regulation remains a key concern, coming third on this year’s list of barriers to growth. When asked about regulation directly, more than 82% of respondents agreed that regulatory issues have become more important since the Deepwater Horizon disaster in the Gulf of Mexico in 2010, and 55% of them think that obtaining drilling permits has become more difficult in the aftermath of Macondo.

Does your company plan to make more or less capital investment in dollar terms over the next 12 months? Select one.

(% respondents)

North America

90%

Europe

71%

Asia-Pacific

81%

Figure 2

How confident are you about the business outlook for your company in the next 12 months? (% respondents)


Figure 3

Invest substantially more (At least 25%

annual increase)

Invest substantially less (At least 25% annual decrease)

Invest somewhat

more

Invest somewhat

less

Keep investment the same as before

20% 43% 9% 3%22%

16% 33% 4%33% 11%

2012:

2011:


8



Which sgment of the industry do you expect to see the strongest business growth in the next 12 months? Select one. (% respondents)

Which of the following regions do you think will offer the greatest opportunities for your business in terms of

revenue growth over the next 12 months?2011 region rankings 2012 region rankings

South-east Asia (including India) 32 % North America 36%

North America 30 % Far East (including China) 31%

Middle East and North Africa 29 % South-east Asia (including India) 29%

Far East (including China) 26 % Latin America 26%

Latin America 23 % Middle East and North Africa 23%

Western Europe 15 % Eastern Europe and CIS 17%

Eastern Europe and CIS 13 % Australasia 17%

Sub-Saharan Africa 13 % Sub-Saharan Africa 15%

Australasia 10 % Western Europe (including Scandinavia) 12%

Central America 6 % Central America 8%

Source: Economist Intelligence Unit.

Figure 4

Top 10 barriers to growth 2011 Top 10 barriers to growth 2012

Rising operating costs, including insurance

premiums36 %

Rising operating costs, including insurance

premiums36%

Increasing regulation 30 % Shortage of skilled professionals 34%

Competitors 28 % Increasing regulation 31%

Limited new areas for exploration 25 % Limited access to capital/finance 23%

Shortage of skilled labour 25 % Limited new areas for exploration 20%

Increasingly limited areas of “easy” production 20 % Competitors 20%

Limited access to capital/finance 16 %Public backlash/litigation over environmental

concerns18%

Public backlash/litigation over environmental

concerns16 % Rising taxation/demands from states 17%

Ensuring adequate safety measures—for

environmental risks13 % Increasingly limited areas of “easy” production 16%

Rising taxation/demands from states 12 %Ensuring adequate safety measures—for

environmental risks10%

Source: Economist Intelligence Unit. Note: Figures do not add up to 100% because respondents are asked to

select their three top barriers to growth.

Figure 6

Figure 5

Upstream UpstreamMidstream MidstreamDownstream DownstreamMarketing Marketing

42% 17% 10% 22%

2012:2011:

56% 12% 14% 8%

9



If your company is involved in exploration, does it plan to increase or decrease the frequency or intensity of its

exploration activities over the next 12 months? Select one. (% respondents)

• Investment intentions have risen significantly.

•Exploration is looming as a key spending growth area for a number of oil companies.

• While most companies expect a supportive price climate, smaller firms may be more exposed to weaker prices.

• National oil companies appear particularly bullish about raising capital expenditure in 2012.

• There is no evidence yet that the euro zone crisis will have a major impact on investment.

Key points

Figure 7

Investment prospectsA look at the industry’s investment plans for the year ahead2

Despite the difficult economic climate and fears of recession in the euro zone, the oil and gas industry is showing a growing sense of confidence about the future investment outlook.

More than four-fifths of respondents (82%) say they are either highly or somewhat confident about the business outlook for their company over the next 12 months. Translating this into corporate action, a significantly larger share of companies than last year (63% this year compared with 49% last year) say their firm plans to increase investment over the next 12 months.

Upstream activities are seen by the majority of respondents as the key area for business growth over the next year, so it should come as little surprise that exploration will be a major beneficiary of this increased investment. Our survey shows that 41% of industry professionals expect to see increased investment in exploration activities over the course of 2012, with only 4% anticipating a decline (see figure 7).

Reflecting differences in demand and infrastructure requirements, however, expectations about capital spending vary across regions. In the Asia-Pacific area 72% of survey respondents predict an increase in capital spending, compared with only 55% in North America and 57% in Europe.

The desire to invest also varies between companies. Majors like Shell are in active spending mode. The company has taken 16 new final investment decisions since the start of 2010 for more than 400,000 barrels of oil equivalent per day of new production. As spending ramps up on these and other projects, it expects that overall capital spending levels will increase as well. The

major growth themes for Shell include deep water in the Gulf of Mexico, liquefied natural gas (LNG) in Australia, tight gas in North America, traditional plays in the North Sea, and its worldwide exploration programme.

In general, the Anglo-Dutch supermajor sees a robust demand outlook for oil and gas, and host governments and regulators are supportive of Shell’s plans to invest for new energy supplies. “The thinking tends to be long-term – many years or even decades in our industry, rather than driven by short-term factors,” says Shell’s chief financial officer, Simon Henry.

�0

Big spenders The outlook for the oil and gas industry in 20�2.

© The Economist Intelligence Unit Limited 20�2 © The Economist Intelligence Unit Limited 20�2

Growing investmentDespite the difficult economic climate and fears of recession in the euro zone, the oil and gas industry is showing a growing sense of confidence about the future investment outlook.

More than four-fifths of respondents (82%) say they are either highly or somewhat confident about the business outlook for their company over the next �2 months. Translating this into corporate action, a significantly larger share of companies than last year (6�% this year compared with 49% last year) say their firm plans to increase investment over the next �2 months.

Upstream activities are seen by the majority of respondents as the key area for business growth over the next year, so it should come as little surprise that exploration will be a major beneficiary of this increased investment. Our survey shows that ��% of industry professionals expect to see increased investment in exploration activities over the course of 20�2, with only �% anticipating a decline (see figure 7).

Reflecting differences in demand and infrastructure requirements, however, expectations about capital spending vary across regions. In the Asia-Pacific area 72% of survey respondents predict

an increase in capital spending, compared with only 55% in North America and 57% in Europe.

The desire to invest also varies between companies. Majors like Shell are in active spending

l Investment intentions have risen significantly.

l Exploration is looming as a key spending growth area for a number of oil companies.

l While most companies expect a supportive price climate, smaller firms may be more exposed to weaker prices.

l National oil companies appear particularly bullish about raising capital expenditure in 20�2.

l There is no evidence yet that the euro zone crisis will have a major impact on investment.

Key points

Somewhatdecrease

Significantlydecrease

If your company is involved inexploration, does it plan to increaseor decrease the frequency or intensityof its exploration activities over thenext 12 months? Select one.(% respondents)

38%30%

11%

17%

3%1%

Somewhatincrease

Significantlyincrease

Stay the same

Don’t know/not applicable

Figure 7

Investment prospectsA look at the industry’s investment plans for the year ahead2


10



Bullish in the USThe oil majors are generally more confident about the investment outlook than their smaller rivals. Over the next two years the US firm ConocoPhillips plans to execute a US$28bn capital programme, almost 90% of which has been allocated to exploration and production (E&P) supporting the company’s 100%-plus reserve replacement target.

In geographical terms, the US is absorbing the largest amounts of capital in the current market. According to Barclays Capital, it pulled in 21% of US$529bn in global E&P spend in 2011, with the capital commitment of US$110.7bn representing an 18% increase over 2010 spending levels.

Companies with large international portfolios are in the midst of ambitious capital expenditure (capex) programmes. Occidental Petroleum, the fourth-largest US oil and gas company, revealed a 56% increase in 2011 capital spending to US$6.1bn, which will increase further as the company proceeds with its extremely capital-intensive Shah sour gas development in the UAE offshore with Abu Dhabi National Oil Co (Adnoc).

Big spending from NOCsMeanwhile, many national oil companies (NOCs) also look likely to go on spending in 2012. In Europe, Norway’s giant Statoil will continue to invest at a high level, “to mature our attractive portfolio and realise our strategy for growth towards 2020”, according to the company’s CEO, Helge Lund. And in Russia, Rosneft has said that it will boost its investment programme for the year by 35% to approximately US$15bn as part of its push to upgrade refineries.

In South America, Brazil’s market-leading giant Petrobras is planning a 24% increase in spending, much of it focused on its deepwater reserves in the Atlantic, and Mexico’s state-owned oil company Pemex is also lavishing large sums on an expanded offshore drilling programme.

There is, however, evidence of a more cautious approach in the Middle East. For example, Carl Sheldon, the CEO of Abu Dhabi National Energy Company (TAQA), sees the company spending US$2bn in 2012, a small increase on the previous year: “Essentially we have a capital spending programme that started in 2010 and goes up to 2013. For each of those years we’ll spend roughly US$2bn each year in five major programmes – drilling in Western Canada, drilling in the North Sea, the Bergermeer gas storage project in the Netherlands and two power projects in Morocco and Ghana.”

Like other companies, TAQA is prepared to cut spending should the price climate become less inviting. “If prices went south in a big way it is pretty easy for us to toggle our Canadian expenditure down, because we drill a lot of wells in the onshore. We drill 70-100 wells a season in Canada, whereas in the North Sea we might drill just 8-12,” says Mr Sheldon.

The threat of another major downturn in the global economy could see this happening, warns Hamid Gayibov, the managing director of Xenon Capital Partners, which advises on Russian energy merger and acquisition (M&A) deals. “I do see there being some increase in capex, and the momentum is there. However, there is big uncertainty regarding the global oil market, and if there is a major dislocation in the global economy, we could see the oil price collapsing and fundamentals continuing to weaken. In that event there will be little incentive for Russian oil companies to increase investment.”

This sense of caution contrasts with the generally positive view of industry fundamentals outlined by the international majors. Statoil’s Mr Lund, for example, argues that the industry remains fundamentally attractive, with energy demand growing.

The overall message is that for those plays where the economics are supportive, oil companies will continue to spend big in 2012. There remains a big caveat, however: if global economic conditions were to foment, oil and gas companies, whether big or small, would have to scale back their spending commitments in those areas where they can do so without creating damage to their wider portfolio.

North America

55%Europe

57%

Asia-Pacific

72%

Figure 8

Does your company plan to make more or less capital investment in dollar terms over the next 12 months? (% respondents)


Invest substantially/somewhat more

11



Risk is integral to the investment process in the oil and gas industry. As the supply-demand gap drives oil companies towards resources that are more difficult to develop and increasingly located in politically challenging terrain, the risk challenge is gaining in intensity.

Our survey bears out the sense of heightened risk and regulation. A combined 55% of respondents confirmed that in the aftermath of the 2010 oil spill in the Gulf of Mexico, drilling permits have become harder to obtain. Even more decisively, an overwhelming majority of respondents (82%) agree that the in the post-Macondo period, regulatory issues have become more important.

From the secular trends shaping the industry – the steady move into deep water, the tapping of tight hydrocarbon formations – to the “black swan” events like the Deepwater Horizon disaster of April 2010, oil companies must confront an environment where risk is far more prominent.

“The outlook for upstream is shifting as the reserve base addition is becoming increasingly complex and unconventional. Complex hydrocarbons make up approximately 85% of the world’s total yet-to-find resources, and conventional resources are increasingly hard to access for international companies,” says Mr Lund.

More than 18 months after the Macondo oil spill, the disaster still casts a shadow over the industry through raised risk aversion, heavier financial commitments and a stronger regulatory footprint in the Gulf of Mexico and beyond.

Despite the lifting of the moratorium on drilling in the Gulf, activity had not returned to pre-Macondo levels by end-2011.

Ironically, given the location of the Macondo disaster, the countries named by the largest number of respondents as having the most favourable regulatory climate in which to operate in 2012 are the US and Canada, at a combined 23%. However, North America also comes top of the list of regions expected to see an increase in regulation over the next 12 months, with 69% of respondents forecasting an increase in 2012.

Regulation has also emerged as a major issue in Asia, precipitated by events like the subsea oil rupture in June 2011 at China’s largest oilfield in Bohai Bay. In late 2011, China’s Ministry of Land and Resources announced plans to revise offshore drilling regulations regarding joint ventures with foreign entities.

Africa is another region where regulation is increasing. In South Africa, for example, the government has imposed a moratorium on exploration in the semi-desert Karoo region amid strong opposition to the use of hydraulic fracturing in drilling activities there. In Nigeria, the Petroleum Industry Bill threatens to impose a range of increases in taxes and royalties, as part of a wider overhaul that includes reform of the state oil company.

Above-ground risks increase Many of the regulatory bugbears are familiar. The oil industry has been heavily regulated for years, more than the natural

• Across the board, oil companies confront a wider array of risks.

• The post-Macondo environment has seen operators seeking to offload risks onto contractors.

• In the context of troubled finances, governments are seeking to tax the industry more heavily.

Key points

Risky businessHow are oil companies’ attitudes to risk evolving?3

12



gas sector. “Oil prices are higher for ‘above-ground’ reasons,” says Christof Ruehl, chief economist at BP. “It is because of politics, and the cartels.” Reflecting this, our survey shows that increasing regulation is regarded by more than 30% of respondents as the main challenge for their company over the next 12 months, exceeded only by the impact of rising operating costs and the shortage of skilled professionals.

New sources of risk Issues like Macondo will also exert a lasting impact because of the ways in which governments and oil companies must now formulate new responses to mitigate or disperse the heightened risk profile.

Companies acknowledge the necessity of instituting greater remedial measures to prevent the recurrence of such events. For example, large oil companies, including BP, ExxonMobil, Shell, Chevron and ConocoPhillips, joined forces in 2011 to spend US$1bn to establish the Marine Well Containment Company, a new entity that will respond to blowouts and spills in the Gulf of Mexico.

For Andrew Gould, the chairman of the oilfield services group Schlumberger, the post-Macondo industry shakedown has created new sources of risk: “Post-Macondo there are many oil company lawyers who consider it their duty to pass the catastrophic risk horizon arising from an incident like Macondo off onto the contractors. In the past, there has always been a tacit bargain that catastrophic risk, except in cases of gross negligence, was a risk that belonged to the operator – because the operator held the resources and therefore had the upside if things went right. But a lot of lawyers are now trying to break that model.”

Tax and spendTax is another pressing issue, identified as the main challenge by 17% of respondents. The growing tax burden is one by-product of the global economic crisis. For example, the UK government, strapped for cash, has identified the country’s maturing offshore oil and gas sector as a revenue source that should be squeezed.

It announced in March 2011 that the supplementary charge on corporation tax would be increased from 20% to 32%, resulting in a tax rate on UK oil and gas production of between 62% and 81%. The lobby group Oil & Gas UK estimates that

the unexpected tax change has rendered marginal 30% of investment in projects previously considered likely to proceed in the next decade.

Despite this, the UK government announced 46 new licenses for North Sea exploration in early January 2012, including awards for the French major Total, suggesting that the impact of the tax change might not be as significant as some had feared.

Nevertheless, industry insiders remain hostile. “In an era when the government has to adopt far-reaching austerity measures, this was a quick way of hitting a constituency that doesn’t have any votes,” says Mr Sheldon of TAQA, which has a number of production assets in the Brent system of the North Sea.

“However, in the long run it was not a very well thought-through thing to do. Hopefully they will take a more pragmatic approach going forward and will try hard to incentivise further investment in the basin - and understand that is not going to come from the supermajors.”

The political risk premiumInconsistent regulatory approaches remain a cause of consternation across the industry, with broad agreement among industry leaders on this point. Jean-François Cirelli, the vice chairman and president of GDF Suez, told the European Autumn Gas conference in Paris in mid-November 2011 that EU regulations were creating an unstable investment climate that was discouraging essential energy investments.

“Governments do not hesitate to take decisions that are not totally based on economic rationale,” he said. “European political risk has become a major concern to energy companies and investors and will clearly impede our ability to invest in Europe.”

This concern about the damaging effects of government action is widely shared. The largest US refiner, Valero, is keeping a close eye on is the implementation of California’s carbon dioxide cap-and-trade regime, known as AB 32. Rules have been approved and will start taking effect in 2013. “We believe this will be very costly to Californian consumers and the state’s economy, and will have no impact whatsoever on overall carbon levels or climate change,” says Valero’s corporate communications manager, Bill Day.

13



Few oil company executives could have anticipated the collective shock to the system that would unfold in the Middle East and North Africa (MENA) region in 2012.

The Arab Spring, still a work in progress in early 2012, will leave a substantially altered political and economic landscape.

According to our survey, however, there is unlikely to be a significant near-term impact on MENA host government polices towards international oil companies (IOCs). Approximately one-quarter of our survey respondents (25.9%) believe that government and/or NOC policies towards IOCs will become more restrictive, whereas about one-fifth (20.5%) think they will become more favourable, and nearly four out of ten (37.3%) think approaches will be broadly unchanged.

In an attempt to thwart the spread of the uprisings into the Arabian peninsula, major MENA oil producers such as Saudi

Arabia have massively ramped up social spending, and with it the oil price they need to balance the state budget. The kingdom, which at the end of 2011 was pumping nearly 10m barrels/day (b/d), has seen its target budget figure rise to above US$90/b, as it seeks to increase revenue to fund additional US$130bn in spending programmes aimed at raising living standards for ordinary Saudi citizens.

Arab Spring’s mixed results Yet the direct impact of the uprisings on the oil and gas sector is mixed. There has been some collateral damage: the sporadic sabotage on the main Egypt-Israel gas export pipeline is a by-product of the security vacuum that affected Egypt in the wake of the Arab Spring; Yemeni gas exports have been disrupted; and the Syrian regime’s robust response to its domestic protests has triggered a ban on Syrian oil exports from the EU.

Despite the disruptions, the short-term effect on oil and gas markets was smaller than initially feared. Global markets were broadly able to cope with the Libyan oil and gas outages, with sufficient spare capacity to prevent sharp price increases – helped along by dampened demand in Europe and a surfeit of global LNG.

Increased security in key oil- and gas-producing areas is one obvious consequence for oil companies. “As of now we have 540 security consultants working for Schlumberger, 440 of these in Iraq. And I suspect we will have 100 in Libya by year-end,” says the chairman of Schlumberger, Mr Gould.

• Ongoing political unrest in the Middle East and North Africa (MENA) will have long-term, rather than short-term, impacts on the oil and gas sector.

• Governments affected by the Arab Spring are under pressure to increase spending and drop subsidy reforms.

• Security will remain a key concern for IOCs active in MENA.

• Pressure on Iran could have a starker impact on oil and gas markets in 2012 than the Arab uprisings.

Key points

A new energy politicsImplications from a year of turmoil in the Arab world4

The Arab Spring will take time to settle, but it will bring with it a lot of opportunities because one reason it happened is that many of these countries have young, growing populations with rising expectations. You cannot contain those expectations – they have to be met. Carl Sheldon, chief executive officer, Abu Dhabi National Energy Corp

14



And now, the upside…But some senior oil executives disagree with the notion that the Arab Spring is necessarily bad for business. Those in strong regional positions believe the Arab Spring will ultimately offer growth opportunities. TAQA is active across the region, with a mix of properties in oil, gas and power and water sectors.

“The Arab Spring will take time to settle, but it will bring with it a lot of opportunities because one reason it happened is that many of these countries have young, growing populations with rising expectations. You cannot contain those expectations – they have

to be met. And within that bunch of expectations is economic advancement – better living standards, access to clean water, power, better economics,” says Mr Sheldon.

The Arab Spring is far from over, and 2012 will see continued political risk impinging on oil company strategies in the Middle East-North Africa region. In the long term, industry fundamentals will reassert themselves more strongly. Says Mr Sheldon: “The upheaval and lack of certainty make it harder to put a lot of money at risk quickly, but over time, as things stabilise, the basic dynamics will be the same, whoever leads.”

15



The shale revolution has transformed the US natural gas market over the past five years in a way few could have imagined, dramatically altering the supply landscape and depressing gas prices. The rapid development of projects like the Marcellus, Barnett, Haynesville and Fayetteville shales has created a ripple effect that has spread across the global energy industry. In Europe, Poland and Ukraine have emerged as a focus for shale gas exploration. Even oil and gas companies with no exposure to unconventional energy sources have been affected by its speedy rise.

The scale of the ramp-up bears examination. A decade ago, gas from shale accounted for barely 2% of US natural gas production. Today it is approaching 30% and rising. The price impact has a significant bearing on the industry. The surge in production has forced domestic natural gas prices to plummet below US$4/m Btu (British thermal units), considered too low to justify many large investment projects. The advent of substantial domestic gas supply has rendered a number of North American LNG projects uneconomic, with majors like ExxonMobil spending billions building LNG receiving terminals that may never reach their intended capacity.

Despite these signs, our latest survey shows that 53% of respondents worldwide think that gas prices are set to rise over the next 12 months.

Talking ‘bout a revolutionThe foundations of this unconventional “revolution” were laid in the US, where advances in technology such as horizontal drilling and hydraulic fracturing have dramatically increased production. Unconventional US output soared to 10bn cu ft/day in 2010, around one-quarter of the country’s total. By 2035 this proportion could rise to one-half, according to the US Energy Information Administration.

Oil companies active in this terrain acknowledge the transformative impact of unconventionals on the industry, particularly natural gas. “We are in the midst of a structural revolution. There are now three times the number of gas wells being drilled compared to oil wells. The debate is no longer, ‘are we running out of gas?’ The debate is, ‘do we now have 100 or 200 years of gas supply in the US?’,” says Thomas Ahlbrandt, the former vice president of exploration at Falcon Oil & Gas.

North America’s unconventional revolution rests on a confluence of favourable factors — a “perfect storm” in the words of one executive. Most important is the strong geological resource base, estimated by the US Energy Information Administration (EIA) at 862,000bn cu ft. Also important are the US’s provision breaks, a stable regulatory regime, private ownership of mineral rights and the existence of a strong service industry.

• Unconventional gas is now approaching 30% of total US natural gas output, transforming the global supply situation.

• Production of 10bn cu ft/day of unconventional US gas will continue to depress gas prices.

• Shale plays are economically competitive to develop, though not unanimously so.

• European oil companies are cautious about prospects for developing unconventional resources in Europe.

• Unconventional projects will absorb a larger proportion of corporate capex in 2012.

Key points

In focusIs unconventional gas really the game changer industry players think it is? 5

16



Shale plays are proving a magnet for oil companies. In the Eagle Ford play, 1,010 permit applications were filed to drill into the Texas play in 2010, a ten-fold rise on the previous year. In 2011 it attracted more than 2,000 permit applications.

“North America has seen the bulk of the activity so far, since that region has a well-developed oil services industry – rigs and crews – and an extensive pipeline network to move the products to market,” says Shell’s Mr Henry.

“At Shell, we are looking into the opportunity worldwide, including interests in China, eastern Europe, South Africa. These plays need to be drilled to delineate the potential, and

the industry at large will need to build up the services and pipeline infrastructure in these new regions,” he adds.

However, some senior executives caution that shale plays may not be as economically competitive as advocates make out – highlighting the point that unconventionals is one area where oil industry consensus is distinctly lacking. “Over time, if you look at the marginal cost of producing shale in volume, only the very best properties in the big shales in Haynesville, Barnett and Horn River can be produced for US$4. Everything else is in the range of US$5.5 to US$6,” says Mr Sheldon.

America alone?There is widespread doubt as to whether the unconventionals revolution can be exported outside North America. The perfect storm that made these developments scalable realities in the US is not evident in other geographies.

Furthermore, the technologies that made the rapid US advance possible – horizontal drilling and fracking — have drawn increasing criticism. Governments, such as that of France, are seeking drilling moratoriums. Meanwhile, there is concern that the depletion rates of unconventional fields are far faster than those of their conventional counterparts.

Whereas US-focused players are notably bullish about unconventional plays, European industry executives are notably more cautious. “Unconventional gas, and especially shale gas, was a game changer in the US gas industry. Operations in Europe are far less mature, and Europe has seen only a couple of exploration wells targeting shale gas,” says Jaap Huijskes, executive board member responsible for E&P at OMV.

Slow progressEurope’s unconventional developments will advance at a slower pace than those in North America. “No significant production contribution is expected within this decade, as

Figure 9

How do you expect natural gas prices (as per Henry Hub or European benchmarks) to change over the next 12 months? (% respondents)

�9


© The Economist Intelligence Unit Limited 20�2

times the number of gas wells being drilled compared to oil wells. The debate is no longer, ‘are we running out of gas?’ The debate is, ‘do we now have �00 or 200 years of gas supply in the US?’,” says Thomas Ahlbrandt, the former vice president of exploration at Falcon Oil & Gas.


Shale plays are proving a magnet for oil companies. In the Eagle Ford play, �,0�0 permit applications were filed to drill into the Texas play in 20�0, a ten-fold rise on the previous year. In 20�� it attracted more than 2,000 permit applications.



Figure 9

2011 2012

2% 5%

5% 7%

2% 1%

28%

18% 14%

34%

35% 31%

Rise by 50% or more

Rise by 25% or more

Rise by 10% or more

Fluctuate by no morethan 10% up or down

Drop by 10% or more

Drop by 25% or more

How do you expect natural gas prices(as per Henry Hub or European benchmarks)to change over the next 12 months?(% respondents)

Figures for 2011 were collected at the end of 2010 and figures for 2012 were collected at the end of 2011.

�9








Figure 9

2011 2012

2% 5%

5% 7%

2% 1%

28%

18% 14%

34%

35% 31%

Rise by 50% or more

Rise by 25% or more

Rise by 10% or more


Drop by 10% or more

Drop by 25% or more



�9








Figure 9

2011 2012

2% 5%

5% 7%

2% 1%

28%

18% 14%

34%

35% 31%

Rise by 50% or more

Rise by 25% or more

Rise by 10% or more


Drop by 10% or more

Drop by 25% or more



�9








Figure 9

2011 2012

2% 5%

5% 7%

2% 1%

28%

18% 14%

34%

35% 31%

Rise by 50% or more

Rise by 25% or more

Rise by 10% or more


Drop by 10% or more

Drop by 25% or more



2012:2011:

17



activities are at best at the technical pilot stage,” says Mr Huijskes, whose company has access to interesting unconventional acreage in Central Europe, Tunisia and Pakistan.

“E&P is, however, by its very nature, a long-term, capital-intensive and risky business. It is definitely too early to say if commercial production of unconventional gas/shale gas in Europe is possible,” says Mr Huijskes.

Look EastChina has been talked up as a major future source of unconventional developments with estimated reserves at 1,275trn cu ft – greater even than North America’s combined 1,250trn cu ft. Beijing held its first shale gas licensing round in June 2011, with several exploration blocks awarded to domestic companies.

“China will develop shale gas, but it will take time,” says David Knox, the CEO of Santos, which is developing unconventional gas projects in Australia to serve the Asian market.

In Australia, the speedy development of coal-bed methane to LNG export projects promises to make the country the world’s biggest exporter of unconventional gas. However, broader issues of licence to operate are a consideration for the companies tapping its unconventional gas base.

“What is challenging in Australia is the enormous ramp-up [in gas production],” says Mr Knox, whose company, Santos, is the sponsor of the large-scale Gladstone LNG project, processing coal seam gas (CSG) into LNG. “The larger onshore footprint of gas production does raise challenges for our industry. One of the concerns we must address and manage is overland access and water production. At Santos we are committed to developing CSG to co-exist with local communities and with agriculture. The environmental regulations are also very onerous – but that is valuable to us as well, as we can show to communities that we are heavily regulated.“

Unconventional capex Inflation is having an impact, particularly in the new unconventional plays that are revolutionising the industry. In the US, E&P companies have responded to inflation in the oilfield services sector with steadily rising capex spend on liquids-rich plays such as the Permian and Eagle Ford basins in Texas, and the Bakken in North Dakota.

The migration to liquids-rich projects has served to heighten competition for staff and equipment on these fields. The result is that companies are factoring in much larger capex spend in 2012. The chief executive of Apache, Steven Farris, says his company saw cost inflation on the scale of 10% to 15% in the oil-rich Permian Basin in West Texas and New Mexico during the first quarter of 2012. For the industry as a whole this could lead to 10-12% growth in spending in the next 12 months in the region and high single-digit increases annually through to 2015.

Strong project economics has incentivised greater spend on shale plays compared with conventional natural gas projects, which are still compromised by the generally weak price environment for gas.

Hess, a significant US integrated company active in the Bakken shale, is meanwhile spending nearly half of its US$7.2bn capital budget on unconventional development, up from 16% two years ago. With Bakken production alone expected to more than triple to 120,000 b/d by 2015, Hess sees unconventionals contributing 40-50% of its production and reserve growth over the next five to seven years.

Despite the rapid advance of unconventional energies in North America, its capacity to transform the long-term global natural gas supply picture is still unproven. The horizontal drilling and fracking technologies that have brought these volumes of unconventional gas on stream remain highly controversial. And the conditions that have made these projects viable in the US are not easily replicated in other geographies. Time will tell as to whether the reality of unconventional gas will ever live up to the hype.

18



Do you expect downstream margins for oil and gas to be better or worse in 12 months’ time?

(% respondents)

22



After a dismal few years the downstream sector is showing some signs of life. Refining profitability has improved, particularly in the US, where robust margins have resulted from a revival of consumption of refined products.

After four years of declining oil-products use, US demand was up by 2% in 20�0 over the previous year, at �9.��8m b/d, according to the EIA. Total consumption of liquid fuels in 20�0 grew by ��0,000 b/d, or 2.2%, the highest rate of growth since 200�.

In the third quarter of 20�� US Gulf Coast gasoline margins per barrel vs Louisiana Light Sweet increased by 89% to US$8.20, from US$�.�5 in the third quarter 2010. A US Gulf Coast refinery running a typical mix of crudes for the area to a catalytic cracking yield would have monthly margins rising to US$21.45/b in July – the highest figure recorded for a cracking refinery by Jacobs, a downstream consultancy.

International demand, particularly in the developing markets, has been the key driver for growth in 20�� and helped to elevate margins. Diesel demand is expected to recover its former strength and grow rapidly in 20�2.

Such conditions are supporting a more optimistic view on margins going forward. A majority of survey

respondents believe that downstream margins will be higher in late 20�2 than in the previous year, with a combined �8% expecting them to be either significantly or somewhat better in 12 months’ time, compared with a combined 2�% who expect them to be significantly or somewhat worse.

Margin callBetter margins have enabled integrated oil companies to reverse a strategy of

l Refining profitability is improving, with margins looking generally stronger.

l Gasoline consumption is stronger, with international demand for products driving growth.

l Many refiners will continue to cut capacity in 2012.

Key points

Significantlybetter

Do you expect downstream marginsfor oil and gas to be better or worsein 12 months' time?(% respondents)

Somewhatbetter

No change

Somewhatworse

Significantlyworse

Don’tknow

8%

31%

30%

22%

9%1%

Figure 10

Refining Better days ahead?6

• Refining profitability is improving, with margins looking generally stronger.

• Gasoline consumption is stronger, with international demand for products driving growth.

• Many refiners will continue to cut capacity in 2012.

Key points

Figure 10

Refining Better days ahead?6

After a dismal few years the downstream sector is showing some signs of life. Refining profitability has improved, particularly in the US, where robust margins have resulted from a revival of consumption of refined products.

After four years of declining oil-products use, US demand was up by 2% in 2010 over the previous year, at 19.148m b/d, according to the EIA. Total consumption of liquid fuels in 2010 grew by 410,000 b/d, or 2.2%, the highest rate of growth since 2004.

In the third quarter of 2011 US Gulf Coast gasoline margins per barrel vs Louisiana Light Sweet increased by 89% to US$8.20, from US$4.35 in the third quarter 2010. A US Gulf Coast refinery running a typical mix of crudes for the area to a catalytic cracking yield would have monthly margins rising to US$21.45/b in July – the highest figure recorded for a cracking refinery by Jacobs, a downstream consultancy.

International demand, particularly in the developing markets, has been the key driver for growth in 2011 and helped to elevate margins. Diesel demand is expected to recover its former strength and grow rapidly in 2012.

Such conditions are supporting a more optimistic view on margins going forward. A majority of survey respondents believe that downstream margins will be higher in late 2012 than in the previous year, with a combined 38% expecting them to be either significantly or somewhat better in 12 months’ time, compared with a combined 23% who expect them to be significantly or somewhat worse.

Margin call Better margins have enabled integrated oil companies to reverse a strategy of growing all lines of their business. Divestment has become a theme. Conoco, for example, announced in July 2011 that it would shed its refining and marketing operations during 2012 in order to create a new company, to be called Philips 66. That same month Marathon completed the separation of its downstream operations into two separate units, with refining operations undertaken by Marathon Petroleum Corporation (MPC).


19



MPC aims to boost crude oil refining capacity by 50,000 b/d at its six refinery systems in early 2012 to 1.19m b/d, with a capex target of US$1.2bn in its first full year of operations. This capital expenditure will be directed primarily toward projects that increase the company’s ability to refine difficult-to-process crudes such as Canadian heavy oil sands, increase its diesel yield, debottleneck its logistics to access additional inland crude oil, prepare to receive new crude oil production from eastern Ohio’s Utica shale, and grow its retail presence in regions where MPC already has strong logistics in place.

Independent refiners are also investing heavily in expansion. The US’ largest independent refiner, Valero, will by the end of 2012 have finished construction on two new 60,000 b/d hydrocrackers – one at its Port Arthur refinery in Texas and one at its St Charles refinery in Louisiana. Together these hydrocrackers will cost over US$3bn. Total capital expenditure in 2011 at Valero is estimated at around US$3.2bn; 2012 should see something similar, says the company.

Economics look stronger There appears to be greater confidence that economic conditions will be supportive of refining margins in 2012. According to Valero’s CEO, Bill Klesse: “We think many of the things that contributed to this year’s financial performance are going to continue next year. And so we’re anticipating a good year next year [2012] as well.”

Valero believes that the spinning-off of Conoco’s and Marathon’s downstream assets will have a stimulative effect on the industry, introducing two new large independent refiners to the market. It maintains that it is strong enough to see off the competition. “Valero is currently by far the largest independent refiner – it’s of a size similar to integrated energy companies, and didn’t have a close peer. Now the spun-off Marathon Petroleum and ConocoPhillips refineries will be of a size closer to what Valero is. But we were already competing with them anyway,” says company spokesman Bill Day.

Rationalisation of capacity looks to be a major theme in 2012, with more refinery closures due. There have been continued announcements of delays and cancellations of large refinery expansions and new-build projects. The 2012-14 period may see further capacity closures announced by refinery operators. For example, Conoco intends to divest “non-core” refineries and reduce the company’s refining capacity by 500,000 b/d by the end of 2012.

In Europe, many refineries have been put up for sale as companies undertake a rationalisation of capacity. Shell has significantly scaled back its refining exposure. In March 2011 it sold its 270,000 b/d Stanlow refinery in the UK and associated local marketing businesses to Essar Oil for US$1.3bn.

According to Shell’s downstream director, Mark Williams, the decision to sell Stanlow is part of its drive to concentrate the company’s global manufacturing portfolio on larger assets and means that the supermajor will have reduced its global refining exposure through a combination of asset sales and closures by a total of 1.6m barrels since 2002.

Switzerland-based Petroplus Holdings, Europe’s largest independent refiner, announced that it would start the temporary economic shutdowns of three of its five refineries in January 2012, given the limited credit availability and the economic climate in Europe. The highly cyclical nature of the refining industry, European refiners’ weak cash flows since 2009 and persistent overcapacity make the refining industry one of the corporate sectors to which European banks are likely to reduce credit exposure this year, noted the rating agency Fitch. In the longer term, Fitch anticipates that only a considerable capacity reduction can materially improve utilisation rates and cash flow in European refining, given weak demand prospects for refined products. This can be achieved through the closure of less efficient or persistently unprofitable refineries, or the conversion of idle capacity into storage depots.

Asian refining margins felt the positive impact of supply shocks in 2011, as China refocused its attentions on meeting a domestic demand surge. However, margins are expected to come under more pressure following larger capacity additions in 2012, with Asia likely to add some 900,000 b/d of new refining output, according to FG Energy, a consultancy.

The overall sector faces mixed fortunes in 2012. Areas of strength, such as stronger middle distillate yields, contrast with concerns that new capacity additions could exceed demand growth and lead to weaker margins. Ongoing capacity closures will help to firm up downstream economics, but with the global economy displaying worrying signs of vulnerability, there will be continued doubts over demand strength in the next 12 months.


20



• Skills shortages are a key barrier to growth and are of increasing concern.

• Following the example of BP and Shell, companies should consider delinking recruitment drives from the oil price cycle.

Key points

SkillsWhat are companies doing to plug the skills gap?7

Skills shortages are becoming more acute and emerge from our survey as one of the biggest barriers to growth over the next 12 months. Last year, skills issues came fifth on our list of barriers and were only identified as a top-three issue by 25% of respondents. This year, the issue has risen to second on the list and has been identified as a key barrier by 34% of respondents.

The lack of suitably qualified labour is a global problem. In Western Australia, where a number of resource plays are under way to meet growing Asian demand, it is estimated that by 2015 there will be a shortage of roughly 150,000 people needed to develop projects in the north of the state.

In the UK, engineering skills shortages threaten to undermine growth in the development of the maturing

North Sea acreage. Some of the majors active in this area have hinted at problems recruiting enough people to fuel expansion of their UK Continental Shelf (UKCS) operations.

According to a UK oil training body, Opito, the most difficult vacancies to fill in the subsea sector are those for engineers, professional engineers and managers, a difficulty which is compounded by the fact that the skills, knowledge and experience lost through retirement are more difficult to replace in these areas than is the case with other workforce areas.

The industry’s long-standing skills gap appears to be getting oil companies’ full attention. Lessons are being learned, as oil companies are now acutely aware of the dangers of failing to invest in talent. The two case studies here explain how BP and Shell are trying to overcome the problem.

21



Like other oil majors, BP faces a constant challenge to secure skilled labour.

The company hires between 6,000 and 8,000 people every year, of whom around 10% are graduates. But in certain geographies there’s less talent entering the industry than companies would like. “In the UK, for example, we are concerned that there aren’t enough STEM (science, technology, engineering and maths) students coming out of universities,” says Jon Tait, BP’s head of global attraction. “We are not struggling to hire graduates – we hire about 150 a year in the UK – but we are keen to make sure that pipeline of good talent comes through the schools and universities and then into our organisation.”

The cyclical nature of oil and gas industry hiring – with periods of depressed prices traditionally yielding reduced hiring – is something that companies like BP are looking to break out of. “What you’ve seen in the industry is a direct correlation between hiring and the oil price, and what BP is trying to do is regardless of the oil price ensure we have the right pipeline of talent coming to

our organisation,” says Mr Tait.

Graduate recruitment is critical. BP recruits thousands of experienced and lateral hires [recruited from other oil companies] every year, but in terms of growing talent in the organisation the company is looking to have the right feeder stock of talent coming in at graduate levels.

Vocational training is a key component of BP’s employment offering, with a US$500m annual budget earmarked for training and development purposes globally.

“In the UK we have an educational services resource centre that provides tools for interactive teaching and lesson plans for teachers. And we have the BP UK Schools Link programme which was set up in 1968 and now covers 194 schools and enables BP employees to work with local schools and help enhance their curriculum especially in the science and engineering space,” says Mr Tait.

Case study: BP

The energy industry needs a deep pool of motivated workers with technical expertise in a range of disciplines, from microbiology to lean manufacturing. The highly skilled nature of many of these jobs means that recruitment can be a challenge. To meet that challenge, says Shell CFO Simon Henry, Shell starts with a truly global approach in which it assesses which of the company’s businesses will grow, which will decline and how its geographical presence will change over time. And it then assesses the demographic profile of its 93,000 employees against these changing requirements.

“This allows us to pursue a selective approach to recruitment, choosing the markets, skills and schools we wish to target on the basis of both global and local need. We aim to recruit high-potential employees early, developing their skills over an extended period of time,” says Mr Henry. “That’s also why we’ve invested heavily in graduate recruitment during the recent recession. This is not something our energy industry has always done well in the past. Recruitment has sometimes tended to follow the oil price.”

“Today, we’re taking a much more consistent approach,

recruiting new talent continuously through the business cycle. Even during the recent economic downturn and in the midst of a major corporate restructuring at Shell that removed 7,000 jobs worldwide, we aimed to recruit about 1,000 graduates a year, up from around 400 in 2003,” explains Mr Henry.

About two-thirds of those new recruits are in skilled technical disciplines. When it has had to cut jobs, the company says it has been careful not to disrupt the talent pipeline of skilled young workers.

Shell has developed close links with leading universities such as Cornell in the US, Imperial College London, and the Technical University of Delft in the Netherlands, assigning a senior Shell employee to manage the company’s relationship with each university.

“Every year our engineers and scientists visit universities to discuss career possibilities and conduct interviews in person. That’s helped to improve our standing as an employer of choice among students, ensuring we consistently attract the top talent in every field,” says Mr Henry.

Case study: Shell

22





Appendix

Oil

Gas

Neither

46

42

43

(% respondents)Do you operate in the oil/gas sector? Select all that apply.

Upstream (including exploration, development and production of oil and/or natural gas)

Midstream (processing)

Downstream (including tankers, refiners and retailers)

Other (including pipeline, marine and other services)

34

14

24

58

(% respondents)Which of the following aspects of the sector do you operate in? Select all that apply.

Highly confident

Somewhat confident



Highly pessimistic

Don’t know

40

41

11

7

1

0

(% respondents)How confident are you about the business outlook for your company in the next 12 months?

Survey results

23



29



Invest substantially more (>25% increase year on year)

Invest somewhat more

Keep investment the same as before

Invest somewhat less

Invest substantially less (>25% decrease year on year)

Don’t know

19

45

22

7

2

4

(% respondents)Does your company plan to make more or less capital investment in dollar terms over the next 12 months?

Significantly increase

Somewhat increase

Stay the same

Somewhat decrease

Significantly decrease


13

29

18

3

1

36

(% respondents)

If your company is involved in exploration, does it plan to increase or decrease the frequency or intensity of its explorationactivities over the next 12 months? Select one.

Increase substantially Increase somewhat Stay the same Decrease somewhat Decrease substantially Don’t know/Not applicable

Exploration

Transmission and distribution

Safety

Wages

Marketing

Operating expenditure

Contractors

Recruitment

Training

R&D

19 43

10 37

17 38

7 39

6 24

12

11

47

42

11 32

11 31

12 33

19217

16333

3339

4534

121948

51027

411131

421337

311044

10640

(% respondents)

How do you expect costs across the following aspects of the business will change over the next 12 months?Select one in each row.

24



�0



North America

Far East (including China)

South-east Asia (including India)

Latin America

Middle East and North Africa

Eastern Europe and CIS

Australasia

Western Europe (including Scandinavia)

Sub-Saharan Africa

Central America

35

33

29

24

21

18

18

15

14

7

(% respondents)

Which of the following regions do you think will offer the greatest opportunities for your business in terms of revenue growthover the next 12 months? Select up to three. Can we ask why?

Significantly more

Somewhat more

The same as before

Somewhat less

Significantly less

Don’t know

10

25

40

7

6

12

(% respondents)Will your company rely more or less on mergers and acquisitions as a source for growth over the coming 12 months?

Significantly improve

Somewhat improve

Stay the same

Somewhat decline

Significantly decline


10

34

19

7

0

30

(% respondents)

If applicable, do you think the replacement rate of your company's oil/gas reserves will improve or decline in the next12 months?

25



��



Rising operating costs, including insurance premiums

Shortage of skilled professionals

Increasing regulation

Limited access to capital/finance

Limited new areas for exploration

Rising taxation/demands from states

Competitors

Public backlash/litigation over environmental concerns

Increasingly limited areas of "easy" production

Ensuring adequate safety measures—for environmental risks

Developing operations in regions with less mature infrastructure

Disputes over sovereignty and legal status of operations

Developing new technologies to support operations

The need for closer collaboration with partners

Ensuring adequate safety measures—for personnel

Weakening relationships between NOCs and IOCs

Other, please specify

37

33

4

1

32

24

19

18

18

18

15

9

9

8

7

6

5

(% respondents)

Which of the following do you believe represent the main challenges for your company in the next 12 months?Select up to three.

Strongly agree Somewhat agree Neither agree nor disagree Somewhat disagree Strongly disagree Don’t know/Not applicable

Regulatory issues have become more important

The oil spill has had a minimal impact on overall demand for oil and gas

Drilling permits have become more difficult to obtain in the last 18 months

The oil and gas industry needs to develop a unified response to technology failures

The oil industry needs to develop more rigorous safety training programmes

The industry needs to increase investment in the development of new technologies to improve safety

36

35

21

38

33

34

4131045

35101334

19262033

3161240

3141940

321743

(% respondents)

To what extent do you agree or disagree with the following statements regarding the aftermath of the 2010 oil spill in theGulf of Mexico?

26



�2



Significantly more Somewhat more No change Somewhat less Significantly less Don’t know/Not applicable

Oil

Gas

Biofuels

Onshore/offshore wind

Solar

Other renewable energies

20

20

11 26

10 22

10 22

12 24

1242340 1

862143 1

272430

303629

333626

302428

(% respondents)Do you expect your business to invest more or less capital in the following energy types over the coming 12 months?

North America

Western Europe

Australasia

Far East (including China)

Latin America

Middle East and North Africa

South-east Asia (including India)

Eastern Europe and CIS

Central America

Sub-Saharan Africa

70

44

24

18

15

15

15

14

13

12

(% respondents)

In which of the following regions do you expect regulations relating to the oil and gas sectors to increase/tighten over thecoming 12 months? Select all that apply.

27


© The Economist Intelligence Unit Limited 2012 ��



United States of America

Canada

Brazil

Australia

China

Nigeria

Libya

India

Malaysia

United Kingdom

Iraq

Norway

Indonesia

Kazakhstan

Kuwait

Qatar

United Arab Emirates

Afghanistan

Algeria

Angola

Bahamas

Colombia

Germany

Ireland

Poland

Russia

Sudan

Tanzania

Trinidad and Tobago

Turkmenistan

Vietnam

Other

13

9

8

7

5

5

5

4

4

3

3

3

2

2

1

1

1

1

11

1

1

1

1

1

1

1

1

1

1

1

1

1

(% respondents)

Which country do you believe will offer the most favourable regulatory environment for oil and gas majors to operate in overthe next 12 months?

28



��



Significantly more favourable

Partially more favourable

Broadly unchanged

Will be somewhat more restrictive

Significantly more restrictive

Don’t know

8

21

37

27

1

5

(% respondents)Looking at the overall picture, do you believe governments' and/or NOCs' policies towards IOCs over the next 12 months will be:

Will favour oil and gas

Will favour renewable energies

Will favour unconventional energies

Will favour oil/gas, unconventional and renewable energies equally

Will favour neither oil/gas, renewables nor unconventional energies

Will discriminate against oil & gas

Will discriminate against renewable energies

Will discriminate against unconventional energies

Will discriminate against oil & gas, renewable energies, and unconventional energies

Don’t know

20

45

6

6

2

12

1

0

0

7

(% respondents)

In your areas of interest, do you expect government subsidies on balance to favour the oil and gas sector, or the renewableenergy sector, over the next 12 months? Select one.

29



�5



Significantly improve

Partly improve

Stay the same

Partly worsen

Significantly worsen

Don’t know

9

30

27

25

2

7

(% respondents)Do you expect access to new sites for oil/gas exploration to improve or worsen over the next year?

Upstream

Midstream

Downstream

Marketing


Don’t know

58

12

14

7

0

9

(% respondents)Which segment of the industry do you expect to see the strongest business growth in the next 12 months?

30


© The Economist Intelligence Unit Limited 2012 © The Economist Intelligence Unit Limited 2012�6



Privately owned

Private-equity backed

Small cap

Mid cap

Large cap

State-owned

Partnership


38

11

4

9

23

12

2

1

(% respondents)Which of the following best describes your company?

Significantly increase

Somewhat increase

No change

Somewhat decrease

Significantly decrease

Don’t know

17

48

20

7

1

7

(% respondents)

Do you believe the use of service contracts – for example, to oilfield services companies – will increase or decrease over thecoming 12 months?

Rise by 50% or more

Rise by 25% or more

Rise by 10% or more

Fluctuate by no more than 10% up or down

Drop by 10% or more

Drop by 25% or more

Drop by 50% or more

Don’t know

4

16

33

30

7

1

0

9

(% respondents)How do you expect natural gas prices (as per Henry Hub or European benchmarks) to change over the next 12 months?

Significantly better Somewhat better No change Somewhat worse Significantly worse Don’t know

Oil

Gas

7

5

9221

9219

31

25

31

40

(% respondents)Do you expect downstream margins for oil and gas to be better or worse in 12 months' time?

31



�7



Australia

United States of America

India

China

Canada

United Kingdom

Nigeria

Indonesia

Malaysia

Spain

Austria

Italy

Netherlands

Norway

Brazil

Germany

New Zealand

Pakistan

Sweden

Thailand

Colombia

Cyprus

France

South Korea

United Arab Emirates

Other

27

18

15

7

3

3

3

2

2

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

8

1

(% respondents)In which country are you personally based?

32



�8



Asia-Pacific

North America

Western Europe

Middle East and Africa

Latin America

Eastern Europe

56

21

14

6

2

1

(% respondents)In which region are you personally based?

$500m or less

$500m to $1bn

$1bn to $5bn

$5bn to $10bn

$10bn or more

40

7

15

13

26

(US$)What are your company's annual global revenues?

Board member

CEO/President/Managing director

CFO/Treasurer/Comptroller

CIO/Technology director

Other C-level executive

SVP/VP/Director

Head of business unit

Head of department

Manager

Other

6

17

8

1

14

6

8

14

21

6

(% respondents)What is your title?

33



While every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. nor the sponsor of this report can accept anyresponsibility or liability for reliance by any person onthis white paper or any of the information, opinions or

conclusions set out in this white paper.

Cover image - © photobank.kiev.ua/Shutterstock

LONDON26 Red Lion SquareLondon WC1R 4HQUnited KingdomTel: (44.20) 7576 8000Fax: (44.20) 7576 8500E-mail: [email protected]

NEW YORK750 Third Avenue5th FloorNew York, NY 10017United StatesTel: (1.212) 554 0600Fax: (1.212) 586 1181/2E-mail: [email protected]

HONG KONG6001, Central Plaza18 Harbour RoadWanchai Hong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

GENEVABoulevard des Tranchées 161206 GenevaSwitzerlandTel: (41) 22 566 2470Fax: (41) 22 346 93 47E-mail: [email protected]

big spenders: the outlook for the oil and gas industry in 2012

Business