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

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

Big
spenders
The outlook for the oil and gas
industry in 2012
A report from the Economist Intelligence Unit

Commissioned by
© The Economist Intelligence Unit Limited 2012

1


Big spenders The outlook for the oil and gas industry in 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 & Gas
Marc Albers*, senior vice president, ExxonMobil
Thomas P Barney, chief economist, Marathon
Petroleum Corp
Steve Chazen*, chief executive, Occidental Petroleum
Jean-François Cirelli*, vice chairman and president,
GDF Suez
Fereidun Fesharaki*, chief executive, FG Energy
Hamid Gayibov, managing director, Xenon Capital
Andrew Gould*, chairman, Schlumberger
Simon Henry, chief financial officer, Shell
Jaap Huijskes, executive board member responsible
for exploration and production (E&P), OMV
Bill Day, corporate communications manager, Valero
Bill Klesse, CEO, Valero

David Knox, chief executive officer, Santos
Helge Lund, chief executive, Statoil
John Richels*, chief executive officer, Devon Energy
Christof Ruehl, chief economist, BP
Carl Sheldon, chief executive officer, Abu Dhabi
National Energy Corp
Jon Tait, head of global attraction, BP
Donald C Templin, senior vice president and chief
financial officer, Marathon Petroleum Corp
Mehdi Varzi, president, Varzi Energy
Gonzalo Velasco, communications manager, Repsol
*Comments from these executives were obtained from conferences
and company conference calls.

2

© The Economist Intelligence Unit Limited 2012


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

Contents

1

About this report

2

Executive summary

4

The oil and gas industry barometer

6

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

2

Investment prospects

3

Risky business 

4

A new energy politics? 

5

In focus 

6
7

9

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

11

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

13

Implications from a year of turmoil in the Arab world

15

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

Refining

18

A focus on downstream investment prospects

Skills

20

What are companies doing to plug the skills gap?

© The Economist Intelligence Unit Limited 2012

3

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

Executive
summary
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.

4

© The Economist Intelligence Unit Limited 2012


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

Key
findings

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.

© The Economist Intelligence Unit Limited 2012

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

1

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

Key points
• 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.

Figure 1
How confident are you about the
business outlook for your company
in the next 12 months?
(% respondents)

2011

34%

Highly confident

42%

Somewhat confident

2012

42%

Highly confident

40%

Neither confident
nor pessimistic

10%Neither
confident nor

7%Somewhat
pessimistic

7%Somewhat
pessimistic

1%

Highly pessimistic

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).

Somewhat confident

16%

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%.

pessimistic

1%

Highly pessimistic

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

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

Source: Economist Intelligence Unit

6

© The Economist Intelligence Unit Limited 2012


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

Figure 2

Europe

How confident are
North
America
you about the
business outlook
for your company

in the next 12 months?

71%

90%

(% respondents)

Asia-Pacific

81%

Source: Economist Intelligence Unit

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 challenges
Of 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.

Figure 3
Does your company plan to make more or less capital investment in
dollar terms over the next 12 months? Select one.
(% respondents)

2011:

16%

33%

33%

11%

4%

43%

22%

9%

3%

Invest
somewhat
less

Invest substantially
less (At least 25%
annual decrease)

2012:
20%

Invest substantially
more (At least 25%

annual increase)

Invest
somewhat
more

Keep investment
the same as before

Source: Economist Intelligence Unit
© The Economist Intelligence Unit Limited 2012

7


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

Figure 4
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
Source: Economist Intelligence Unit.

6%

Central America

8%

Figure 5
Which sgment of the industry do you expect to see the strongest business growth in the next 12 months?
Select one. (% respondents)

2012:

2011:

42%
Upstream

56%

17% 10% 22%
Midstream Downstream

Marketing

Upstream

12% 14% 8%
Midstream Downstream Marketing

Figure 6
Top 10 barriers to growth 2011

Top 10 barriers to growth 2012 

Rising operating costs, including insurance

Rising operating costs, including insurance

premiums

36 %

premiums

36%

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
concerns
Ensuring adequate safety measures—for
environmental risks
Rising taxation/demands from states

Public backlash/litigation over environmental
concerns

18%

16 %

Rising taxation/demands from states

17%

13 %

Increasingly limited areas of “easy” production

16%

12 %

Ensuring adequate safety measures—for
environmental risks

10%

Source: Economist Intelligence Unit. Note: Figures do not add up to 100% because respondents are asked to
select their three top barriers to growth.
8

© The Economist Intelligence Unit Limited 2012


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

2

Key points

2

Big spenders The outlook for the oil and gas industry in 202.

Investment prospects

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

Investment prospects

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

• Investment intentions have risen significantly.
•Exploration is looming as a key spending growth area for a number of oil companies.

Key points

• While most companies expect a supportive price climate, smaller firms may be more exposed to weaker prices.
l Investment intentions have risen significantly.

• National oil companies appear particularly bullish about raising capital expenditure in 2012.
l Exploration is looming as a key spending growth area for a number of oil companies.

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

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 202.
Despite the difficult economic
climate and fears of recession
major growth themes for Shell include deep water in the Gulf
l
There
is no
evidenceisyet
that the aeuro

zone crisis will have a major impact on investment.
in the euro zone, the oil and
gas
industry
showing
growing
of Mexico, liquefied natural gas (LNG) in Australia, tight gas
sense of confidence about the future investment outlook.
in North America, traditional plays in the North Sea, and its
worldwide
exploration
programme.
an increase
in capital
spending, compared with
Growing investment
More than four-fifths of respondents (82%) say they are either
only 55% in North America and 57% in Europe.
Despite the difficult economic climate and fears of
highly or somewhat confident
about the business outlook for
In general, the Anglo-Dutch supermajor sees a robust demand
recession in the euro zone, the oil and gas industry
their company over theisnext
12 months.
Translating
this into aboutoutlook
fordesire
oil andtogas,
andalso

host
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invest
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showing
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the The
corporate action, a significantly
larger share
of companies than are supportive
companies.
Majorsplans
like Shell
are infor
active
of Shell’s
to invest
newspending
energy
future investment
outlook.
last year (63% this year compared with 49% last year) say their
supplies. “The thinking tends to be long-term – many years or
More than four-fifths
of respondents
firm plans to increase investment
over the next
12 months.(82%) sayeven decades

Figurein7our industry, rather than driven by short-term
they are either highly or somewhat confident factors,” says Shell’s chief financial officer, Simon Henry.
If your company is involved in
business
outlook
for their company
Upstream activities areabout
seenthe
by the
majority
of respondents
exploration, does it plan to increase
over the
next 2
months.
Translating
as the key area for business
growth
over
the next
year, so itthis into Figure 7
or decrease the frequency or intensity
corporate
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a significantly
share of
of itsisexploration
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should come as little surprise
that

exploration
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a major
If your company
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doesthe
it plan
companies
than
last
year
(6%
this
year
compared
next
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Select
one.
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or
decrease
the
frequency
or
intensity
of its
beneficiary of this increased investment. Our survey shows

(%
respondents)
with
49%
last
year)
say
their
firm
plans
to
increase
exploration
activities
over
the
next
12
months?
Select
one.
that 41% of industry professionals expect to see increased
(% respondents)
investment over the next 2 months.
investment in exploration activities over the course of 2012, with
Significantly
only 4% anticipating aUpstream
decline (see
figureare
7).seen by the majority

increase
activities

of respondents as the key area for business

11%

Reflecting differencesgrowth
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infrastructure
overand
the next
year, so it should come as
requirements, however,
expectations
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capital spending
little
surprise that
exploration
will be a major
vary across regions. Inbeneficiary
the Asia-Pacific
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72%
survey Our
of this increasedofinvestment.
respondents predict ansurvey
increase
in capital

spending,
compared
shows
that %
of industry
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with only 55% in Northexpect
America
and
57%
in
Europe.
to see increased investment in exploration

38%

Don’t know/
not applicable

30%
Somewhat

activities over the course of 202, with only %

The desire to invest also
varies between
companies.
Majors
anticipating
a decline

(see figure
7). like
Shell are in active spending mode. The company has taken 16
Reflectingsince
differences
in demand
andmore
new final investment decisions
the start
of 2010 for
infrastructure
requirements,
however,
expectations
than 400,000 barrels of oil equivalent per day of new production.
about capital spending vary across regions. In the
As spending ramps up on these and other projects, it expects
Asia-Pacific area 72% of survey respondents predict
that overall capital spending levels will increase as well. The
0

© The Economist Intelligence Unit Limited 202

increase

1%

Significantly
decrease

© The Economist Intelligence Unit Limited 2012

17%

Stay the same

3%

Somewhat
decrease

Source: Economist Intelligence Unit

9


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

Bullish in the US
The 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 NOCs
Meanwhile, 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.

Figure 8
Does your company plan to make more or less capital
investment in dollar terms over the next 12 months?
(% respondents)

North
America

55%

57%
Asia-Pacific

72%

Source: Economist Intelligence Unit

10

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.

Europe

Invest substantially/somewhat more

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.

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.

© The Economist Intelligence Unit Limited 2012


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

3

Risky business
How are oil companies’ attitudes to risk evolving?

Key points
• 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.

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

© The Economist Intelligence Unit Limited 2012

11


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

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 spend
Tax is another pressing issue, identified as the main challenge
by 17% of respondents. The growing tax burden is one byproduct 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

12

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 thoughtthrough 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 premium
Inconsistent 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.

© The Economist Intelligence Unit Limited 2012


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

4

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

Key points
• 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.

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.

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

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 byproduct 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.

© The Economist Intelligence Unit Limited 2012

13


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

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

14

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.”

© The Economist Intelligence Unit Limited 2012


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

5

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

Key points
• 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.

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 revolution
The 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.

© The Economist Intelligence Unit Limited 2012

15

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These plays need to be drilled to delineate the potential, and

Whereas US-focused players are notably bullish about
unconventional plays, European industry executives are
The Economist Intelligence
© The
© The
Economist
Economist
Unit Limited
Intelligence
Intelligence
202 Unit
Unit
Limited
Limited
202
202
9
99
the industry at large will need to build up©the
services
and
notably more cautious. “Unconventional gas, and especially
pipeline infrastructure in these new regions,” he adds.
shale gas, was a game changer in the US gas industry.
Operations in Europe are far less mature, and Europe has seen
However, some senior executives caution that shale plays
only a couple of exploration wells targeting shale gas,”
may not be as economically competitive as advocates make
says Jaap Huijskes, executive board member responsible
out – highlighting the point that unconventionals is one area

for E&P at OMV.
where oil industry consensus is distinctly lacking. “Over time,
if you look at the marginal cost of producing shale in volume,
Slow progress
only the very best properties in the big shales in Haynesville,
Europe’s unconventional developments will advance at a
Barnett and Horn River can be produced for US$4. Everything slower pace than those in North America. “No significant
else is in the range of US$5.5 to US$6,” says Mr Sheldon.
production contribution is expected within this decade, as
16

© The Economist Intelligence Unit Limited 2012


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

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, capitalintensive 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 East
China 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 rampup [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.

© The Economist Intelligence Unit Limited 2012

17


Big spenders The outlook for the oil and gas industry in 202.

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

66

Refining
Better daysRefining
ahead?
Better days ahead?

Key points
Key points

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

l Gasoline consumption is stronger, with international demand for products driving growth.
• Refining profitabilitylisMany
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with
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looking

refiners
will
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to cutgenerally
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in 2012.

• Gasoline consumption is stronger, with international demand for products driving growth.
• Many refiners will continue to cut capacity in 2012.

respondents believe that downstream margins will
After a dismal few years the downstream sector is
higher in late 202 than in the previous year,
showing
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After a dismal few years the downstream sector is showing some Marginbecall
with
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to be eitherto reverse
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Better margins
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products.
consumption of refined products.
become a theme. Conoco, for example, announced in July
significantly
or somewhat
worse. operations during
that itbe
would
shed its refining
and marketing
After fouroil-products
years of declining
oil-products
use,
After four years of declining
use, US
demand was
upUS 2012 in order to create a new company, to be called Philips 66.
was up
by at
2%19.148m
in 200 over

previous
Margin
callMarathon completed the separation of its
by 2% in 2010 over demand
the previous
year,
b/d, the
according
That same
month
year, at 9.8m
b/d,
according
the by
EIA. Total
Better operations
margins have
enabled
integrated
to the EIA. Total consumption
of liquid
fuels
in 2010togrew
downstream
into
two separate
units, with refining
consumption
of
liquid

fuels
in
200
grew
by
0,000
oil
companies
to
reverse
a
strategy
of
410,000 b/d, or 2.2%, the highest rate of growth since 2004.
operations undertaken by Marathon Petroleum Corporation
b/d, or 2.2%, the highest rate of growth since 200.
(MPC).
In the third quarter of 2011 US Gulf Coast gasoline margins
Figure 10
In the
third
quarter
of 20byUS
GulftoCoast gasoline
per barrel vs Louisiana
Light
Sweet
increased
89%
Figure 10 Do you expect downstream margins

margins
perthird
barrel
vs Louisiana
Sweet
US$8.20, from US$4.35
in the
quarter
2010. ALight
US Gulf
for oil and gas to be better or worse
increased
by mix
89%oftocrudes
US$8.20,
from
US$.5
Do you expect downstream margins for oil and gas to be
Coast refinery running
a typical
for the
area
to a in the
in 12inmonths'
time?
better or worse
12 months’
time?
thirdwould
quarter

2010.
A US Gulf
Coastrising
refinery
(% respondents)
catalytic cracking yield
have
monthly
margins
to running (% respondents)
a typical mix of crudes for the area to a catalytic
US$21.45/b in July – the highest figure recorded for a cracking
cracking yield would have monthly margins rising
refinery by Jacobs, a downstream consultancy.
Significantly
Don’t
to US$21.45/b in July – the highest figure recorded
better
1% know
for
a
cracking
refinery
by
Jacobs,
a
downstream
Significantly
International demand, particularly in the developing markets,
worse

9% 8%
consultancy.
has been the key driver
for growth in 2011 and helped to elevate

margins. Diesel demand is expected to recover its former
International demand, particularly in the
strength and grow rapidly in 2012.
developing markets, has been the key driver for
in 20
and helped
to elevate
Such conditions aregrowth
supporting
a more
optimistic
view onmargins.
DieselA demand
to recover itsbelieve
former
margins going forward.
majorityisofexpected
survey respondents
strength and grow rapidly in 202.
that downstream margins will be higher in late 2012 than in the
previous year, with a combined 38% expecting them to be either
Such conditions are supporting a more optimistic
significantly or somewhat
better in 12 months’ time, compared
view on margins going forward. A majority of survey

with a combined 23% who expect them to be significantly or
somewhat worse.

22

© The Economist Intelligence Unit Limited 202

18

© The Economist Intelligence Unit Limited 2012

22%

31%
Somewhat

Somewhat
worse

better

30%

No change

Source: Economist Intelligence Unit


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

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 difficultto-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.

© The Economist Intelligence Unit Limited 2012

19

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

7

Skills
What are companies doing to plug the skills gap?

Key points
• 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.

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

20

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.

© The Economist Intelligence Unit Limited 2012


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

Case study: BP
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: Shell
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.

© The Economist Intelligence Unit Limited 2012

21


Big spenders The outlook for the oil and gas industry in 202.
Big spenders The outlook for the oil and gas industry in 2012

Appendix

Survey results
Do you operate in the oil/gas sector? Select all that apply.
(% respondents)
Oil
46

Gas
42

Neither
43

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

(% respondents)
Upstream (including exploration, development and production of oil and/or natural gas)
34

Midstream (processing)
14

Downstream (including tankers, refiners and retailers)
24

Other (including pipeline, marine and other services)
58

How confident are you about the business outlook for your company in the next 12 months?
(% respondents)
Highly confident
40

Somewhat confident
41

Neither confident nor pessimistic
11

Somewhat pessimistic
7

Highly pessimistic
1

Don’t know
0

28

© The Economist Intelligence Unit Limited 202

22

© The Economist Intelligence Unit Limited 2012


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

Big spenders The outlook for the oil and gas industry in 202.

Does your company plan to make more or less capital investment in dollar terms over the next 12 months?
(% respondents)
Invest substantially more (>25% increase year on year)
19

Invest somewhat more
45

Keep investment the same as before
22

Invest somewhat less
7

Invest substantially less (>25% decrease year on year)
2

Don’t know
4

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)
Significantly increase
13

Somewhat increase
29

Stay the same
18

Somewhat decrease
3

Significantly decrease
1

Don’t know/not applicable
36

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

Increase substantially

Increase somewhat

Stay the same

Decrease somewhat

Decrease substantially

Don’t know/Not applicable

Exploration
19

43

17 2

19

Transmission and distribution
10

33

37

3

16

Safety
17

39

38

3

3

Wages
7

34

39

5

4

Marketing
6

48

24

91

12

Operating expenditure
12

27

47

10

5

11 1

4

13 2

4

Contractors
11

31

42

Recruitment
11

32

37

Training
11

44

31

10 1

3

R&D
12

33

© The Economist Intelligence Unit Limited 2012

40

6

10

23


Big spenders The outlook for the oil and gas industry in 2012
Big spenders The outlook for the oil and gas industry in 202.

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? Select up to three. Can we ask why?
(% respondents)
North America
35

Far East (including China)
33

South-east Asia (including India)
29

Latin America
24

Middle East and North Africa
21

Eastern Europe and CIS
18

Australasia

18

Western Europe (including Scandinavia)
15

Sub-Saharan Africa
14

Central America
7

Will your company rely more or less on mergers and acquisitions as a source for growth over the coming 12 months?
(% respondents)
Significantly more
10

Somewhat more
25

The same as before
40

Somewhat less
7

Significantly less
6

Don’t know
12

If applicable, do you think the replacement rate of your company's oil/gas reserves will improve or decline in the next
12 months?
(% respondents)
Significantly improve
10

Somewhat improve
34

Stay the same
19

Somewhat decline
7

Significantly decline
0

Don’t know/not applicable
30

24

© The Economist Intelligence Unit Limited 2012

© The Economist Intelligence Unit Limited 202


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

Big spenders The outlook for the oil and gas industry in 202.

Which of the following do you believe represent the main challenges for your company in the next 12 months?
Select up to three.
(% respondents)
Rising operating costs, including insurance premiums
37

Shortage of skilled professionals
33

Increasing regulation
32

Limited access to capital/finance
24

Limited new areas for exploration
19

Rising taxation/demands from states
18

Competitors
18

Public backlash/litigation over environmental concerns
18

Increasingly limited areas of "easy" production
15

Ensuring adequate safety measures—for environmental risks
9

Developing operations in regions with less mature infrastructure
9

Disputes over sovereignty and legal status of operations
8

Developing new technologies to support operations
7

The need for closer collaboration with partners
6

Ensuring adequate safety measures—for personnel
5

Weakening relationships between NOCs and IOCs
4

Other, please specify
1

To what extent do you agree or disagree with the following statements regarding the aftermath of the 2010 oil spill in the
Gulf of Mexico?
(% respondents)

Strongly agree

Somewhat agree

Neither agree nor disagree

Somewhat disagree

Strongly disagree

Don’t know/Not applicable

Regulatory issues have become more important
36

45

10

13

10

31

4

The oil spill has had a minimal impact on overall demand for oil and gas
34

35

5

3

Drilling permits have become more difficult to obtain in the last 18 months
33

21

20

6 2

19

The oil and gas industry needs to develop a unified response to technology failures
40

38

12

61

3

41

3

17 2

3

The oil industry needs to develop more rigorous safety training programmes
40

33

19

The industry needs to increase investment in the development of new technologies to improve safety
34

© The Economist Intelligence Unit Limited 2012

43

25