Accounting firm Ernst & Young released its Oil & Gas Center’s quarterly outlook this week highlighting the major trends expected in various petroleum industry sectors over the near term. It’s done on a quarterly basis and provides an overall view of main themes to be watching. It is primarily generated as an internal document, “so everyone knows what’s going on and highlights are sent to clients,” Foster Mellen, Senior Analyst with Ernst &Young’s Oil & Gas Practice told Breaking Energy.

Some points of interest include the long-overdue startup of Kazakhstan’s giant Kashagan field and how companies may cope with US natural gas prices that have persistently remained below historical norms.

Highly Challenged: Kashagan

“The Kashagan field, believed to be the largest known oil field outside the Middle East and the fifth largest in the world in terms of reserves, is located off the northern shore of the Caspian Sea near the city of Atyrau,” the EIA says. The field is being developed by the North Caspian Operating Company, a consortium made up of Kazmunaigaz (the Kazakh national oil company), Eni, ExxonMobil, Shell and Total 16.81% each, ConocoPhillips 8.40% and INPEX 7.56%. Conoco is in the process of selling its stake to India’s ONGC Videsh.

The participation of several major oil companies underlines the project’s importance, but also speaks to the field’s extremely challenging nature. “The development of Kashagan, in the harsh offshore environment of the northern part of the Caspian Sea, represents a unique combination of technical and supply chain complexity. The combined safety, engineering, logistical and environmental challenges make it one of the largest and most complex industrial projects currently being developed anywhere in the world,” according to the consortium.

These challenges have led to delays and repeated cost overruns. CNN Money recently ranked Kashagan at the top of the world’s 10 most expensive energy projects, estimating the cost at $116 billion.

“The word out of Eni [a joint operator] is the consortium is shooting for a mid-year startup. Sometime this year looks like a fairly good estimate,” said Mellen. Initial production is expected at about 75,000 barrels per day, then ramping up to about 400,000 b/d within a year or so, Mellen said he and his colleagues have been hearing from industry sources.

Exposed: US Natural Gas Producers

US natural gas producers are historically under hedged for 2013 and 2014, meaning they have not locked in purchase agreements on the futures market at prices higher than prevailing spot prices. This is reportedly one of the more serious points of contention between Aubrey McClendon and the Chesapeake Energy Board of Directors that contributed to the CEO’s resignation announced this week.

“The unhedged position is not surprising when prices are very low – the hope is that prices don’t fall too much lower so you can’t lose much by not hedging,” Mellen said. Some producers are holding back volumes and would likely “open the valves” if spot prices broke above recent range-bound levels, he said.

Below are key themes and summary findings from the E&Y Oil & Gas Center Quarterly Outlook identified by the company’s analysts:


In 2013, the global oil supply-demand balance is expected to remain uneasy amid geopolitical tensions and economic uncertainty. Oil markets could face an ugly Arab winter given the unstable political environments in Syria, Egypt and Libya. Meanwhile, Iraqi production continues to grow, currently topping 3 million barrels of oil a day, taking the No. 2 spot among OPEC producers from Iran. The Iraqi increases put significant pressure on OPEC members to cut back their production in order to make room for Iraq’s new output.

The long overdue, super-giant Kashagan project offshore Kazakhstan is expected to start production by mid-year and contribute to the rising global oil supplies from non-OPEC sources.
In the US, despite a substantial build-out of the oil transportation infrastructure this year, bottlenecks in the Midwest are expected to continue the pressure on US and Canadian oil prices.


Last year, US natural gas prices averaged below $3/MMBtu for the first time since the late 1990s amid a glut of production, leaving many if not most natural gas producers in a bind. Small gas producers are expected to continue struggling this year with questions remaining about their ability to survive. Low natural gas prices, however, will continue driving a renaissance in the US petrochemical and manufacturing sectors as they lower feedstock costs. US natural gas exports will remain a controversial issue this year as supporters and adversaries escalate political tensions around how much exports could impact domestic natural gas prices.


Profit margins for the US refining business were up across the board in 2012, with Midwest refineries having another stellar year thanks to access to cheaper WTI and Canadian crudes. While expected to diminish somewhat, the structural imbalances in the US Midcontinent are expected to continue this year, prolonging the advantage of regional refiners that have access to cheaper oil supplies.

Globally, refiners had a good year in 2012, but their performance was nowhere near the profitability seen in the US. Going forward, the consensus view is that the economics for refiners outside the US will remain challenging as more refining capacity comes online and plants continue to process relatively more expensive crudes.

Oilfield Services

Last year was not a bad year for oilfield services companies as rig counts held up and global upstream spending cautiously increased. The US rig count was slightly off as gas-directed drilling slowed and was not fully offset by new oil- and liquids-directed drilling. Oilfield service cost pressures slowed somewhat due to efficiency gains, while labor pressures rose. Offshore, there still are a large number of new-builds coming into the market that are expected to keep a lid on day rates, utilization and profit margins.


Annual transaction activity in terms of total reported deal value was up 20% in 2012 compared with a year earlier, topping $400 billion, the highest ever reported value. However, activity in terms of deal volume or the number of deals was down slightly for the year. A full $60 billion of the total transaction value involved Russia’s oil giant Rosneft, which struck deals with AAR and BP for the TNK-BP joint venture. Asian outbound oil and gas acquisitions had another strong year in 2012, and the acquisition pace looks to continue in 2013.