O&G Risk/Reward Ratings: Stable Scores Defy Volatile Oil Market

BMI View: S table ranking s , despite some small movement in individual scores, ha ve allowed North America to continue its strong performance in the developed states oil and gas risk/reward ratings . However, a wave of exploration and production in the developed states is likely to translate into future gains i n the region's rewards scores, raising the entire risk/reward rating.

Outperformers Highlight Of Stable Ratings

The highlight to a relatively stable developed states risk/reward ratings (RRRs) is the continued wave of exploration and production (E&P) targeting the developed markets. The US and Canada remain at the forefront of a boom in oil and gas production, yet Norway and the UK are increasingly enjoying renewed upstream activity. For Norway and the UK, increased offshore activity has the potential to slow, or stem, the decline in production from mature fields. Norway has enjoyed a number of significant offshore discoveries of late, while the UK has reaped big benefits from fiscal incentives that have to-date been positively received, with an uptick in investment.

Key Themes From BMI's Developed Markets Oil and Gas RRR

  • Continued weak consumption growth as energy efficiencies and slower economic activity limit demand of both oil and gas, placing downward pressure on our ratings.

  • Strong upside risks to Industry Rewards come with increased upstream exploration. North America, Norway and the UK are set continue enjoying the biggest rewards, but with an end to an offshore drilling moratorium in Italy and increasing prospectivity in the Mediterranean potentially supporting an upcoming licensing round in Greece, the zone of activity may be set to spread.

  • Booming natural gas production in North America has continued to depress prices, weighing on corporate earnings, and along with a slight decrease in our US gas production forecast, has led to a small decline in our upstream ratings for the US and Canada.

  • Refinery rationalisation in Europe continues to keep downstream scores low - the outlook for North America benefits from access to lower cost feedstock from domestic production - but we continue to foresee volatile downstream business, particularly for Developed Europe which will see continued pressure on refining margins as new capacity East of the Suez comes online.

North America has maintained a lead across our RRRs, with the largest divergence in the upstream, where large reserves and increased production of conventional and unconventional oil and gas have led to strong rankings. In Europe, increased exploration has led to big gains for Norway, with significant discoveries presenting upside risks to our long-term forecasts and prompting Norwegian national oil company (NOC) Statoil to aim to produce more in 2020 than in 2011, a reversal from previous aim to simply maintain previous levels ( see our online service, August 28 2012, 'New Discoveries Lift Long-Term Production Forecast').

Table: Oil & Gas Upstream Risk/Reward Ratings
Upstream Industry Rewards Upstream Country Rewards Upstream Rewards Upstream Industry Risks Upstream Country Risks Upstream Risks Upstream R/R Ratings Rank
Source: BMI
Canada 71 100 78 95 86 92 82 1
US 58 100 68 90 83 88 74 2
Norway 44 80 53 80 91 84 62 3
Germany 30 70 40 90 85 88 54 4
UK 20 100 40 90 81 87 54 5
Italy 35 45 38 60 72 64 46 6
Denmark 21 50 28 80 87 82 45 7
Spain 13 55 23 85 77 82 41 8
Belgium 8 45 17 60 81 67 32 9
France 8 40 16 60 77 66 31 10
Greece 0 5 1.25 40 61 47 15 11
Average 28 63 37 75 80 77 49

Beyond the traditional outperformers, we highlight potential for future increases in performance for particular countries on the back of recent development. As mentioned, Italy's decision to end the moratorium on offshore drilling - issued following the Gulf of Mexico disaster in 2010 - will allow some EUR4.5bn of previously approved investments to move forward. Moreover, Greece ' s dec ision to undertake seismic surveys comes in preparation for a 2013/2014 licensing round that , despite the country's fiscal woes , may draw strong interest given a series of prolific discoveries in the Eastern Mediterranean ( see ' Seismic Tender Opens A New Market In The Eastern Med, ' August 31 ).

Beyond North America, Western Europe remains split on tapping its shale gas resources due to environmental concerns related to fraccing, with France and Germany imposing nationwide and regional bans respectively. However , the UK has taken tentative steps toward tapping its shale gas resources. D espite political uncertainty , the issuance of what may well be a more gas- friendly energy policy in Autumn 2012 bodes well for the likelihood that the process will eventually take place on UK soil.

Opportunity For Rich Developed States
Developed States Oil & Gas Risk/Reward Ratings

Looking Downstream

Although rankings remained stable, a worsening macroeconomic outlook contributed to lower scores for Spain's downstream rewards. Falling crude consumption in Greece helped improve the country's downstream rewards, although it remained at the bottom of our rankings. Overall, downstream rankings held steady, with the scores between North America and Europe reflecting the greatest convergence. Only one point separates second-ranked Canada and third-ranked Germany in terms of our overall RRRs.

Table: Oil & Gas Downstream Risk/Reward Ratings
Downstream Industry Rewards Downstream Country Rewards Downstream Rewards Downstream Industry Risks Downstream Country Risks Downstream Risks Downstream R/R Ratings Rank
Source: BMI
US 50 84 59 85 77 82 66 1
Canada 50 68 55 90 76 84 63 2
Germany 44 76 52 90 73 83 62 3
UK 41 80 51 80 71 76 58 4
Belgium 37 54 41 95 63 82 53 5
Spain 30 56 37 90 59 78 49 6
Italy 36 58 41 60 63 61 47 7
Norway 36 34 35 70 80 74 47 8
France 33 56 39 60 68 63 46 9
Denmark 21 46 27 90 80 86 45 10
Greece 21 38 25 60 49 55 34 11
Average 36 59 42 79 69 75 52

Demand Grows Slow

Among the factors weighing on downstream scores is our forecast for demand growth , where we see decreasing economic activity contributing to slower demand for both oil and gas, with several developed states set to experience little to no growth over our six-year average. Relatively higher demand for oil in Norway and gas in Greece are outliers to the weak demand growth across the developed states. Aside the impact of economic concerns, gains in efficiency will ensure that primary demand growth globally comes from outside the developed markets, marking a shift in historical consumption patterns.

Demand, Like Rankings Holds Stead
Scores for Oil And Gas Demand Growth, Six-Year Average, Scores out of 10

Despite continued deteriorating economic conditions across many developed states and volatile oil prices, risks stayed largely steady , with political risk, corruption and physical infrastructure contributing t o a number of countries with relatively similar scores. Underperforming countries were weighed down by the continued crisis in the eurozone and a generally less liberal energy market compared to higher perform ing peers.

More Than Enough Risk To Go Around - Developed States Oil & Gas Risk/Reward Ratings

Looking Ahead

With our forecast for relatively high oil prices to r emain in the medium term , E&P in developed states should continue to enjoy strong incentives. However , each market will face localised risks . H igh labour costs in Norway ' s oil sector and the threat of strikes, or inadequate midstream infrastructure in North America, are among the above ground risks that well weigh on ratings in the short term.

Table: Developed States Oil & Gas Risk/Reward Ratings
Upstream R/R Ratings Downstream R/R Ratings Oil & Gas R/R Ratings Rank
NB scores out of 100. Source: BMI
Canada 82.5 63.5 73.0 1
US 74.0 65.5 69.8 2
Germany 54.5 61.6 58.0 3
UK 54.0 58.4 56.2 4
Norway 62.2 46.9 54.5 5
Italy 45.5 47.1 46.3 6
Spain 40.8 48.9 44.8 7
Denmark 44.6 44.9 44.8 8
Belgium 32.1 53.3 42.7 9
France 30.8 46.3 38.5 10
Greece 15.1 34.4 24.7 11
Average 48.7 51.9 50.3
This article is tagged to:
Sector: Oil & Gas
Geography: Europe, Belgium, Canada, Germany, Denmark, France, United Kingdom, Greece, Italy, Norway, United States

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