Many energy executives expect the price-per-barrel of Brent crude oil to peak this year at levels significantly higher than today (currently $112 /bbl). In fact, 43 percent predict oil prices to exceed $141 per barrel, according to the results of the 10th annual energy executive survey conducted by the KPMG Global Energy Institute.
More than two-thirds of the respondents to KPMG’s survey say U.S. energy independence is not attainable until at least 2030, despite the increased focus on domestic energy sources, energy infrastructure, and alternative energy sources such as Shale.
In this year’s KPMG energy survey, which polled 225 financial executives from global energy companies in late-April 2012, 25 percent think 2012 Brent crude oil prices will peak between $131 and $140 per barrel.
Almost half of executives see even higher prices, with 27 percent predicting a peak between $141 and $150; nine percent predicting $151 and $160; and six percent between $161 and $180. One-third think Brent crude prices peaked earlier this year when it was hovering in the mid-$120 range – predicting between $121 and $130 per barrel as a high for 2012.
“Our survey findings confirm that we may not have seen peak levels on crude yet. Energy leaders tells us continued volatility will be driven by underlying issues such as economic uncertainty, geopolitical risk, rising operational costs and regulatory concerns,” said John Kunasek, national leader of the KPMG U.S. energy practice, and executive director for the KPMG Global Energy Institute. “In fact, 40 percent of executives say the single most important energy issue facing the United States is the need for a sound and long-term energy policy.”
This perceived lack of a national energy policy could be a driver to executives’ thoughts on the reality of U.S. energy independence. When asked when they think the United States can attain energy independence, 27 percent say never, 21 percent say 2040 or beyond, and 18 percent say by 2030. Interestingly, 12 percent deem it possible by 2020 while the remaining 22 percent think by 2025.
The Shale Gale
The majority of executives in the KPMG survey agree that the development of shale oil and gas reserves will have a significant effect on global energy needs over the next three years. In addition, nearly half (49 percent) believe shale, which accounted for only 20 percent of total natural gas production in 2010, will become the U.S.’s dominant source for natural gas by 2020. Another 22 percent believe shale will be the primary source for natural gas by 2025.
“Increased production of shale gas in North America could have profound implications on the global energy sector,” said Regina Mayor, oil and gas sector leader for KPMG U.S. “Companies will continue to invest heavily in shale assets, as the industry has only just scratched the surface in the development and resulting production resulting from these assets.”
Seventy-eight percent of executives believe the industry’s emphasis in developing environmentally friendly technologies should be focused on natural gas. As such, shale gas/oil (61 percent) was most frequently cited by executives as the alternative energy source that will win the most significant R&D investment over the next three years – up from 44 percent who selected shale in KPMG’s 2011 survey. Interestingly, executives surveyed admit that the environmental concerns around fracking, may eventually have an upward pressure on natural gas prices.
Alternative Energy Investment
Global investment in renewable energy projects in 2011 exceeded investment in fossil fuel power projects for the first time. However, despite the bullish outlook for shale projects, KPMG’s 2012 survey found that only 19 percent of executives expect R&D investment in alternative energy sources to increase this year – down from 35 percent who predicted an increase in last year’s survey.
Additionally, 61 percent of executives believe renewable energy investment will begin to decline as governmental subsidy programs become harder to reconcile with budget shortfalls, and as other cheaper energy sources such as shale gas become more prevalent.
“This data does not mark the beginning of declining investment in renewables,” added Kunasek. “It suggests that executives are fully aware of the ramifications of the upcoming U.S. presidential election, and also the understanding that 2011 saw historic investment levels in assets that must now be developed and monetized. We will still see significant investment from the industry going forward, but perhaps at flat levels.”
In addition to plans for shale investment, executives also cited solar (22 percent), wind (21 percent), clean coal technologies (16 percent), and biofuels (14 percent) as alternative energy sources that would see increased R&D investment over the next three years.
Capital Spending and Operating Expenses
Executives surveyed by KPMG say their companies will increase capital spending in 2012 compared to 2011. In fact, 60 percent of executives expect capital spending to rise. The factors that will have the most significant impact on capital spending decisions include Regulatory requirements/ constraints, availability of capital/ financing, and forecasted crude oil and natural gas prices. In addition, 69 percent anticipate operating costs will go up over the next 12 months as well.
A significant portion of the additional capital spending could be allocated to increasing human resources, as many of the executives (48 percent) expect their company’s workforce to expand over the next 12 months. Twenty-nine percent expect the workforce to increase up to five percent; 10 percent see increases between five and 10 percent; and nine percent think their company will expand the workforce by more than 10 percent.
“Executive expectations for capital spending and hiring are very positive indicators for the energy industry,” said Mayor. “Companies appear focused on data driven transformation efforts, technology investments and innovation, despite the significant regulatory and economic risk factors they are confronting.”
KPMG will host its 10th Annual Global Energy Conference on May 16th and 17th at the Intercontinental Hotel in Houston. The Global Energy Institute (GEI) provides an open forum where industry financial officers, risk officers, internal audit directors, and tax executives can share knowledge, gain insights, and access thought leadership about key oil and gas or power and utilities issues and emerging trends.