The reality facing oil and gas industries has changed dramatically over the past year, and nearly two-thirds of oil and gas CEOs say their companies face more risks than they did three years ago against today’s backdrop of oversupply and low commodity prices, according to a survey from accounting firm PricewaterhouseCoopers.
“For oil and gas companies, an increasing tax burden, over-regulation and geopolitical uncertainty top the list, followed by government response to fiscal deficit and debt burden, and protectionist tendencies of national governments,” according to PwC’s 18th Annual Global CEO Survey.
Falling oil and gas prices have prompted many energy companies to slash planned spending in 2015.
Downtown-based driller EQT Corp reduced its 2015 budget by about 18 percent, to $2.05 billion, due to tumbling commodity prices. It also plans to cut its Marcellus shale drilling plan by 59 wells to 122 wells and reduce its Permian drilling plan by 10 wells to five wells to hold acreage in Texas.
“Speaking only for EQT, in times of financial stress such as these, we think the prudent approach is to be conservative financially — continue to control what we can control, operate within our means and make investments that ultimately create shareholder value,’ said spokeswoman Linda Robertson.
The Brent crude oil price, a major benchmark for oil prices worldwide, is expected to average $58 per barrel (bbl) in 2015. The annual average West Texas Intermediate price is expected to be $3 per barrel to $4/bbl below Brent, according to a forecast from the U.S. Energy Information Administration released in January.
On the natural gas side, the Energy Information Administration expects the Henry Hub natural gas spot price, a key benchmark for gas prices, to average $3.44 per million British thermal units (MMBtu) in 2015, down from $4.39 in 2014.
Fort Worth-based Range Resources, which operates in the Appalachian Basin and in the Midcontinent region of Texas and Oklahoma, slashed its 2015 capital budget from $1.3 billion to $870 million, citing the “continuing erosion in commodity prices.”
The company also closed its Oklahoma City office and laid off at least 60 employees last week, according to an article Friday in the Fort Worth Star-Telegram.
Among energy CEOs surveyed by PricewaterhouseCoopers, 83 percent are concerned about an increasing tax burden.
“Taxes are a particular issue for the sector, which also rates an internationally competitive and efficient tax system as the top outcome it would like to see from government,” according to the survey.
In Pennsylvania, the tax debate has been heating up with the election of Democratic Gov. Tom Wolf, who has proposed a 5 percent severance tax that would be used to fund the state’s education system.
Currently, the state uses a shale impact fee that’s indexed to the price of natural gas. The bulk of the revenue supports local communities with shale wells within their borders. So far, the fee has brought in about $633 million.
Ms. Robertson said there are concerns about how a severance tax will be structured, especially now that natural gas prices are low.
“A severance tax, like the impact fee, is an economic cost of doing business, and while EQT is willing to pay its fair share toward a severance tax, a tax that is more sensitive to prevailing market prices for natural gas and natural gas liquids may be more practical than a flat dollar amount or even a flat percentage,” Ms. Robertson said.
“The current low-price environment, for example, makes it even clearer that a more progressive tax — which would be lower than 5 percent at today’s prices — would be more pragmatic,” she said.
PricewaterhouseCoopers said survey respondents expect growth in the long term, but will need to weather the short term.
About 26 percent of energy CEOs expect the global economy to “decline over the next 12 months, up from just 10 percent last year, although another 35 percent of oil and gas CEOs anticipate an improved outlook,” according to the accounting firm.
“When it comes to their own prospects, 29 percent of oil and gas CEOs are very confident of revenue growth over the next 12 months — down from 39 percent last year,” according to PricewaterhouseCoopers.
In the next three years, the outlook is sunnier, with 43 percent very confident of growth.
In addition, about half of oil and gas CEOs expect to enter into a new strategic alliance or joint venture over the next 12 months.
“With weakening global demand, many oil and gas companies are relying on joint ventures, strategic alliances and informal collaborations to drive cost-efficient ways of operating,” the accounting firm said.
“They most often use such partnerships to access new customers, geographic markets and new/emerging technologies, as well as to share risk,” according to the report.
“They partner most frequently with suppliers, but 57 percent of oil and gas CEOs also say they are working with competitors, or are open to doing so. More than half partner with business networks, cluster or trade organizations or are considering doing so.”
This article was written by Stephanie Ritenbaugh from Pittsburgh Post-Gazette and was legally licensed through the NewsCred publisher network.