The oil and gas industry in the United States faces various trends within the next five years that promote considerable optimism but that also highlight the need for continual vigilance, says Melvin F. “Trey” Hunt III, partner-in-charge of Oil and Gas Services at Weaver. Those trends relate to the cost and availability of credit and capital, technology, the regulatory landscape, and global conditions and energy demand.
Smart Business spoke with Hunt about the challenges and rewards that those in the oil and gas industry can expect over the next five years.
What do cost and availability of capital and credit look like going forward for the oil and gas industry?
Adverse business conditions in the U.S. during the past five years prompted the Federal Reserve to reduce the prime lending rate to promote investment and economic growth. Although the national economy continues to display signs of recovery, interest rates are likely to remain low for quite some time, leaving credit readily available for capital expenditures. That is great news for oil and gas companies seeking funds to expand operations.
How has new technology revolutionized this industry?
Horizontal drilling and hydraulic fracturing might represent a modern-day Industrial Revolution that will make much more hydrocarbon energy available to consumers in the U.S. and beyond.
The Eagle Ford shale area, a few hours southwest of Houston, serves as an example of the impact those technologies can have for increasing hydrocarbon energy production. For more than 50 years, oil and gas companies largely ignored the Eagle Ford shale due to its marginal economic profile. During that span, the area was home to more white-tailed deer, javelinas and rattlesnakes than people. Thanks to the combination of hydraulic fracturing and horizontal drilling, the vast reserves of the Eagle Ford shale area are now being exploited.
While these technologies are often associated with natural gas production and previously untapped areas, oil companies are also using technology to greatly extend the productive lifespans of mature oil-producing regions. Without question, technological advancements will continue to impact the industry.
How is the regulatory landscape creating a potential challenge for oil and gas exploration?
While the low cost of capital, the availability of credit and improved technology hold tremendous promise for energy companies, the national regulatory landscape presents the potential for unfavorable conditions.
The two major political parties in the U.S. differ in how they view the oil and gas industry. Among other issues, those differences are reflected in debates regarding the continuation of the Intangible Drilling Costs deduction, Cost Depletion allowance and other federal tax incentives favorable to the oil and gas industry. Whether or not such tax provisions remain in effect for 2013 and beyond may hinge on the November election results and any ensuing Congressional and White House
negotiations.
While domestic oil and gas companies benefit from technological advances, they also face calls for more stringent regulation regarding hydraulic fracturing and other practices. Up to now, those calls have mainly affected companies operating in the Eastern United States. Such calls, though, may also affect Texas oil and gas operations during the next five years.
What is in store for the future of the oil and gas industry because of global conditions and energy demand?
Various economic side effects caused by regulatory and geopolitical changes may affect oil companies more than traditional market fundamentals, such as supply and demand.
The measured and efficient exploitation of natural resources around the world depends upon maintaining political stability in Saudi Arabia, Nigeria, Venezuela and other energy-exporting nations. Political unrest in such international regions will influence market conditions for Texas companies. At some point, though, the global economy will also regain momentum, and the hydrocarbon-hungry economies of China, India and other countries will most likely drive energy commodity prices higher. All the while, Big Oil, smaller tech-oil innovators backed by eager venture capital firms and everyone in between will be frenetically pursuing new and creative ways to extract the world’s hydrocarbon treasures.
The next five years offer the promise of low interest rates and access to capital, presenting ideal conditions for business expansion by oil and gas companies. The capabilities of horizontal drilling and hydraulic fracturing make it economically feasible for companies to extract more oil and gas. If the geopolitical and regulatory environments cooperate, the United States could have a recipe for energy independence and economic prosperity for generations, a recipe that would particularly benefit Texas oil and gas companies.
Melvin F. “Trey” Hunt III, CPA, is Weaver’s partner-in-charge of Oil and Gas Services. Weaver is ranked the largest independent regional accounting firm in the Southwest with seven offices throughout Texas. Reach him at (832) 320-3296 or [email protected].
