US oil output continues to rise, but becoming world's top producer is an uphill battle

   US oil output continues to rise, but becoming world's top producer is an
                                uphill battle

According to Ernst & Young Oil & Gas Center's quarterly outlook

PR Newswire

HOUSTON, Jan. 28, 2013

HOUSTON, Jan. 28, 2013 /PRNewswire/ -- Topping the list of the big oil and gas
stories in 2012 was the dramatic surge is US oil production. In 2013, the US
will remain the largest source of new oil growth worldwide aided by the shale
boom, but surpassing Saudi Arabia as the globe's top oil producer by 2020 will
be a challenge.

The big turnaround of US oil production brought by new light tight oil
developments was fully recognized in 2012, putting to rest the long-held
notion that domestic oil production was in terminal decline. The rise in
domestic oil output and the expectation that US oil development will continue
to grow amid high oil prices prompted some market observers to predict the US
could become the world's largest oil producer, upstaging Saudi Arabia, by
2020.

But while US oil output growth is expected to continue to be strong, it's
going to be hard to rival Saudi Arabia. US oil production comes at an
extremely high cost. Some anticipated increases in domestic oil production may
not materialize if crude prices decline below $80 a barrel.

"Whether the US will become the world's top producer is not the most important
thing to focus on," said Marcela Donadio, Americas Oil and Gas Leader for the
global Ernst & Young organization. "What matters is the dramatic reversal of
the US energy fortunes and the need for the US to take significant steps to
ensure oil supply growth continues. Coherent energy policy, access to
resources, improved infrastructure and economic stability are all key to
future success."

Oil
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.

Gas
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.

Downstream
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.

Transactions
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.

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release has been issued by Ernst & Young LLP, a client-serving member firm of
Ernst & Young Global Limited located in the US.

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Contact:
Erin Dillard
713-513-9503
Erin.Dillard@fleishman.com

SOURCE Ernst & Young

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