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Volatile Oil and Gas Prices are #1 Risk to U.S. E&P Industry, According to BDO USA Report
added: 2011-05-26

Oil and gas companies believe risks associated with rising oil and gas prices and regulatory changes, including those related to greenhouse gas emissions, hydraulic fracturing and tax incentives, pose the greatest threat to their businesses. According to a report by BDO USA, LLP, a leading accounting and consulting organization, these two risks were cited by all (100%) of the 100 largest U.S. oil and gas exploration and production (E&P) companies in their 10-K SEC filings this year.

With fallout over the Deepwater Horizon spill, nearly all companies (97%) list operational hazards, such as blowouts, spills, injury and loss of life, as top risks. Disruptions due to natural disasters or extreme weather conditions are high on the list of concerns as well (96%). Having enough insurance coverage to mitigate the liability of such disruptions is also a primary risk stated by 87 percent of companies.

“The spike in oil prices resulting from supply issues and ongoing regulatory battles are the issues weighing heavily on the minds of oil and gas executives,” said Charles Dewhurst, partner and leader of the Natural Resources Practice at BDO USA, LLP. “These issues have long been prevalent in the industry, but are tinged with more urgency as significant tax and environmental regulations come closer to fruition and turmoil in the Middle East continues to drive up prices. We expect these to remain top risks for companies for the foreseeable future.”

Further findings from the 2011 BDO RiskFactor Report for Oil and Gas Businesses include:

- Regulatory risks run rampant. Regulatory issues continue to plague the oil and gas industry. Of the 100 percent that cited regulatory issues as a risk, 94 percent cited environmental restrictions including climate change, 69 percent noted greenhouse gas legislation and 52 percent mentioned hydraulic fracturing regulations. The derivatives legislation contained in the Dodd-Frank Act (63%) and pending elimination of federal income tax deductions (43%) are other major regulatory concerns. These issues were also highlighted in the 2011 BDO Energy Outlook study, which found that 54 percent of chief financial officers (CFOs) at oil and gas E&P companies felt that “legislative changes” would be the most important factor inhibiting the growth of the U.S. oil and gas industry in 2011.

- Credit markets loosen but liquidity remains a concern. Inadequate liquidity, access to capital and indebtedness are among the top ten risks for companies (95%) despite the sentiment that access to capital and credit is improving. More than half (56%) of CFOs reported their ability to access capital and credit is either the same or better than last year in the 2011 Energy Outlook Survey. The general state of the economy also ranks high (#9) on the risk factor list, stated by 91 percent of companies.

- Replacing and estimating reserves is a risky business. Replacing reserves is a dominant risk factor for oil and gas companies (98%). Not only do new reserves threaten to turn out dry wells or unsatisfactory levels of production, but industry competition is fierce (cited by 87% as a risk factor) and companies have to battle over the acquisition of new drilling properties. Estimating reserves is also an inexact science, and 96 percent of companies are concerned over the financial fallout of inaccurate reserve estimates.

- Financial status of partners and third parties causes discomfort. While many oil and gas companies have seen their own financials improve, the financial stability of partners, customers, vendors and suppliers remain top risk factors (75%). Companies are also uncomfortable with their reliance on third-party owned pipeline, transportation and processing facilities (83%) as even minor disruptions in transportation could have major financial ramifications.

Source: Business Wire

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