The offshore market is looking up, according to a new report on the future of the sector published by the Economist Intelligence Unit and sponsored by GL Noble Denton.

Despite concerns over tougher industry regulation and increased operating costs, the 194 board-level executives and policy makers from some of the industry’s leading international companies surveyed for the report are optimistic that 2011 will be a key turning point as operators prepare to drill deeper in new geographies.

Indeed, 76% of respondents to the survey described themselves as either “highly” or “somewhat” confident about their company’s business outlook. Only 8% were “highly” or “somewhat” pessimistic.

This renewed confidence is largely due to a period of relative price stability, particularly in North America, and the fast-growth economies in Asia. The largest portion of industry executives questioned (32%) saw Southeast Asia as offering the greatest opportunities for their businesses in 2011, while nearly 30% of respondents identified North America as the most significant region.

Rising demand for energy means companies increasingly have to develop resources in more challenging environments such as deep water.

Regulation uncertainty

The industry still values the potential of North American production. For larger oil companies in particular, the Gulf of Mexico (GoM) remains an attractive province. The potential impact of regulatory changes following the biggest oil disaster in US history continues to feature heavily in industry debate a year after the Deepwater Horizon incident. Survey results reflect the industry’s feeling of uncertainty about the effect of future legislation.

The oil and gas industry recognizes that increased regulation will follow the Macondo incident, but respondents seemed unclear about when new legislation would appear and what effect it might have. A large portion (72%) of respondents said they expect regulation to become more stringent in North America in particular, while a substantial majority (68%) expects cost increases in general.

During a roundtable discussion organized by GL Noble Denton in London to discuss the findings of the Economist Intelligence Unit report, European industry leaders voiced concerns that the increased cost of post-Macondo regulatory compliance could price smaller operators out of the market.

Certainly, rising costs are most likely to be more problematic for smaller E&P companies. Nearly two-thirds of production in the GoM is accounted for by such companies, and proposals to raise the US $75 million cap on liabilities related to offshore oil spills will most likely hit them hardest as insurance becomes impossible or too costly to obtain.

Rising demand for energy means companies also increasingly are required to develop resources in more challenging environments, such as deep water. With 20% of major oil companies’ portfolios now coming from deepwater positions, this clearly will have an impact on spending.

The longer-term impact of Macondo, however, might well be on companies’ operational strategies, with the report suggesting safety records will become a more important factor in gaining access to global reserves.

Natural gas

Natural gas has gained a reputation as a relatively low-carbon “transition fuel” in recent years, and the global demand for LNG has grown as countries in Asia and Europe have sought to increase their supply options.

The emergence of large reserves of unconventional gas in North America has proven highly attractive to companies looking to replace declining production. Instead of experiencing an anticipated decline, the region has seen dramatically increased extraction as new technologies have helped to unlock gas resources.

Interestingly, some of the industry’s key players have disagreed with the report’s findings, which call natural gas an industry “game changer.” Opponents say companies may find that the cost of extracting unconventional gas will result in a weaker return on investment than originally expected.

Regulations also could add cost to the extraction process. Currently, individual states regulate this in North America, but there is potential for a further federal layer of regulation, which could slow operations and increase cost. The report also notes that there is an expectation for closer scrutiny of the environmental impact of unconventional gas.

The majority of the industry executives polled expects a modest shift upward in natural gas prices, especially as global demand is forecast to increase steadily over the next decade. Nearly one-half expects an increase of at least 10% in gas prices, compared with just 7% who think prices will fall by 10% or more. Most of the rest (35%) expect prices to fluctuate around the current price range.

Developing the next generation

The increasing shortage of technical skills is another topic close to the hearts of oil and gas professionals and was a subject of debate at the recent roundtable discussion. There is an overall feeling that the industry will encounter challenges as a result of its failure to attract, recruit, and retain highly talented people.

There are several reasons why the oil and gas industry is likely to experience a skills deficit within the next 15 years. One is the success of the finance industry in recruiting talented graduates through the promise of high salaries and quick career progression. The negative impact of the Macondo disaster also played a role alongside skepticism among younger people about the oil and gas industry’s efforts to support more environmentally friendly approaches to energy production and distribution.

The industry could soon find itself returning to a situation in which technical resource demand outweighs supply. Roundtable participants agreed the industry needs to work more cohesively to address the skills problem rather than trying to pursue one another’s human resources.

Cautious optimism

The oil and gas industry is extremely focused on its future challenges and understands the need to find innovative solutions to operating more safely, sustainably, and efficiently.

The success of key players in the industry in finding more innovative solutions to mitigate risk while remaining resourceful and sustaining activity will define their position and reputation in the market this year.