US Shale Not a Threat to Stable EMEA Oil and Gas Outlook

13 Dec 2012 10:18 AM
US Shale Not a Threat to Stable EMEA Oil and Gas Outlook

Link to Fitch Ratings' Report: 2013 Outlook: EMEA Oil and Gas

Fitch Ratings-London-13 December 2012: Cheap US shale gas is not a material threat to the EMEA oil and gas sector in 2013, Fitch Ratings says. A lack of US export infrastructure, a political desire for the US to be self-sufficient in gas, and the prevalence of long-term oil-based gas supply contracts in Europe all suggest at worst modest downward pressure on European prices in the short to medium term.

More broadly, we see supply and demand pressures supportive of oil prices (Brent) above USD100/bbl in 2013. While European demand will be weak, this will be more than offset by emerging market growth. On the supply side, the balance of risk is towards negative, rather than positive shocks, with the possibility of military intervention in Iran still the most obvious potential disruptor. We think that there is enough spare capacity in the world to deal with the loss of Iran's roughly 2.8 million barrels per day of output, although this would leave little spare capacity in the system.

One place we don't expect additional supply to come from is Russia. Its challenge is to maintain output as cheap and plentiful Western Siberian reserves are depleted and have to be replaced by oil from more challenging sources.

Rosneft's acquisition of TNK-BP is interesting in this context. The acquisition has been seen by some as evidence of growing resource nationalism in Russia. Our view is the opposite -oil and gas continue to occupy an integral place in Russia's economy and if it is to succeed in keeping up production it will need foreign capital and skills. This gives the Russian government a clear incentive to maintain a relatively open and transparent regime. We expect Russia will continue to offer tax breaks and other incentives to encourage further exploration and development of challenging oil formations.

For more information on our outlook for the EMEA oil and gas sector, including prospects for demand and the likelihood of sustained high capital expenditure, please see "2013 Outlook: EMEA Oil and Gas" at www.fitchratings.com.

Contact:

Alex Griffiths
Senior Director
Corporates

Jeffrey Woodruff
Senior Director
Corporates

Simon Kennedy
Director
Fitch Wire