What Awaits the Oil and Gas Industry in 2023?
February 17, 2023
For the oil and gas sector, 2023 appears to be a year full of opportunity and uncertainty. We sat down with Richard Stepler, a partner in EisnerAmper’s Private Client Services Group and the head of the Oil and Gas Services Group, to ask a few questions on what's next for businesses looking to protect themselves from the unexpected and position themselves for long-term prosperity.
Will prices stabilize in 2023 after two years of extreme volatility? If not, what do you anticipate will happen to production and pricing in 2023?
The biggest unknown factor impacting prices right now is geopolitical risk in Ukraine and around the world. In the absence of a flare-up event, there are several compelling reasons for oil prices to stay in an elevated range. As profits have increased to historic highs, many companies are prioritizing shareholder returns and clean energy investments over reinvestment in traditional assets. The Strategic Petroleum Reserve (“SPR”) has been drawn to low levels and is likely to be a net buyer going forward. Also, U.S. employment reports have remained resilient despite the rise in interest rates. While it is certainly possible that oil prices could head further south, these factors should help provide a floor of support as we begin 2023. Natural gas prices, on the other hand, have seen a sharp decline so far in 2023, and it is more difficult to be optimistic about a near-term price recovery as we move into the spring season.
What role will natural gas have in the transition to clean energy?
Natural gas has tremendous potential to further the clean energy transition over the coming years. The industry continues to make significant progress in reducing carbon and methane emissions from natural gas production. At the same time, a rising number of LNG export facilities are under construction and coming online, enabling greater mobility of U.S. production across the world. While some aspects of the clean energy transition (i.e., solar and wind) could take many years to reach critical mass, low-carbon natural gas could have a more immediate impact on the transition to clean energy.
Over the past few years, M&A has become a significant trend in the oil and gas industry. Do you think that this trend will continue at the same rate through 2023? In general, I believe it should continue due to the current strength of the industry's company balance sheets. That said, pricing will be key to the number of deals as 2023 progresses. Elevated prices give buyers a greater means to acquire companies via higher cash balances and stock prices, while also enticing sellers to go to market. Given the recent decline in natural gas, I’d expect oil assets to see more acquisitions in the foreseeable future. If gas prices stay low and interest rates stay elevated, we may see some distressed sales on the market later this year.
Could you provide our readers with a summary of the effects of the Inflation Reduction Act (“IRA”) on the oil and gas industry and how you expect these effects to play out in 2023?
The IRA will make unprecedented investments in green initiatives for many years to come. I think we will see many new companies and business lines formed to take advantage of the subsidies provided by the IRA, particularly in alternative energy, including solar and wind. The IRA could also help support wider adoption of electric vehicles via tax credits as major manufacturers move towards higher production of these vehicles. In terms of short-term impact on oil and gas companies, the IRA provides incentives for companies to monitor and reduce emissions from their production activities. While the impact of the IRA will undoubtedly be significant, I believe there is a consensus that these initiatives will take some time before they have a meaningful impact on the state of the energy market.