Source: Business Wire, May 15, 2012
Posted on: http://www.marketwatch.com
U.S. Shale Boom Highlights the Intersection between Public Concern and Industry Efforts
The U.S. oil and gas industry is booming under the vast potential of its shale reserves, but it also faces the increased scrutiny and responsibility that comes with drilling in the public’s backyard. An annual report conducted by BDO USA, LLP, a leading accounting and consulting organization, found a striking increase in environmentally-focused risks cited by the most influential U.S. industry players. An analysis of the risk factors listed by these companies in their most recent 10-K filings reveals that regulatory and legislative changes remain the top concern, cited by 100 percent of companies. Yet this year, those regulatory risks are tied directly to public anxiety over the environmental ramifications of shale gas extraction.
Foremost among these concerns is the increasingly contentious issue of hydraulic fracturing. Oil and gas companies are facing the challenge head-on as they develop new technologies to reduce water usage and earthquake risks. This year, 74 percent of oil and gas companies cited hydraulic fracturing regulation as a risk factor, up from 52 percent in 2011. Moreover, risks related to the impact of climate change and greenhouse gas legislation grew by 17 percent (cited by 81 percent of companies in their financial statements, versus 69 percent in 2011). As the industry touts the promise of job opportunities and energy independence, it is also bracing for the complications that accompany a burgeoning industry with decades of development ahead. Liabilities related to pollution jumped 33 percent (59 percent in 2011 to 79 percent in 2012), and litigation risks were cited by 70 percent of respondents, compared to just 48 percent in 2011.
“The U.S. energy industry is tremendously optimistic about the potential of its natural gas reserves,” said Charles Dewhurst, partner and leader of the Natural Resources Practice at BDO USA, LLP. “Yet rather than bask in this relatively newfound world of opportunity, oil and gas companies are taking action and holding themselves accountable for the responsibilities that come with drilling on American soil. This accountability is reflected in an increasing awareness of the risks associated with the operational and legislative aspects of shale gas extractions.”
These findings are from the second-annual BDO RiskFactor Report for Oil and Gas Businesses, which examines the risk factors listed in the most recent SEC 10-K filings of the 100 largest (by revenue) publicly traded U.S. E&P companies. The risk factors were analyzed and ranked in order of frequency cited.
The following is a list of the top 25 risk factors cited by
the 100 largest U.S. E&P companies:
2012 Risk Factor Cited in 10-K Filing 2012 2011
Rank
—- —————————————————————— —- —-
1. Regulatory and legislative changes and increased cost of 100% 100%
compliance
—- —————————————————————— —- —-
2. Volatile oil and gas prices 99% 100%
—- —————————————————————— —- —-
3. Inability to expand reserves or find replacement reserves 98% 98%
—- —————————————————————— —- —-
3t*. Operational hazards including blowouts, spills and personal injury 98% 97%
—- —————————————————————— —- —-
5. Natural disasters and extreme weather conditions 95% 96%
—- —————————————————————— —- —-
5t. Inaccurate reserve estimates 95% 96%
—- —————————————————————— —- —-
7. Inadequate liquidity or access to capital, indebtedness 94% 95%
—- —————————————————————— —- —-
7t. Environmental or health restrictions and regulations 94% 94%
—- —————————————————————— —- —-
7t. General national or global economic concerns 94% 91%
—- —————————————————————— —- —-
10. General industry competition 89% 87%
—- —————————————————————— —- —-
11. Inadequate or unavailable insurance coverage 88% 87%
—- —————————————————————— —- —-
12. Changes in demand for oil or natural gas 87% 76%
—- —————————————————————— —- —-
13. Shortage of rigs, equipment and personnel 81% 72%
—- —————————————————————— —- —-
13t. Impact of climate change and greenhouse gas legislation 81% 69%
—- —————————————————————— —- —-
15. Reliance upon third party transportation and processing facilities 80% 83%
—- —————————————————————— —- —-
16. Ability to attract or retain key personnel 79% 78%
—- —————————————————————— —- —-
16t. Liabilities for pollution resulting from current or previous 79% 59%
operations
—- —————————————————————— —- —-
18. Competition from alternative energy sources 78% 72%
—- —————————————————————— —- —-
19. Financial risk associated with partners, customers, or suppliers 75% 75%
—- —————————————————————— —- —-
19t. Increased operating costs 75% 67%
—- —————————————————————— —- —-
19t. Accounting method concerns 75% 65%
—- —————————————————————— —- —-
22. Hydraulic fracturing regulation 74% 52%
—- —————————————————————— —- —-
23. Elimination of federal income tax deductions 73% 43%
—- —————————————————————— —- —-
24. Litigation and other legal proceedings 70% 48%
—- —————————————————————— —- —-
25. Failure to properly execute strategy 67% 73%
—- —————————————————————— —- —-
25t. Dodd Frank and derivatives legislation 68% 63%
—- —————————————————————— —- —-
*t indicates a tie in the risk factor ranking
Further findings from the 2012 BDO RiskFactor Report for Oil and Gas Businesses include:
— Global Volatility Heightens Operating Risks. Even as oil and gas companies tackle the responsibilities of increasingly public-facing operations, they are also aware of the risks outside of their control. Concerns associated with national and global economic conditions loom large, cited as a risk by 94 percent of companies compared to 91 percent in 2011. Due to global political and economic unpredictability, 99 percent of oil and gas companies consider volatile oil and gas prices to be a concern, making it the second most highly-cited risk factor for 2012. This volatility was accompanied by increased supply and demand concerns, with 87 percent of companies citing demand for oil and natural gas as a risk, up from 76 percent in 2011.
— Proposed Tax Changes Have Oil and Gas Companies on High Alert. As the energy industry weathers an election year, the threat of proposed tax changes is particularly pronounced. This year, the elimination of federal income tax deductions was cited as a concern by 73 percent of companies–a dramatic increase from just 43 percent in 2011. As companies work to stay abreast of legislative changes, worries over internal controls are also on the rise. The risks associated with financial reporting, compliance issues, and accounting standards were cited by 42 percent of companies, up from 37 percent in 2011.
— BP Oil Spill Still Salient. More companies cited ramifications from the Deepwater Horizon oil spill as a risk in this year’s report (19 percent versus 16 percent in 2011). Two years later, the heightened concern further proves the industry’s appreciation for public concern–both on land and in the ocean. Heightened awareness also indicates that companies have learned from the spill and its consequences. This year, 63 percent of companies cited difficulty in obtaining drilling permits as a risk, up from just 29 percent in 2011. Worries over increasing operating costs are also on the rise, cited as risk by 75 percent of companies compared to 67 percent in 2011.
Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.
About the Natural Resources Industry Practice at BDO USA, LLP
BDO’s Natural Resources industry practice provides assurance, tax and advisory services to emerging and established businesses in the United States and all over the world that are involved in both the traditional and alternative energy industries. Our clients often operate across borders, either raising capital or making acquisitions abroad. Our extensive industry knowledge is supported by our global network of 1,082 offices in 119 countries, allowing us to provide a consistently high level of service wherever our clients do business.
About BDO
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,082 offices in 119 countries.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com .
SOURCE: BDO USA, LLP