Ernst & Young looks at upside of downturn

Based on an analysis of past economic trends, Ernst & Young believes that when the current pricing cycle stabilizes, oil and gas producers will benefit from solid opportunities in the overall economic recovery.

Offshore staff

HOUSTON -- Based on an analysis of past economic trends, Ernst & Young believes that when the current pricing cycle stabilizes, oil and gas producers will benefit from solid opportunities in the overall economic recovery. Previous commodity price downturns lasted an average of 73 weeks. The company believes the country may be half-way through this cycle.

With the current economic turmoil and the sharp decline in global oil demand, average crude oil prices have declined by more than $100/bbl, marking the sharpest commodity price decline in history, an unprecedented 75%. The severity of the current situation can be attributed to the cascading effect of the current economic crisis, the company says.

"Compared to the recovery of the last major collapse in the 1980s, today's industry is much leaner, more efficient and better-positioned to take advantage of opportunities during an economic recovery," says Marcela Donadio, Americas Director of Oil & Gas for Ernst & Young. "Looking at the duration of previous commodity price downturns, we could be half-way through this cycle. Now's the time to plan for the upside."

Ernst & Young believes that sustained E&P activity will enable producers to meet long-term demand and offset pricing shocks in the next up cycle. Producers would be wise to maintain a long-term focus and "drill through the storm," even as margins decline, the company says. This will not only ensure continuity of supply, but serve to help retain top talent which will pay dividends in the long term as the retiring of today's oil and gas workforce gets underway.

02/17/2009

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