Annual Oil & Gas Industry Report Reveals Impediments to U.S. Shale Boom

-- Domestic Production Grows More Important as Instability Abroad Proliferates --

CHICAGO--(BUSINESS WIRE)--Now in its second decade, the U.S. shale boom is running up against an increasingly stringent regulatory environment as it drives industry growth and development of new technologies. An annual analysis by BDO USA, LLP of risk factors listed by the top 100 oil and gas companies in their most recent 10-K filings reveals that regulatory and legislative changes remain the top concern for the third consecutive year, with 100 percent of companies citing it as a leading risk. This year, hydraulic fracturing regulation in particular entered the top 20 risks cited by oil and gas companies for the first time, with 85 percent of companies including it as a threat to operations. Concerns about broader environmental regulation also remain high, with 96 percent of companies citing it as a risk this year.

Further tempering optimism surrounding the shale boom is the intersection of infrastructure limitations and growing production volumes. Concerns about a lack of adequate pipeline, storage and trucking capacity grew by 27 percent this year, with four out of five companies citing it in their 10-Ks.

"2013 will serve as a reality check for U.S. oil and gas companies," said Charles Dewhurst, leader of the Natural Resources practice at BDO. "The industry is butting up against some uncomfortable obstacles, including the delayed approval of the Keystone XL pipeline, opposition to fracking and a strained refining capacity. Aspirations of U.S. energy independence will hinge upon the industry’s and government's ability to find mutually-agreeable resolutions to these problems."

These findings are from the third 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 20 risk factors cited by the 100 largest U.S. E&P companies:

2013 Rank	Risk Factor Cited in 10-K Filing	2013	2012	2011
1.	Regulatory and legislative changes and increased cost of compliance	100%	100%	100%
1t*.	Volatile oil and gas prices	100%	99%	100%
3.	Inability to expand reserves or find replacement reserves	96%	98%	98%
3t.	Natural disasters and extreme weather conditions	96%	95%	96%
3t.	Environmental and/or health regulations	96%	94%	94%
6.	Operational hazards including blowouts, spills and personal injury	95%	98%	97%
7.	Inaccurate reserve estimates	93%	95%	96%
8.	General national or global economic conditions	92%	94%	91%
9.	Inadequate liquidity or access to capital, indebtedness	91%	94%	95%
9t.	Changes in demand for oil or natural gas	91%	87%	76%
11.	General industry competition	90%	89%	87%
12.	Impact of climate change and greenhouse gas legislation	89%	81%	69%
13.	Shortage of rigs, equipment and personnel	88%	81%	82%
14.	Liabilities for pollution resulting from current or previous operations	87%	79%	59%
15.	Inadequate or unavailable insurance coverage	86%	88%	87%
16.	Hydraulic fracturing regulation	85%	74%	52%
17.	Disruption due to political instability, civil unrest or terrorist activities	82%	72%	52%
18.	Reliance upon third party transportation and processing facilities	80%	80%	83%
18t.	Insufficient pipeline, storage or trucking capacity	80%	63%	29%
20.	Use of hedging or derivative instruments	77%	48%	N/A
*t indicates a tie in the risk factor ranking

Further findings from the 2013 BDO RiskFactor Report for Oil and Gas Businesses include:

Global instability underlying acceleration of U.S. shale production. As international political conditions grow more troubling--in particular with an escalating civil war in Syria and ongoing sanctions regimes against Iran--U.S. oil and gas producers are increasingly turning to domestic oil and gas production to offset disruptions overseas. This year, threats related to international political instability and terrorism ranked in the top 20 for the first time, with 82 percent of companies citing it as a risk.

Commodity price volatility driving derivatives risk. Volatility in oil and gas prices remains a top concern for companies, with 100 percent citing it as a risk this year, in line with both 2012 and 2011 assessments. In an effort to take advantage of the current pricing environment and shelter themselves against future fluctuations, many oil and gas companies are entering into longer-term, increasingly complex derivatives contracts. As these derivatives arrangements grow more exotic and technical, companies face higher rewards, but also higher risks. The risks of using hedging instruments are growing alongside the increasing reliance upon them: 77 percent of companies cite their use of derivatives as a risk this year, up from 48 percent in 2012.

Companies less concerned about Federal income tax changes. Last year, 73 percent of companies studied cited the elimination of Federal income tax deductions (including those related to exploratory drilling activities) as a top risk to business. This year, that risk dropped by 10 percentage points to 63 percent, removing the risk from the upper quartile altogether.

"With the 2012 General Election now over and the fiscal cliff crisis mostly averted, concerns about the loss of certain income tax deductions are less prominent than before," says Clark Sackschewsky, partner with the Natural Resources practice at BDO. "Uncertainties remain, but the oil and gas industry no longer fears that it is in the crosshairs of a political stand-off."

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 1,204 offices in 138 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 more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 45 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,204 offices in 138 countries.

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