2017 BDO OIL & GAS RISKFACTOR REPORT

Energy’s Evolving Challenges: Emerging Risks Cloud Hopeful Skies for Oil & Gas

Big Energy is feeling optimistic—but cautiously so. With more than half of 2017 behind us, oil & gas companies are tempering a hopeful outlook with practical realism as they balance on a tightrope of fluctuating commodity prices, dynamic economic and political developments (including a new U.S. administration and diplomatic crises in the Middle East), labor concerns, changes in supply and demand and more.

While numerous positive developments—including a slight boost in global commodity prices due to OPEC’s production cut and other factors—have come to light, the embattled sector still faces many uncertainties in the months ahead.

The 2017 BDO Oil & Gas RiskFactor Report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. oil & gas companies. The factors are analyzed and ranked by the percentage of companies that cite them.

2017 BDO OIL & GAS RISKFACTOR REPORT

RISK FACTOR CITED IN 10-K FILING 2017 2016 2015 2014 2013

Fluctuations in the price/volatility of oil/gas/energy commodities

#1t 100% #1t 100% #3 99% #1t 100% #1t 100%

Political/regulatory/legislative developments

#1t 100% #1t 100% #1t 100% #1t 100% #1 100%

Disruptions due to natural disasters, unexpected weather conditions, etc.

#1t 100% #4 97% #4t 96% #6 96% #3t 96%

Environmental and/or health requirements/restrictions/regulations

#4 99% #5t 96% #7 95% #3t 98% #3t 96%

General national/global economic conditions

#4t 99% #9 89% #11 88% #9 90% #8 92%

Changes in level of demand #6t 98% #13t 84% #10 89% #8 92% #9t 91%

Supply risks #6t 98% #1t 100% #1t 100% #3t 98% #3t 96%

Inaccurate reserve estimates #8 97% #8 93% #9 91% #10 89% #7 93%

Operational and E&P risks #9 96% #5t 96% #4t 96% #3t 98% #6 95%

Limited access to capital/indebtedness #10t 95% #5t 96% #8 93% #7 95% #9t 91%

General competition #10t 95% #10 87% #12t 87% #13t 84% #11 90%

Inability to properly recover/develop undeveloped or proved reserves

#12t 93% #27t 69% #31 69% #17 81% #29 61%

Insurance: self, credit, cost, potential losses due to uninsured liabilities

#12t 93% #16t 83% #12t 87% #13t 84% #15 86%

Impact of climate change/greenhouse gas legislation

#14 91% #11t 85% #17t 82% #18 80% #12 89%

Competition from or price/availability of alternative energy sources

#15t 89% #20 79% #15t 83% #20 79% #21 76%

Insufficient refining/pipeline/storage/trucking capacity

#15t 89% #22t 74% #20 80% #13t 84% #18t 80%

Changes to federal tax policy #15t 89% #26 70% #33 67% #25t 68% #28 63%

Interruptions/threats to production from terrorist activities/political instability

#18t 85% #11t 85% #15t 83% #23 74% #17 82%

Reliance upon third party-owned processing facilities/transportation

#18t 85% #21 77% #21 77% #22 77% #18t 80%

Liabilities/costs for pollution resulting from current or previous operations

#18t 85% #16t 83% #26 72% #16 83% #14 87%

*t indicates a tie in the risk factor ranking

Top 20 Risk Factorsfor Oil & Gas Companies

2017 BDO OIL & GAS RISKFACTOR REPORT

1

SPOTLIGHT

Show Me the Money: Energy’s Economic Woes

Reflecting 2015 and 2016 industry sentiment, economic woes continue to top the list of business risks, with nearly all (99 percent) energy companies citing general national and worldwide economic conditions as a major concern. Market volatility—most notably the fluctuations in the price of oil, gas and energy commodities cited by all 100 companies in the study—continues to be a wild card, sparked by dramatic shifts in supply and demand fundamentals.

The ability to access capital, cited by 95 percent of companies, also ranks in the top 10 risks—perhaps unsurprising when reflecting upon the industry’s prolonged financial struggles since the start of the oil bust in 2014. Factors that could contribute

100% #1: Market volatility and fluctuations in commodity prices

100% in 2016

95% Limited access to capital

96% in 2016

81% Increasing operating costs

59% in 2016

29% Bankruptcy 19% in 2016

THE OIL & GAS INDUSTRY’S BIGGEST FINANCIAL RISKS

to this concern include increases in operating costs (81 percent, up from 59 percent in 2016); creditworthiness and financial risks tied to partners, customers, suppliers and vendors (78 percent); and potential downgrades in credit ratings (45 percent, up from 25 percent in 2015).

And then there is the ultimate nightmare of bankruptcy, cited by over a quarter of companies (29 percent), a significant 10 percentage point increase from 2016 (19 percent) and more than triple that of 2015 levels (8 percent). This is also perhaps unsurprising when considering the high number of bankruptcies filed last year.

2017 BDO OIL & GAS RISKFACTOR REPORT

2

Oil & gas, mining and other energy companies accounted for 41% of all public

bankruptcies in 2016.

80 public companies in the energy and mining sectors filed for U.S. Bankruptcy Court protection within the last two years.Source: BankruptcyData’s 2016 Corporate Bankruptcy Recap

“Political turmoil and international tensions continue to be top of mind for many energy companies, especially when considering many of the recent geopolitical developments. From shifting trade alliances and policies to the introduction of new

global, national and industry-specific regulations, this year has already proved that companies must be vigilant and ready to adapt to the changes ahead.”

Charles Dewhurst, international liaison partner and leader of BDO’s Global Natural Resources practice

SHIFTING POLITICS DOMESTICALLY AND ABROAD

From the new U.S. administration to turmoil in the Middle East to trade agreements in limbo, political developments on the U.S. and international stages have made political risks top of mind for energy companies this year: 85 percent of companies in the study are concerned about political instability interrupting their business operations.

Forty-five percent specifically worry about risks to their international operations, including those related to currency exchange rates (27 percent), changing trade agreements and restrictions on business from foreign governments (22 percent). Forty-one percent listed risks related to the new U.S. administration.

“The pricing ups and downs of the last few years have placed tremendous financial strain on

many energy companies, with far-reaching consequences for not only the producers, but also the companies that provide oilfield services and equipment to them. However, these challenges have also encouraged innovation in unprecedented ways—forcing companies to look outside their comfort zones to push the boundaries of what they think they can do.”

Basil Karampelas, managing director in BDO’s Business Restructuring and Turnaround Services practice

85% Political

instability

45%International

operations

41%New U.S.

administration

TOP POLITICAL RISKS CITED BY ENERGY COMPANIES

2017 BDO OIL & GAS RISKFACTOR REPORT

3

Navigating U.S. Regulatory, Tax & Compliance Risks

Nearly 1/5 of oil & gas companies specifically mentioned President Trump in their annual 10-Ks.

100%

80%

60%

40%

20%

0%

CHANGES TO FEDERAL TAX DEDUCTIONS OR TAX POLICY CITATIONS

2011 2012 2013 2014 2015 2016 2017

SPOTLIGHT

President Trump’s pro-energy stance—reinforced by his appointment of former ExxonMobil Chief Executive Rex Tillerson as Secretary of State and former Texas Governor Rick Perry as Energy Secretary—is widely perceived as a boon for the oil & gas industry, but political gridlock and ongoing controversy are starting to take a toll. From pending tax reform to a series of executive orders that elicited mixed reactions, oil & gas companies are taking extra caution as they figure out how to navigate the choppy waters ahead.

As mentioned earlier, 41 percent of companies cite risks associated with the new administration in their 10-Ks. Nearly one-fifth of companies (18 percent) mention President Trump’s name a total of 31 times.

The legislative and regulatory changes that are most top of mind for the industry include tax, environmental, accounting and industry-specific regulations at the federal, state and local levels—all of which have the potential to interrupt and/or delay current and future business operations and planning.

TALK OF TAX REFORM SPURS ANXIETYWith tax reform on the table—and the White House’s initial proposed tax framework announced—anxiety is high for what changes to the current federal tax policy may mean for businesses in the year ahead. Eighty-nine percent of oil & gas companies cite changes to federal tax deductions and/or tax policy as a risk—a significant jump from 70 percent in 2016 and the highest in this study’s history.

2017 BDO OIL & GAS RISKFACTOR REPORT

4

While many of the proposed reforms at the federal level would be favorable to the industry, the implications of some, like the Border Adjustment Tax included in the House GOP Tax Reform Blueprint, are less clear. Then, of course, there is uncertainty around how much of the current administration’s tax reform agenda will make it from proposal to legislation. [See our Border Adjustment Tax explainer for energy companies here.]

One particular area of concern is the elimination of certain federal tax incentives that have historically played a significant role in encouraging greater investment in oil & gas exploration and production. In the 2017 BDO Energy Outlook Survey, energy CFOs ranked intangible drilling costs and percentage depletion as the top tax issues for the sector, cited by 42 percent and 32 percent of survey participants, respectively. Uncertainty

over whether these tax breaks will remain available in the future may have been sparked by new regulation from the IRS issued in October dealing with the allocation of liabilities from a partnership to a partner. On April 21, the new administration issued an executive order to review this tax regulation, among other “significant” tax regulations issued on or after January 2016, to determine whether it places an undue financial burden on taxpayers. Just two of the oil & gas companies in our study published their 10-K filings after April 21, which may explain the significant increase in concern despite the business-friendly tax environment.

“For an industry that has used federal tax laws and regulations to help spur growth and investment, the possibility of a tax reform that may change or eliminate some of these long-standing regulations constitutes a very real fear. However, the bigger

concern is the uncertainty around what tax reform will look like—and whether significant changes to tax policy will pass in the first place—which makes planning for future investments a challenging balance of foresight and caution.”

Clark Sackschewsky, tax managing principal in BDO’s Houston office

Repealing the percentage depletion allowance for oil and natural gas properties

Eliminating intangible drilling costs

Eliminating domestic production deduction

Extending the amortization period for certain geological

and geophysical expenditures

TOP TAX RISKS CITED BY ENERGY COMPANIES

65% 63% 59% 58%

2017 BDO OIL & GAS RISKFACTOR REPORT

5

79% Maintaining effective accounting

and internal controls and adapting to changes in financial reporting and

accounting standards

64% Meeting certain SEC accounting

requirements

63% Risks associated with Dodd‑Frank

THE PRESSURE TO BE ENVIRONMENTALLY FRIENDLYSince the first year of this study in 2011, environmental regulation has consistently been cited by more than 90 percent of oil & gas companies. This year marks the highest percentage of companies reporting concerns related to the environment at 99 percent.

Ninety-one percent of oil & gas companies specifically worry about the impact of climate change and greenhouse gas (GHG) legislation on their operations, up from 85 percent in 2016 and 82 percent in 2015. Meanwhile, 85 percent worry about the liabilities and costs for pollution resulting from current or previous operations.

Ongoing debate about the hydraulic fracturing process and whether it adversely harms the environment has also led 82 percent of companies to cite legislation that could establish an additional level of regulation and permitting as a risk. Forty-five percent additionally worry about the impact of government investigations into the effects of fracking, including drinking water and seismic activity studies, on various oil & gas exploration activities.

This heightened concern exists despite the rollback by the new administration of key Obama-era clean energy initiatives, cited by more than a third (35 percent)

in their most recent filings. While oil & gas companies look to lawmakers for guidance, the court of public opinion weighs just as heavily.

KEEPING ACCOUNTING DUCKS IN A ROWThree-quarters of companies (79 percent) cite the ability to maintain effective accounting and internal controls and adapt to changes in financial reporting and accounting standards as a risk, down slightly from 2016 and 2015 levels (84 percent both years), but up drastically from 2014 levels (57 percent). In addition, 64 percent of companies cite specific SEC requirements on reporting oil & gas reserves as a risk factor, down from 68 percent the previous year. Concerns around the Volcker Rule,

a section of Dodd-Frank that could hamper commodities hedging, dipped to 63 percent from 66 percent in 2016.

These slight decreases year over year may be a reaction to the new administration’s efforts to repeal disclosure requirements for the energy industry in its first few months. President Trump’s February executive order to roll back a SEC regulation that would have required oil & gas and mining companies to disclose the payments they make to foreign governments was one of the first major reporting changes under the new administration. The Financial CHOICE Act, passed by the House in June, would undo significant pieces of Dodd-Frank, including the Volcker Rule.

ENVIRONMENTAL RISKS CITED

2011 2012 2013 2014 2015 2016 2017

69%59%

Impact of Climate Change & GHG Legislation Liabilities & Costs for Pollution from Current or Previous Operations

81%89%

80% 82% 85%91%

79%87% 83%

72%83% 85%

TOP ACCOUNTING & REPORTING RISKS CITED BY ENERGY COMPANIES

2017 BDO OIL & GAS RISKFACTOR REPORT

6

Smooth Operator

DRILLING DEEPAlmost all oil & gas companies (98 percent) worry about general supply risks, which include expanding and replacing reserves, developing new drilling prospects, and accessing or acquiring production facilities. Similarly, 93 percent are concerned about their ability to properly recover undeveloped reserves or develop proved reserves. Due to the inherent uncertainty of calculating future prices and costs of production operations, making inaccurate reserve estimates is a key risk for 97 percent of oil & gas companies.

Half of oil & gas companies reference limited geographic drilling diversification as a risk to their business in the year ahead, up from 43 percent in 2016. Oversaturation in the Permian and Delaware Basins could be amplifying concerns around concentration of activity in select geographic areas, which can expose companies disproportionately to the impact of regional supply and demand factors, local governmental regulations and competition between

energy companies. As turf wars for select land heat up, 83 percent of companies worry about a shortage in rigs, equipment and personnel.

UNDER CONSTRUCTION: ENERGY INFRASTRUCTURE STILL THE X FACTORAs a part of the new administration’s broader aim to strengthen the nation’s energy infrastructure, the president issued executive orders in January removing roadblocks to the Keystone XL and Dakota Access pipelines. Despite movement on pipeline construction and a proposed $200 billion increase to federal

infrastructure investment in the White House’s 2018 budget plan, nearly 9 in 10 companies (89 percent) still report insufficient refining, pipeline, storage or trucking capacity as a risk.

While a boost to federal infrastructure spending and incentives for private investment could lessen this threat in the long-term, tangible improvements to energy infrastructure likely won’t come to fruition for years to come. In a similar vein, reliance on third party-owned processing facilities and transportation is also a concern, identified by 85 percent of oil & gas companies.

INSUFFICIENT REFINING, PIPELINE, STORAGE OR TRUCKING CAPACITY

SPOTLIGHT

Oil & gas operations—from exploration and production to processing and refinement—carry many inherent risks. Key among these challenges are those related to supply, new technology, cybersecurity, business continuity and more.

2015 2016 2017

80% 74% 89%

2017 BDO OIL & GAS RISKFACTOR REPORT

7

FOR OIL & GAS, THE FUTURE LOOKS DIGITAL It’s the age of Industry 4.0, where the cyber and physical worlds seamlessly intersect, and oil & gas companies are enlisting in the movement. The industry started to embrace automation, the Internet of Things and other technology developments during the global downturn, recognizing the potential to increase efficiency, cost-effectiveness, responsiveness and safety through operational excellence and data-driven decision-making. Even as prices have edged slightly higher, the top oil & gas companies remain committed to technology-driven operational improvements and strategic investments in the future of energy production. This June, BP inked a deal to invest in an artificial intelligence (AI) startup, and Pioneer Natural Resources announced plans to use AI in their drilling operations.

While new technology carries the potential to streamline, expedite and enhance operations, the oil & gas industry is likely to experience growing pains as changes take hold. More than two-thirds (69 percent) report technological advances affecting energy production, consumption and supply as a risk, up from 60 percent last year. Competition could be another factor driving concerns around technological advancements. As energy giants accelerate investments in new operational technology, slower adopters could be left behind in the innovation arms race.

In the face of this industry disruption, energy jobs—and the skillsets they require—are evolving. Skilled workers with more specialized, technological expertise are quickly becoming a more valuable commodity. Seventy percent of oil & gas companies in the study cite a shortage of skilled personnel as a concern, up from 65 percent last year, and another three-quarters of oil & gas companies worry about their ability to

attract and retain key personnel, up 10 percentage points from 2016.

BEWARE THE CYBER PLATEAUWith the adoption of automation and smart production processes comes more attack vectors for bad actors. The oil & gas industry has come a long way since 2012, when just 12 percent of companies reported cyber risk in their 10-Ks, but many are still underestimating its impact. After a steep climb to 72 percent in 2015, the percentage of companies citing cybersecurity concerns has plateaued at 73 percent this year.

In this report’s history, cyber risk has never appeared in the top 20, yet it has become of increasing national concern. The energy industry is particularly vulnerable to cyberattacks due to the large geographic distance that many oil & gas companies cover, with numerous access points spread across

their production, transport, storage and distribution infrastructure. The vulnerability of oil & gas companies is further exacerbated by the need to protect not only their traditional IT infrastructure, but also their Industrial Control Systems (ICS) infrastructure and the many internet-enabled instruments and devices they employ.

Strengthening the cybersecurity of critical infrastructure, which includes oil and natural gas pipelines, has been the subject of federal attention several times already this year as state-sponsored attacks have ramped up. In early March, the Department of Homeland Security (DHS) issued a cybersecurity alert for critical infrastructure owners and operators to outline the key threats. President Trump signed a long-awaited cybersecurity executive order in May that focuses on strengthening federal cybersecurity networks and critical infrastructure.

RISKS RELATED TO TECHNOLOGICAL ADVANCEMENTS

CYBERSECURITY CONCERNS LEVEL OFF FOR OIL & GAS

80%

70%

60%

50%

40%

30%

20%

10%

0%2012 2013 2014 2015 2016 2017

58%

2015

69%

2017

60%

2016

2017 BDO OIL & GAS RISKFACTOR REPORT

8

“When it comes to cybersecurity, oil & gas companies can’t afford to let their guards down. Virtually any company operating in the energy industry can, and likely will be, targeted by hackers with a wide range of motivations and levels of sophistication, as

energy is one of the primary targets of cyber warfare. Developing a comprehensive risk-based cybersecurity program is crucial to energy resilience.”

Eric Chuang, head of the Cybersecurity Incident Response team and managing director in the Forensic Technology Services practice

The cyber landscape and the nature and severity of cyberattacks has certainly evolved over the last two years, suggesting that oil & gas companies still have much to do to ensure they are cyber-ready with the proper internal controls, detection capabilities and mitigation strategies in place.

MOVING FULL SPEED AHEAD In addition to cyber threats, oil & gas companies are susceptible to a wide array of business continuity risks, ranging from natural disasters to human error. Unanimously cited as a risk to operations, natural disasters and unexpected weather conditions could wreak havoc on offshore drilling and production facilities or coastal refining plants. In the event of a hurricane, earthquake or other severe weather, a well-developed disaster preparedness and business continuity

plan is key to minimizing damage and disruption.

Ninety-six percent of companies point to operational and E&P risks, which encompass spills, blowouts and equipment shortages or delays, as well as personal injury or loss of life. With an acute understanding of the risks at hand, about two-thirds of oil & gas companies (66 percent) are concerned about

TOP THREATS TO BUSINESS CONTINUITY

96% cite operational and

E&P risks

100% worry about natural disasters and unexpected weather conditions

litigation and other legal proceedings, an increase from 43 percent in 2016. Ninety-three percent also worry that these liabilities may not be fully covered by their current insurance policies, up 10 percentage points from last year.

2017 BDO OIL & GAS RISKFACTOR REPORT

9

SPOTLIGHT

Competition Amidst Transition

For better or for worse, the oil price collapse in late 2014 fundamentally changed the energy marketplace. Gone are the days when success was linked almost exclusively to high production volumes and growing reserves. While prices are recovering, the same supply and demand dynamics that led to the downturn remain in place, which, as we’ve seen in the first half of 2017, may continue to foment wide price swings.

The downturn may be over, but volatility, at least for the foreseeable future, is here to stay. In an environment where higher prices don’t have staying power and political pressure to rebalance the market remains, oil & gas companies face fierce competition for finite demand. In fact, the industry sees 2017 as its most competitive year since 2011: 95 percent cite competition as a top risk factor in their 10-Ks, up from 87 percent the previous year.

BECOMING A PETROLEUM POWERHOUSEIn this year’s study, 66 percent of U.S. oil & gas companies cite competition from foreign energy sources, including concerns around competitor pricing and availability.

America’s dependence on foreign oil has been a hot-button issue since the 1970s, when members of OPEC imposed an embargo on petroleum exports to the U.S. What’s changed is that as the U.S. has ramped up domestic production

and become an exporter of finished petroleum products and crude oil, the rest of the energy-producing world now sees it as a threat. The U.S. is also expected to become a net exporter of liquefied natural gas (LNG) by 2018.

A decade ago, net imports comprised more than 50 percent of U.S. petroleum consumption. However, thanks to the introduction of new drilling techniques and the shale gas boom in 2008,

America’s looming energy crisis was averted. Over the past several years, net imports of crude oil and products to the U.S. fell from 12.5 million BPD in 2005 to 4.7 million BPD in 2015—representing 24 percent of U.S. petroleum consumption, the lowest percentage since 1970, according to the U.S. Energy Information Administration (EIA). It is no coincidence that the sharp fall-off in prices coincided with peak production levels in the U.S.

25.00

20.00

15.00

10.00

5.00

.00.00

5.00

10.00

15.00

20.00

25.00

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Total Petroleum Field Production (Thousand Barrels per Day)

Petroleum Net Imports (Thousand Barrels per Day)

Total Petroleum Consumption (Including the Residential, Commercial, Industrial, Transportation & Electric Power Sectors) (Thousand Barrels per Day)

U.S. PETROLEUM AND OTHER LIQUIDS, CONSUMPTION, PRODUCTION, AND NET IMPORTS (1949-2014) million barrels per day

Source: U.S. Energy Information Administration, Monthly Energy Review, Table 3.1, June 2017), preliminary data for 2016

Total Petroleum Field Production (Thousand Barrels per Day) Petroleum Net Imports (Thousand Barrels per Day) Total Petroleum Consumption (Including the Residential, Commercial, Industrial, Transportation & Electric Power sectors) (Thousand Barrels per Day)

2017 BDO OIL & GAS RISKFACTOR REPORT

10

Source: Bloomberg

WHICH COUNTRIES REACHED THEIR OUTPUT TARGET IN APRIL?Ten of 21 countries involved reached their target

Production reached target Production did not reach target Non-OPEC nation

Mexico

Venezuela

EcuadorEquatorial Guinea

Angola

Gabon

Algeria

Sudan

Saudi Arabia

Iraq

Oman

South Sudan

KuwaitBahrainQatarU.A.E.

Russia

Kazakhstan

Azerbaijan

Brunei

Malaysia

While OPEC extended its deal to cut output through March 2018, of the 21 countries that agreed to the previous six-month cut, only 10 met their target. Increased U.S. shale production—which the IEA reports surpassed five million barrels per day in June—is further bloating supply and dulling the impact of OPEC’s efforts. If the supply glut isn’t eliminated, the winners won’t be those with the highest production volumes, but those who can lower costs and boost profit margins regardless of where they’re based.

Competition is the 10th most frequently cited risk factor in oil & gas companies’ 10-Ks.

66% cite competition from foreign rivals as a top risk factor.

The challenge, for U.S. oil & gas companies and foreign producers alike, is that increases in supply haven’t been commensurate with increases in demand. According to the International Energy Administration (IEA), global supply is predicted to outpace demand in 2018, with non-OPEC nations expected to increase production by 1.5 million barrels per day but global demand increasing only 1.4 million barrels per day. Just over a quarter (28 percent) of oil & gas companies specifically cite this imbalance as an ongoing risk in their annual filings.

2017 BDO OIL & GAS RISKFACTOR REPORT

11

THE GREEN AGENDAConcerns around competition from foreign energy pale in comparison to U.S. oil & gas organizations’ anxiety around the threat posed by alternative energy sources, which have quickly become a serious contender on the global energy stage. While alternative energy still has a long way to go before it surpasses oil, gas and coal, it is making up a bigger slice of the global energy pie with every passing year.

According to the IEA, renewable energy sources, led by solar and wind, accounted for about 10 percent of total U.S. energy consumption and about 15 percent of electricity generation last year. The IEA forecasts this percentage will increase in the future, with total utility-scale solar generation capacity increasing by 48 percent from the end of 2016 to the end of 2018, along with increases in total wind capacity.

The transition to green energy has been driven by technological advancements and increasingly stringent regulations to reduce carbon emissions. While the U.S.’ withdrawal from the Paris climate agreement raises questions about whether this trend may reverse in the country, actions taken by more than 1,200 signatories (including 12 states, Puerto Rico, and more than 200 cities) pledging to stay in the accord suggests the pressure to go green isn’t likely to subside.

New technologies and shifting behaviors are also behind the shift to alternative energy and flattening fuel demand.

slow growth in fuel demand from the transportation and industrial sectors.

The rapid growth of renewables has significant implications for the industry’s long-term growth and sustainability. To stay competitive over the longer term, traditional oil & gas players must continue to diversify their energy portfolios to keep pace with the broader global shift to low-carbon alternative fuels.

“Most of the industry believes, as do we, that oil & gas will continue to be a vital part of the global energy mix for years to come. But that doesn’t mean companies can afford to ignore the global transition to clean energy and its economic repercussions.

The future of energy is inevitably greener than it is today. The savviest oil & gas producers are ahead of this trend and focused on diversifying their revenue streams.”

Tom Elder, partner and leader of BDO’s U.S. Natural Resources practice

33% of the largest oil & gas companies cite energy efficiency initiatives as a key risk factor.

Source: BP, Financial Times

WIND AND SOLAR HAVE SURGED COMPARED WITH OTHER ENERGY SOURCES...

1,226

3782 78 71

Hydro Gas Coal Oil Nuclear

A more environmentally and price-conscious consumer base is taking advantage of innovations like smart thermostats and other energy efficiency initiatives to lower their energy bills and minimize their carbon footprint. Distributed generation systems such as solar panels and small wind turbines have also become much more affordable and reliable for both residential and business customers. According to the Environmental Protection Agency, the United States has more than 12 million distributed generation units—about a sixth of the capacity of the nation’s existing centralized power plants.

And then there is the electric vehicle revolution. The barriers to mass-market adoption are the upfront costs and lack of infrastructure. But recent analysis from Bloomberg New Energy Finance predicts the manufacturing cost of electric cars will drop below that of gasoline-powered vehicles around 2026, which may

29

Wind, solar and other renewables

World energy consumption (cumulative % growth since 1990)

...BUT FOSSIL FUELS STILL DWARF RENEWABLES World energy consumption (billion tonnes of oil equivalent)

1990 2015

3.2

2.21.8

0.5.03

Oil 4.3Coal 3.8Gas 3.1

Hydro 0.9

Wind, solar and other renewables 0.4

Nuclear 0.6

2017 BDO OIL & GAS RISKFACTOR REPORT

12

ABOUT THE BDO USA NATURAL RESOURCES PRACTICE

For more than 100 years, BDO has been a valued business advisor to energy companies. The BDO Natural Resources Practice professionals have specific experience and knowledge working with clients in the upstream, midstream and downstream segments of the industry. Our Houston and Dallas practices serve as the hub of our national energy industry experience.

ABOUT BDO

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, 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 more than 60 offices and over 500 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 67,700 people working out of 1,400 offices across 158 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.

The 2017 BDO Oil & Gas RiskFactor Report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. oil & gas companies. The factors are analyzed and ranked by order of frequency cited.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

© 2017 BDO USA, LLP. All rights reserved.

2017 BDO OIL & GAS RISKFACTOR REPORT

13

FIRST NAME LAST NAME

EMAIL PHONE

SUBJECT

MESSAGE

SUBMIT

CONTACT US:

For more information on BDO USA’s service offerings to this industry, please contact one of the following regional practice leaders:

ROCKY HORVATHHouston713-986-3150 / rhorvath@bdo.com

RAFAEL ORTIZSan Antonio713-986-3176 / rortiz@bdo.com

CLARK SACKSCHEWSKYHouston713-986-3101 / csackschewsky@bdo.com

ALAN STEVENSDallas214-665-0786 / astevens@bdo.com

CHARLES DEWHURSTHouston713-548-0855 / cdewhurst@bdo.com

TOM ELDERHouston713-407-3959 / telder@bdo.com

RICHARD BOGATTOHouston713-407-3723 / rbogatto@bdo.com

VICKY GREGORCYKHouston713-407-3955 / vgregorcyk@bdo.com

Local Contacts:

NameCityphone / email

NameCityphone / email