With capital expenditure at record levels and crude prices returning more strongly than expected, the 2011 outlook for the oil and gas industry is optimistic, says an Ernst & Young review.

The total value of oil and gas transactions announced globally reached USD 270 billion in 2010, according to Ernst and Young's Global Oil and Gas Transactions Review 2010.

This is 35 per cent higher than the total of USD 200 billion in 2009. The report also estimates that natural gas supply will outweigh demand over the next three to five years and natural gas prices are expected to remain relatively soft, the company said.

In his keynote address at the Kuwait Oil and Gas Summit and Exhibition 2011, Mark Otty, Managing Partner EMEIA (Europe, Middle East, India and Africa), Ernst & Young, said: "There are many reasons to believe that the outlook for the sector is promising.

There is potential upside to capital spending expectations based on higher cash flows from stronger oil prices. The increased investment is likely to target the predicted growth in oil demand".

According to the review, M&A activity in the oil and gas industry rebounded strongly in 2010, with total industry deal value in the first three quarters of the year up by 50 percent over the same period in 2009.

With spending increases approaching 20 per cent in 2010, the oilfield services sector had a good year and 2011 is shaping up to be even busier. Recent spending plans announced by major integrated companies, including ExxonMobil , Shell and Chevron , indicate the industry is eager to ramp up investment in an effort to meet demand.

However, regulatory uncertainty surrounding offshore production in certain geographies and hydraulic fracturing in relation to shale gas will continue to impact operators' long-term planning abilities, the review said.

Reflecting the return of larger deals, notably involving stronger, cash-rich, larger companies, the number of deals was up by about 25 per cent. In aggregate, 947 deals were announced in 2010, with upstream continuing to dominate the landscape, accounting for 73 percent of transactions. Volumes were 5 per cent higher than 2009.

John Avaldsnes, EMEIA Oil & Gas Leader, Ernst &Young, said, "Oil majors are continuing to divest non-core assets, particularly in downstream markets". "It's likely that this increasing optimism will underpin robust transaction activity levels in 2011, with a greater range of acquirers being active.

Smaller companies who have been nursing their balance sheets through recent years may feel greater confidence to return to acquisition activity, and financial investors are also re-establishing their interest in the sector," he said.