Oil industry economics 2017 update Stewart Williams, 28 September 2017

Transcription

1 Oil industry economics 217 update Stewart Williams, 28 September 217 Trusted commercial intelligence woodmac.com

2 1 Industry recovery: adjusting to a lower-for-longer world 2 Market outlook: 218 imbalance looms 3 Project sanctions on the rise; breakeven cost curves flatter

3 Industry recovery The past few years have been about survival woodmac.com 3 The sector response to oil price slump was fast, broad and deep Levers pulled by oil & gas companies* Corporate cash flow breakevens (US$/bbl) 12 As at end 214 (for 215/16) US$235 billion Total 216 E&P capex cut relative to 214 (down 48%) 1 8 As at start 217 (for 217/18) US$6 billion Cuts to shareholder distributions 6 US$118 billion Equity issuances (US$23 bn) and asset sales (US$95 bn) 4 2 E&P International E&P North America Majors NOC Source: Wood Mackenzie. *The ~6 IOCs and NOCs covered in Wood Mackenzie s Corporate Service.

4 Industry recovery M&A activity slowing after a blistering start to 217 woodmac.com 4 6% of 217 year-to-date spend occurred in the first quarter Deal count Deal spend (US$ billion) 6 5 Corporate Asset 5-year ave. 1-year ave Asset > $1bn Corp >$1bn Corporate Asset 5-year ave. 1-year ave Source: Wood Mackenzie M&A Service

5 Industry recovery North America accounts for 75% of year-to-date M&A spend woodmac.com 5 Changing corporate landscape in North Sea is the highlight for the rest of the world Announced deals in 217 Source: Wood Mackenzie M&A Service. Each circle represents a deal announced in 217.

6 Capex (US$Bn) Industry recovery woodmac.com 6 Investment is creeping up, mainly because of US tight oil, but pre- FID * projects are crucial to the mix too Global upstream development capital expenditure Pre-FID US Onshore Under Development Onstream Source: Wood Mackenzie *FID Final Investment Decision

7 Industry recovery woodmac.com 7 Global utilisation rates of offshore rigs H1 217 showing the first positive movement for counts and utilisation since Q3 214 The recent positive movement in Q1-17 continued through H1. Jack-ups counts have stabilised and grown. Floater counts appear to be bottoming Total supply *, demand and utilisation rates Demand (LHS) Supply (LHS) Utilisation Rate (RHS) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Source: Wood Mackenzie. *Supply includes all working + marketed assets. It excludes cold stacked assets.

8 Industry recovery woodmac.com 8 Despite recent positivity, floating rig day rates remain at rockbottom with fierce competition for nearly every tender Rig managers are reticent to disclose fixture rates. The handful of rates that have been disclosed in 217 show further year-on-year decline from 216 (down c.25% y-o-y) Floater day rates: US$k/day MW DW UDW UDW SS UDW DS Average Source: Wood Mackenzie

9 1 Industry recovery: adjusting to a lower-for-longer world 2 Market outlook: 218 imbalance looms 3 Project sanctions on the rise; breakeven cost curves flatter

10 Year-on-year change, million b/d Year-on-year change, million b/d Global supply million b/d Short-term market outlook woodmac.com 1 Market faces supply growth of almost 1.6 million b/d in 218 even with OPEC and Russian production restraint Global oil demand expected to hold steady after slow start to the year Global demand Global supply and year-on-year change China India Rest Asia US Europe Other* Global * Other includes Middle East, Africa, Russia/ Caspian, and Latin America Global supply change Global supply (rhs) Asia Source: IEA MODS, EIA, Wood Mackenzie

11 US$ per bbl Short-term market outlook Price support will weaken in H1 218 woodmac.com 11 Downward pressure as global supply growth exceeds demand growth Brent price outlook (nominal) $7 $6 $5 May 25: OPEC announces production cut extension to March 218; Russia adheres to extension US rig count, and US production continue to grow. Demand growth forecast to decelerate into 218. Price comes under downward pressure as global stocks build $4 $3 $2 $1 $ Price support from global stock draw (albeit small). Evidence of demand accelerating from weak start to the year, helping to offset increasing US supply $51 $5 Price support from OPEC production cut extension through 218 Market looks to lagged effect of pullback in project FID s over the past few years.

12 1 Industry recovery: adjusting to a lower-for-longer world 2 Market outlook: 218 imbalance looms 3 Project sanctions on the rise; breakeven cost curves flatter

13 Commercial reserves (billion boe) Project FIDs and cost curve woodmac.com 13 Industry is on target to hit our forecast of 2-25 project sanctions in 217 Reserves approved in H1 217 nearly matches entire of 216; but weighted to gas Major project sanctions (5+ mmboe reserves), by year Sanctioned projects, by year (217 to-date) and reserves 45 1 Gas Liquids projects 9 projects Jan 217 forecast YTD projects * projects 5 projects 6 projects H1 217 Source: Wood Mackenzie *Average of >5 mmboe projects sanctioned per year

14 Project FIDs and cost curve woodmac.com major projects have been sanctioned so far in 217, of which only 5 are greenfield developments Focus on phased developments, expansion, strategic gas and quick return oil projects Sanctioned projects by country, theme & operator and reserves Christina Lake Ph2B, (MEG), 285 mmboe Bauge (Statoil), 68 mmboe Njord Future (Statoil), 16 mmboe Mad Dog Ph.2 (BP), 472 mmboe Buckskin (LLOG), 14 mmboe West White Rose (Husky), 129 mmboe Kaikias - MC 768 (Shell), 147 mmboe Angelin (BP), 173 mmboe Liza Ph1 (ExxonMobil), 448 mmbboe Leviathan (Noble 1 Energy), 3899 mmboe 1 Ahnet basin fields, (Sonatrach), 528 mmboe Absheron Deep EPS (JOCAP/Total), 166 mmboe Halfaya Ph.3 (PetroChina), 485 mmboe D-34 (Reliance), 21 mmboe 1 Ca Rong Do (Repsol), 78 mmboe Colour key: Onshore project Shallow-water Aguada Pichana Vaca Muerta Shale (Total), 268 mmboe 3 Coral FLNG (Eni), 1,96 mmboe Deepwater Brownfield/expansion/tieback/ leverages existing infrastructure Fortin de Piedra Vaca Muerta Shale (Tecpetrol), 254 mmboe Source: Wood Mackenzie Average of >5 mmboe projects sanctioned per year

15 ' b/d Project FIDs and cost curve Oil and NGL production from 217 FIDs is relatively modest woodmac.com 15 Liza, West White Rose and Mad Dog Phase 2 biggest incremental projects Liquids production from oil focused FIDs in Liza Christina Lake Phase 2B West White Rose Extension - Phase 4 Ca Rong Do (Block 7/3) Halfaya Phase 3 Njord Future Project Bauge (Snilehorn) Buckskin (KC 872) Kaikias (MC 768) Mad Dog Ph Source: Wood Mackenzie

16 Million b/d Million b/d Project FIDs and cost curve woodmac.com 16 Production ramp-up of conventional pre-fid projects takes time Conventional projects add 4.4 million b/d by 225; production from new US drilling reaches that level in 219 Production from conventional pre-fid projects Production from new US drilling Other Uganda Russian Federation Other Niobrara Mid-Continent Bakken 7 6 Mexico Nigeria Canada 7 6 Eagle Ford Bone Spring Wolcamp 5 Guyana 5 4 United States Norway 4 3 Brazil Source: Wood Mackenzie

17 Million b/d Million b/d Project FIDs and cost curve Supply gap to 225 woodmac.com 17 By 225, the market looks to more expensive conventional oil to fill the gap Tight oil is an important contributor to global supply over the next decade but it is not enough to fill the gap New supply required to fill the gap m m m 14.7m m 8 1 OPEC Capacity Growth 7 5 Non-OPEC Other Sources* Conventional Pre-FID US Lower 48 Future Drilling Demand Demand growth by 225 Non-OPEC decline, onstream fields Non-OPEC, projects under dev Supply gap Source: Wood Mackenzie Oil Supply Tool, Breakevens at 15% discount rate; *Non-OPEC Other Sources: biofuels, CTL,GTL, oil Shale, reserves growth, yet-to-find, and other technical discoveries.

18 Brekeven US$/bbl Brent equivalent Project FIDs and cost curve woodmac.com 18 The pre-fid cost curve in 225: US Permian and Eagle Ford dominate Deepwater Brazil is competitive; focus will be on project execution and potential delay Pre-FID and US L48 future drilling production by breakeven in 225 by resource theme 12 1 Deepwater Shallow water Onshore Lower 48 Tight Oil Weighted average breakeven based on 225 production Shallow Water other OPEC Vertical wells US Lower 48 Other US L48 Tight Oil Deepwater other Non-OPEC Shallow Water other Non-OPEC Shallow Water Europe Offshore Nigeria Offshore Angola Niobrara 8 Bakken 6 Wolfcamp Eagle Ford Bone Spring 4 Deepwater Brazil 2 Mid-Continent Canada Oil Sands Onshore OPEC Onshore other Non-OPEC Deepwater US Liquids production 225 (million b/d) Source: Wood Mackenzie Oil Supply Tool, point forward breakevens weighted by 225 liquids production, 15% discount rate. H1 217 dataset

19 woodmac.com 19 Key takeaways Economics are improving Corporate cash flow breakevens have fallen to around US$5/bbl Supply pressure in 218 US tight oil dominates near-term growth. 218 supply growth will put downward pressure on price. Brownfield over green Project FIDs up in 217; focus on smaller expansion projects Operators doing more for less The big players are most active in new project sanctions but contractors still feeling the squeeze Conventional projects required Medium term price support: we think market needs higher cost conventional projects Project execution improving Evidence that projects are being delivered on schedule and budget

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21 Stewart Williams woodmac.com 21 Vice President, Upstream Research Biography Stewart is VP, Upstream Research with a specific focus on Saudi Arabia and the wider Middle East Since joining Wood Mackenzie in 1996, Stewart has advised a wide range of clients on entry and growth strategies, fiscal terms, competitor intelligence, asset benchmarking, M&A, global supply outlook and project finance due diligence. He has recently appeared before a UK parliamentary select committee, providing expert opinion on the Middle East s oil and gas sector. He has been quoted extensively in the financial press. Stewart has 26 years oil industry experience in a variety of technical and commercial functions. Before joining Wood Mackenzie Stewart was a senior geophysicist with GETECH. Stewart started his career as a field engineer, spending two years exploring for oil and gas in Nigeria and Libya. Stewart graduated from Leeds University with a BEng (Honours) degree in Electrical and Electronic Engineering and holds an MSc in Exploration Geophysics, also from Leeds. Connect with Stewart stewart.williams@woodmac.com

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