Latin American E&P Outlook Society of Petroleum Engineers April 20, 2017 www.stratasadvisors.com UPSTREAM MIDSTREAM DOWNSTREAM FUEL & TRANSPORT
Who We Are Stratas Advisors is a global consulting and advisory firm that covers the full spectrum of the energy sector and closely linked industries The world s leading businesses, governments and institutions turn to us for data, analysis and insight (IOCs, NOCs, independents, energy consumers and financial entities) We help our clients achieve tangible results through informed strategic decision-making and implementation planning Key differentiators include Global coverage with deep local knowledge Integrated analysis across the entire energy value chain, including macro-level analysis (geopolitics, macro-economics, policies and regulations) Our research and consulting staff comprises professionals located on the ground in key global energy market centers Combined, our team brings over 500 years of combined energy industry expertise, including www.stratasadvisors.com Technical (Petroleum Engineers, Geologists, Process Engineers) Economists Political Scientists Financial Analysts Stratas Advisors. All rights reserved. 2
Million barrels / day Inventories million barrels Lay of the Land Oil Market Improving Even with slippage from OPEC, demand exceeds supply Early compliance data on OPEC is strong; demand growth view is cautious at 1.3 mmb/d Stratas Advisors. All rights reserved. 3
Mixed Bag for Key Economic Indicators Sentiment is growing more positive, but headwinds remain Mexico and Brazil are seeing some growth as they emerge from tough times Stratas Advisors. All rights reserved. 4
Latin American Economic Outlook Commodity prices putting pressure on GDP, but growth to resume Growth will improve in outer years as commodity prices rise and development levels improve Stratas Advisors. All rights reserved. 5
Mb/d Short Term Supply Growth Limited to Brazil Brazil and Ecuador will see primary growth, while other markets will see declines 700. 600. 500. 400. 300. 200. 100.. -100. -200. -300. -400. Latin American Incremental Supply (1Q2015 Base) 2015 2016 2017 2018 Brazilian pre-salt production driving virtually all Latin America Supply growth in the short term Most incremental demand medium-sweet while declines from other key markets are heavy barrels While there have been some recent drilling successes (specifically ENI in March), large scale production out of Mexico remains several years out VENEZUELA MEXICO ARGENTINA COLOMBIA Source: Stratas Advisors ECUADOR REST OF LATIN AMERICA BRAZIL Venezuela declines assume lack of investment but no major government collapse Stratas Advisors. All rights reserved. 6
Mexico Economic Overview Dwindling reserves combined with rapid inflation creating squeeze Worsening economic conditions driving energy reforms, including privatization and subsidy reduction at consumer level Stratas Advisors. All rights reserved. 7
Mexico s Move Towards Privatization GOM offshore auction prospects improving with the market 2015 Rounds Unsuccessful as low commodity prices prevented transaction 2016 Rounds More interest from majors, higher levels of success 8 of 10 in two auctions Future Foreign policy Taxation on carbon, expensing of capital, etc. Fiscal stimulus Source: Statoil Stratas Advisors. All rights reserved. 8
Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Thousand barrels Million cubic feet In Lieu of Supply Growth, US fills the gap Mexico s rising demand creating opportunities in the US 18000 16000 14000 140000 120000 Mexico s demand for product specifically for gasoline continues to rise while refining remains insufficient 12000 10000 100000 80000 Natural gas exports rising as new infrastructure takes hold and power demand rises quickly 8000 6000 4000 60000 40000 New E&P development could dampen this trend, but remains far off 2000 0 20000 0 Gasoline demand exports will continue this trend unless fuel subsidy reduction harms consumption Source: EIA Gasoline (Left) Natural Gas (right) Stratas Advisors. All rights reserved. 9
Jan-2002 Jun-2002 Nov-2002 Apr-2003 Sep-2003 Feb-2004 Jul-2004 Dec-2004 May-2005 Oct-2005 Mar-2006 Aug-2006 Jan-2007 Jun-2007 Nov-2007 Apr-2008 Sep-2008 Feb-2009 Jul-2009 Dec-2009 May-2010 Oct-2010 Mar-2011 Aug-2011 Jan-2012 Jun-2012 Nov-2012 Apr-2013 Sep-2013 Feb-2014 Jul-2014 Dec-2014 May-2015 Oct-2015 Mar-2016 Aug-2016 Jan-2017 Mb/d Canada Displacing LATAM Heavy in US Latin American crude continues to be under threat as US remains key importer 6000 US Net Crude Imports by Country 5000 4000 3000 2000 1000 0 60% 30% Venezuela Ecuador Mexico Colombia Brazil Canada Latin American Crude imports to US have declined steadily, while Canada makes up the difference Stratas Advisors. All rights reserved. 10
Venezuela is in Trouble Nation appears on the verge of collapse with limited upside to be seen 25.% 20.% 15.% 10.% 5.%.% -5.% -10.% -15.% 2700 2500 2300 2100 1900 1700 1500 Venezuela Key Economic Indicators 2014 2015 2016 2017 Real GDP (Percent Change) Unemployment Rate Venezuela Crude Supply Outlook Venezuela s conditions continue to deteriorate Unemployment continues to skyrocket as GDP tanks Inflation in 2016 was over 475% Without Investment, Crude production will continue to decline Coup/revolution is likely, but base case assumes only mild supply disruption but this could change Source: IMF, Reuters, Stratas Advisors Stratas Advisors. All rights reserved. 11
Border Adjustment Tax Remains Unlikely but could create challenges for Latin American E&P prospects The Border Adjustment Tax (BAT) originating from congressional Republicans is gaining some traction, but accomplishing it remains far off Strong opposition within the administration and congressional circles remains, but many, including President Trump, are warming to the idea. NAFTA revision Stratas Advisors assumes that, if a BAT is enacted, it may work to Canada s advantage as a free trade agreement between US and Canada is likely to remain 2020 Forecasted Crude Prices w/ 20% Border Adjustment Tax As show on the chart to the right, a BAT on key LATAM heavy crude producers could create a $20-$25 premium for those crude vs. WCS All LATAM crudes will also be priced at or higher than WTI Stratas Advisors. All rights reserved. 12
Long Term Price and Differential Outlook H/L differentials will rise along with crude prices over the next 10+ years Long Term Crude Price Outlook Stratas Reference Case Long Term Heavy Light Differential (vs. WTI) Stratas Reference Case In the Stratas Reference (business as usual) Case, crude prices progressively climb and while heavy/light crude differentials narrow in the outer years as demand for heavy crude rises Stratas Advisors. All rights reserved. 13
Key Takeaways Latin American E&P will be under pressure, but long term opportunities remain Short term challenges remain in Latin America especially Venezuela and to a lesser extent Mexico While Venezuela teeters on the verge of collapse, Mexico is likely to see a rebound as crude prices improve and development levels rise but there are headwinds Bid rounds on Mexican upstream assets are improving, with the latest considered successful but the economics will make development challenging Risks abound from OPEC, US Shale, US policy and inflation But Asian demands for heavy crude will rise creating opportunities for Latin American production in the long term Stratas Advisors. All rights reserved. 14