In for the Long Haul Why Lower Oil Prices will be Good for You! CO2-EOR Institute, 16 July 2015 BEG/CEE-UT, 1
Lower oil prices will Build demand Reduce competition to oil from non-oil alternatives (high performance combustion engines) Complicate climate politics Impact supply competition Looking for Silver Linings Could lower prices also enhance the value of legacy assets? BEG/CEE-UT, 2
Price, $/BBL $160 $140 $120 Cushing, OK WTI Spot Price FOB ($/Bbl) Europe Brent Spot Price FOB ($/Bbl) WTI-Brent Spread China! The Party s Over, 2008 "Arab Spring" 2010 $10 $5 Saudi Market Share Strategy II, 2014... $0 $100 $80 $60 $40 $20 Saudi Market Share Strategy I, 1985-86 to 2000 Desert Storm, 1990 USD Neutral Asia Financial Collapse, 1997-99 China "Coming Out" Party, 2006-08 Iraq War, 2003-06 U.S.-Europe Financial Collapse, 2008-09 USD Neutral US LTO Surplus -$5 -$10 -$15 -$20 -$25 Spread: WTI minus Brent, $/BBL $0 -$30 BEG/CEE-UT, 3
World GDP, Oil Consumption, Y-Y 8% 6% World GDP Oil Consumption Oil Price 250% 200% 4% 2% 0% 150% 100% 50% 0% Change in Oil Price, Y-Y -2% -50% -4% 1980-1981 -100% BEG/CEE-UT, 4
Total Oil Supplied ('000 B/D) 100,000 90,000 80,000 Rest of Non-OPEC Russia Libya Iraq United States Rest of OPEC Iran Saudi Arabia 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 BEG/CEE-UT, 5
Y-Y Change 25% 20% U.S. Iraq Saudi Arabia OPEC 15% 10% 5% 0% -5% -10% -15% BEG/CEE-UT, 6
Market Share 70% Non-OPEC U.S. Russia OPEC Saudi Arabia Iraq Iran 60% 50% 40% 30% 20% 10% 0% BEG/CEE-UT, 7
To Nabucco (delayed) Iraq-Turkey Pipeline Current 1.0 MMBPD With 2 nd Strategic Pipeline 1.6 MMBPD Possible expansion 2.85 MMBPD Proposed Gas Export (to Syria, Turkey, Europe) Iraq-Syria pipeline (closed) 700 MBPD expand to 3MMBPD Mansuriyah Gas field Gas Field (3-4.5 Import TCF) Pipeline from Iran (880 MMCFD) Akkas Gas Field (2.1-5.6 TCF) Second Strategic Pipeline Adds 900 MBPD Siba Gas Field (0.1-3.3 TCF) Shell LNG Project 600 MMCFD Export Pipeline to Saudi Arabia (closed) 1.65 MMBPD Basrah Terminal Iraq Crude Oil Expansion Project 4.5 MMBPD Iraq-Kuwait (closed) (400 MMCFD) BEG/CEE-UT, 8
2014 2013 2012 2011 2010 2009 High Cost Producer Average Low Cost Producer High Cost Producer Average Low Cost Producer High Cost Producer Average Low Cost Producer High Cost Producer Average Low Cost Producer High Cost Producer Average Low Cost Producer Upstream Matters $0 $20 $40 $60 $80 $100 High Cost Producer Average Low Cost Producer 3-Yr MA FD Costs/3-Yr MA Additions ($/BOE) Annual Cash Costs per Bbl of Production ($/BOE) BEG/CEE-UT, 9
An industry leader with an early shift to liquids It Takes an Industry A successful gassy player 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 96 104 An Equivalent Barrel 122 138 158 190 2009 2010 2011 2012 2013 2014 US Oil and Liquids Production (MMB) US NGL Production (MMB) US Gas Production (MMBOE) US Total Production (MMBOE) 200 180 160 140 120 100 80 60 40 20 0 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 27 30 An Equivalent Barrel 34 2009 2010 2011 2012 2013 2014 US Oil and Liquids Production (MMB) US NGL Production (MMB) US Gas Production (MMBOE) US Total Production (MMBOE) 46 57 71 80 70 60 50 40 30 20 10 0 Cost Stack with FD Capex Return Cost Stack with FD Capex Return 2014 2014 2013 2013 2012 2012 2011 2011 2010 2010 2009 2009 $0 $20 $40 $60 $80 $100 $120 3-Year Average US FD ($/BOE) US Cash Cost ($/BOE) FD Return ($/BOE) $0 $10 $20 $30 $40 $50 $60 $70 3-Year Average US FD ($/BOE) US Cash Cost ($/BOE) FD Return ($/BOE) BEG/CEE-UT, 10
2014 to Now: Who s Minding the Store?? 2014 results for Bernstein covered companies: $203 billion in total capex About 4.9 billion BOE production About $42 per BOE capex on average About $101 billion in opex About $21 per BOE Capex of $42/BOE compares to about $30/BOE in operating cash flow BUT (there s always at least one) Companies have mostly been cash flow negative since 1Q04! Operating CF is now well below organic capex. Based on 2014 full year review for companies under coverage by Bernstein Research. Proprietary report. BEG/CEE-UT, 11
What Gives??? The Brute Force Method Vertical to horizontal Core of core (bias in reporting) More proppant, more pressure (the oil service money maker) Super fracs Longer laterals But (again!): Shale efficiencies have improved a remarkable 21% CAGR since 2012 in oily basins; Drilling efficiency (wells/rig) grew 13% CAGR but has slowed and will plateau; Variable cost efficiency (longer laterals spreading fixed costs across more 'rock') grew 7% CAGR but lateral lengths now stand at ~7,400 feet, will grow only modestly from here; Production efficiency (liquid rate per unit length) grew 0%. (All from Bernstein Research proprietary report.) BEG/CEE-UT, 12
What the U.S. is Producing Central Oklahoma Blaine 46.53 Kingfisher 42.63 Cushing Canadian 43.22 Stephens 55.36 Garvin 49.32 BEG/CEE-UT, 13
Comparison of Crude Qualities Crude Types API Bakken 40-43 WTI 37-42 LLS 36-40 Eagle Ford 47.7 Eagle Ford Light 58.8 Brent 37-39 Western Canada Select 21.3 Source: NDPC Study BEG/CEE-UT, 14
Contract Terms Quality penalties associated with higher gravity are creeping into contracts. $.02 cents per every one-tenth of a degree of gravity higher than 60 deg In addition there are volumetric deductions for higher gravity- -60.1-64.9 deg API equals a 3% deduction -65.0-79.9 deg API equals a 6% deduction -80.0 and above equals a 20% deduction BEG/CEE-UT, 15
More Contract Terms Quality penalty to be deducted from price at rate of $0.02 per 0.1 degree of gravity above 45 deg. If gravity exceeds 59.9 degrees, volumes will be reduced by an additional 2% loss allowance. BEG/CEE-UT, 16
Where Does this Leave Things? No reason to expect a fast or steep oil price recovery Desire by core exporters to sustain demand Shale plays will continue to contribute somewhat but add more value on the natural gas side Business models need to improve across the board Past is not prologue Legacy production needs to continue to be developed BS (Before Shale), base production 9.5-10.5 MMBD 50%+ import dependence, still ~40% Quality shifts from onshore downstream consequences BEG/CEE-UT, 17
The Missing Part of the Story 1980 1990 2000 2013 United 10,809 United 9,678 Saudi 9,476 United 12,343 States States Arabia States Saudi 10,285 Saudi 7,019 United 9,058 Saudi 11,702 Arabia Arabia States Arabia Iraq 2,526 Iran 3,113 Russia 6,724 Russia 10,764 Venezuela 2,246 Mexico 2,992 Iran 3,765 China 4,459 Mexico 2,129 China 2,768 Venezuela 3,461 Canada 4,074 China 2,114 Venezuela 2,262 Mexico 3,460 UAE 3,441 Nigeria 2,060 UAE 2,252 China 3,378 Iran 3,192 Libya 1,827 Iraq 2,064 Norway 3,355 Iraq 3,058 Canada 1,816 Canada 2,040 Canada 2,753 Mexico 2,908 Kuwait 1,760 UK 1,982 Iraq 2,582 Kuwait 2,812 UAE 1,747 Nigeria 1,817 UAE 2,572 Brazil 2,694 Iran 1,683 Norway 1,725 UK 2,440 Venezuela 2,689 UK 1,674 Indonesia 1,537 Kuwait 2,201 Nigeria 2,372 Indonesia 1,659 Libya 1,407 Nigeria 2,169 Qatar 2,067 Algeria 1,143 Algeria 1,315 Brazil 1,534 Angola 1,889 BEG/CEE-UT, 18