OPEC vs Shale in A Tightening Market Rystad energy Marine Money Japan Ship Finance Forum David Mullins Senior Vice President, Asia Pacific
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How we got here: the generic commodity cycle supply, demand, prices A commodity market with no price maker (OPEC, etc) endlessly repeats this cycle Higher reinvestment increases production Production outpaces demand Increased investment, capacity issues Prices drop, hurting cash flow and returns Higher prices improve cash flows Demand outpaces production Low reinvestment hurts production Cash flow declines, spending cuts, lay offs Source: Rystad Energy research and analysis 6
In 2015 & 2016, we witnessed the largest drop in oil & gas industry spending ever. Investments in the global E&P industry USD billions (real 2016 dollars) - 25% Cash flow declines, spending cuts, lay offs - 22% 7
Supply impact: Some now, but 2020+ a large gap from conventional oil emerges Liquids production (excl. shale assets) by approval year Million bbl/d 4.0 3.5 Low reinvestment hurts production 3.0 2.5 2014 2.0 2013 1.5 2012 2017 1.0 2011 0.5 2015 2016 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: Rystad Energy UCube 8
Just as the natural commodity price cycle began to rebound OPEC stepped in again. Q2 2014 Higher reinvestment increases production Production outpaces demand Q3 2014 OPEC reintroduces production target 2017-2018 Increased investment, capacity issues Higher prices improve cash flows Q3 2016 Demand outpaces production Low reinvestment hurts production Prices drop, hurting cash flow and returns Cash flow declines, spending cuts, lay offs Q2 2016 Q1 2015 Source: Rystad Energy research and analysis 9
No longer a Normal Commodity Price Cycle: But not OPEC vs. OECD anymore either Source: Rystad Energy Dynamic Oil Price Simulation Model
Global oil supply growth Shale continues to dominate;; Conventional Onshore declines despite OPEC ramp-up 11
Oil supply, demand and implied stock changes under OPEC agreement through 2Q:2018 Stock draws before OPEC cut extension announced last week World liquids supply and demand, quarterly Million bbl/d Million bbl/d Note: The 1Q drop in global supply in 2017 and 2018 is partly driven by the ~400 kbbl/d seasonal drop q/q in biofuels production in Brazil. Source: Rystad Energy s Global Oil Market Trends Report (OMT) 12
Oil supply, demand and implied stock changes as OPEC led supply agreement currently stands OPEC cut extension through year-end 2018: Creating a new glut in 2019 Source: Rystad Energy s Global Oil Market Trends Report (OMT) 13
US shale oil production short term Latest quarterly reporting reveals shale producers increasing gap in cash flow balances Shale peer group s reported cash flow breakdown Billion USD 60 50 40 Cash in Cash out Other financing Net borrowing/reimbursement Other Investing Acquisition of Assets Cash from Operations Net Change in Cash Net cash of Equity Dividends Sale of Fixed Assets Capex Cash Flow before Financing 30 20 10 0 31 33 34 35 28 27 27 23 29 22 18 13 14 15 16 10 4 12 9 11 10 10 1112 11 13 15 12-10 -20 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Source: Rystad Energy s Global Oil Market Trends Report (OMT), Rystad Energy NASWellCube Peer group: APC, AR, APA, BBG, CRZO, CHK, XEC, CXO, COP, CLR, DVN, ECA, EGN, EOG, EPE, EQT, HK, LPI, MRO, MUR, NFX, NBL, OAS, OXY, PE, PDCE, PXD, QEP, SN, SD, SM, SWN, WLL, WPX 14
Global oil supply growth Shale production that is commercial at US$50/bbl 15
Global oil supply growth Shale production that is commercial at US$80/bbl an additional ~5 mmbbls/d in 2022 16
Field economics require 70+ USD/bbl for global supply to meet demand. But Shale will meet most of that demand out to 2020. Consensus 2020 Demand *Using 10% nominal discount rate for calculating present value of future cash flows. Source: Rystad Energy research and analysis, UCube 17
Conclusions: The conflict between OPEC, Shale, and Conventional is a three-sided balancing act. It can appear stable at times. OPEC intervention has sped up the recovery, but could also bring about the next downturn if cuts are maintained too long. Shale has breakevens that effectively create commercial production peaks at different price levels. Shale commerciality has required significant support from investors/financing. If this support dwindles, shale production will fall and the global supply/demand gap will be accelerated and exacerbate. Stronger oil prices do not mean the market is balanced or stable price will be driven by Shale vs. Conventional breakevens with OPEC regaining market share where ever possible. 18