fueling the future - alaska oil and gas association · 2020-01-03 · crude oil production from...

© 2016 IHS. ALL RIGHTS RESERVED.

FUELING THE FUTURE

Alaska Oil and Gas AssociationAnchorage

25 MAY 2016

Atul AryaSenior Vice President, IHS Energy


Outline

� Context and Key Questions

� What is the Future Outlook for Oil Markets?

� Where are LNG Markets Heading?

� How are Governments Responding to Low Oil Price?

� What Next?

©2016 IHS2


Context and Key Questions

3

© 2016 IHS

Three “Transitions” Underway

1. "BRIC Era" (2004-2014) to "Shale Era” – Demand to Supply

� From strong growth in emerging markets leading to strong oil market and high prices….

� ...to over-supplied oil market and weak prices

� Breakthroughs on shale gas and shale oil

� "New Mediocre“ in world economy - today

2. China's transition� “Industrial/exporter“ to "services/consumer society"

� Structural problems

� "Policy mistakes"-- and dilemmas

3. Paris Climate Conference� Transition to "lower carbon future“

� 185+ nations with carbon reduction plans

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© 2016 IHS

Future expectations are shaped by beliefs …which have proven to be incorrect …

Source: IHS Energy. Numbered for ease of reference, not in order of importance or other reasons.

1. In early 1980s common belief prices would be $100 by 1990-2000.

2. High ($40s) oil would lead to recession (1980s- mid 2000s: oil price was in $20s)

3. Economic crisis come from emerging markets, not developed markets

4. US oil production would never stop declining

5. OPEC always supports price through supply management

6. Oil supply is scarce (“peak oil”) and will increasingly rely on Middle East

7. Oil demand will be strong for many years because more Chinese will be driving cars —and China’s economy will be strong for many years to come

©2016 IHS 5

© 2016 IHS

Tight oil

1. What is the timing of the crude oil price recovery?

2. At what price level will growth in US crude oil production return?

3. OPEC does not exist as we knew it. What does this mean for oil supply and the oil market?

4. Is a peak in global oil demand approaching?

5. Are we approaching a “Global Gas Reset”? What is the future for LNG?

6. What will be the impact on energy mix of efforts to address climate change and local pollution?

Note: Issues numbered for ease of reference and not necessarily order of importance.

Questions for the energy market in 2016 and beyond

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© 2016 IHS

The share of fossil fuels in the global energy mix has been remarkably steady at around 80% for over two decades

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Share of global primary energy demand by energy source

*Geothermal and ocean/wave energy are also included. **Other includes noncommercial and commercial collection and use of biomass, biofuels, solid waste, and miscellaneous balancing items. Source: History from IHS and International Energy Agency.

© 2015 IHS

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NuclearWind, solar, & hydro*

©2016 IHS 7


Oil Markets

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© 2016 IHS

Snapshot of global oil fundamentals and prices

Snapshot of global oil fundamentals and price outlook

© 2016 IHS

*This outlook is based on our April 2016 balances, which we plan to release along with our monthly Global Crude Oil Markets Market Briefing.Notes: OPEC production includes production from all current members (including Indonesia). Liquids supply includes crude oil, condensate, and natural gas liquids (NGLs). Liquids demand includes all refined products, blended biofuels, synthetic fuels, as well as liquefied petroleum gases (LPGs) and ethane. Call on OPEC crude = total global liquids demand - non-OPEC liquids supply - OPEC condensate and NGL supply - processing gains - biofuel supply - other liquids supply. OPEC spare capacity is for crude oil only. Figures are rounded. MMb/d = Million barrels per day.Source: IHS, Argus Media Limited

2013 2014 2015 2016 2017FUNDAMENTALS

World economic growth 2.5% 2.7% 2.6% 2.6% 3.1%

(from previous year)

World oil (liquids) demand growth* 1.3 0.5 1.6 1.2 1.4

(from previous year in MMb/d)

Non-OPEC liquids supply growth* 1.3 2.1 1.4 -0.8 0.8

(from previous year in MMb/d)

Call on OPEC crude* 32.4 30.5 30.4 31.9 32.2

(annual average in MMb/d)

OPEC production* 31.2 31.0 32.1 32.5 32.5

(annual average in MMb/d)

PRICES

Dated Brent $ 109 $ 99 $ 52

(annual average per barrel)

WTI $ 98 $ 93 $ 49

(annual average per barrel)

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© 2016 IHS

How do you upend the order of the global oil market?See the stunning growth in USA production from 2008-15

©2016 IHS

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Cumulative growth in oil production relative to 2008

Notes: Production growth is for crude oil, condensate, and natural gas liquids.Source: International Energy Agency, EIA, IHS. . © 2016 IHS

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The $2 trillion global upstream spending cutGlobal upstream oil and gas capital expenditures (capex) forecast for 2015-19 is down $2 trillion since the oil price collapse. About half of the cut is due to service cost reductions. The other half due to activity reduction.

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Total Global Upstream Oil and Gas Capex 2015 – 2019(USD Trillion)

Data Source: IHS Global Upstream Spending Report

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© 2016 IHS

US crude oil productionDeclines expected to continue for the next few months as sharp drop in activity reverberates across the US onshore

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History Outlook

Monthly US crude oil production

Source: EIA (history through January 2016); IHS (estimates for February 2016 and March 2016, and outlook) © 2016 IHS

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New world of oil: On supply side, economics rule with no OPEC management

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New world oil of oil: Economics rule with no OPEC management

Source: IHS CERA © 2013 IHS

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Global Demand

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OPEC does not exist as we knew it: More low cost oil from “G5” will be in the market in the new world of oilG5 = Major Gulf producers (Saudi Arabia, Iran, Iraq, UAE, and Kuwait)

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Crude oil production from Major Gulf OPEC Producers: Saudi Arabia, UAE, Kuwait, Iraq, and Iran

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April 2015 outlook

We expect 2 MMb/d more of low cost oil from the G5 than we did a year ago. This means less need for

high cost oil.

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The three production types reveal three stories of policy, production, persistence — US finally set to fall sharply

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Crude production changes since third quarter 2014

Source: IHS

Notes: NoNUS = Non OPEC, Non US production

© 2016 IHS

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© 2016 IHS

Charting the Path to Market Rebalancing The road from consolidation to mid-cycle prices goes through Riyadh

April to July 2015: $55/bbl - The spring rally

August to November 2015: $45/bbl - Testing US resilience

December 2015 to mid-April 2016:$35/bbl - Cash Suffocation

April 2016 to June 2016:$45/bbl - Consolidation

3Q16 to 2Q17:$50/bbl - Recovery

2H17: $57-$63/bbl - Mid-cycle price?

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Tight oil

1. The beginning of the end of the oil supply glut will be in third quarter 2016

2. Key to eliminating the supply glut is further declines in US crude oil production through at least 3Q 2016

3. Prices of $45/bbl or higher in first half 2016 would slow the global rebalancing process.

4. More than expected supply of “political barrels” could prolong supply glut

5. Low-cost producers have incentive to expand output. Without effective OPEC supply management, there is no real or imagined “floor price”

Key crude oil market messages

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LNG


A Bear Market for LNG

• Supply capacity increasing by 50% in the next 5 years.

• Demand is much weaker than anticipated in core importing markets.

• Prices could fall very low for an extended period of time. Variable cost of LNG will influence how low prices can go and how much US production might be shut-in.

• Europe will serve as the key LNG market balancer.

• Key implications in the near term:

• Weak outlook for new Final Investment Decisions (FIDs)

• Aggregators key to market balancing

• Heightened optimization of LNG trade

• Liquefaction project FIDs in the longer term will be impacted by these changing market dynamics.

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Global gas snapshot – May 2016

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Key regional trends shaping the LNG market

© 2016 IHS

China slowdown; strong coal competition

‘Residual market’ for LNG

Ongoing cost reductions

LNG imports for power

Growing LNG dependence

Supply surge; CBM uncertainty

Nuclear policy uncertainty; solar uptick

East Africa remains on

starting blocks

Growing gas surplus capacity

Alaskan and Canadian LNG

remain on starting blocks

Gas Long

Gas Short


The LNG supply step-up is just starting and will be sustained

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Note: MMtpa = Million metrics tons per annumSource: IHS © 2016 IHS

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• Australia and the US Lower-48 are set to increase liquefaction capacity by ~50% by 2020.

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‘It’s not just LNG’: Russian surplus capacity is growing

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Gazprom gas production overhang capacity

Source: IHS Energy © 2015 IHS

• Russia will defend a 30% market share in Europe.27%

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© 2016 IHSSource: IHS Energy

12-pt - IHS donut chartEuropean gas supply by share of demand

Notes: Gross Russian imports (including reexports to Ukraine). Indigenous production net of total Norwegian exports.

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Europe and China will be the largest source of incremental demand growth

• Europe in particular will have to play a key role in managing excess LNG as oversupply intensifies since other major importers are facing structural and economic demand constraints. But there is a limit to how much it can absorb.

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Source: IHS © 2016 IHS

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Variable cost of LNG: US Lower-48 establishes price floor

• Most non-US producers will not see a price signal to shut-in large volumes of production. US LNG will balance the oversupply at the end of the decade; as much as 35% will be unutilized in certain years.

• European gas prices will limit how much US LNG will be needed on the market.

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Variable cost curve US projects Integrated projects Transfer projects CBM projects Other projects

Short-run variable cost curve: LNG supply in 2020

Notes: FID = Final investment decision; CBM = Coalbed methane; excludes projects that have not yet reached FIDCosts shown represent delivery to the United Kingdom, to the regasification terminal point. Source: IHS Energy © 2016 IHS

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Total supply (MMtpa)

Forecasted LNG demand

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Complicating factors for new FIDs

• Finding buyers is still a key milestone needed for bring a project to FID.

• With so much excess LNG in the market, even if demand recovers buyers can dip into the spot market.

• We expect a sustained spot price discount to oil-indexed prices which will discourage buyers from committing to new supply.

• Project developers will likely focus on controlling costs. While upstream costs are coming down in line with oil prices, it is unclear how quickly liquefaction costs will respond to the commodity price downturn.

• Developers that are involved in the current wave may be too jaded by their current experience to justify new projects of their own, or they may simply be too financially constrained. Thus, new developers and financiers are likely preparing for lower investment returns if they reach FID.

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Complexity of liquefaction project development can lead to costly cost over-runs and delays

GLNG T1-2

APLNG T1-2

Pluto LNG T1QCLNG T1-2

Wheatstone LNG T1-2Ichthys LNG T1-2

Gorgon LNG T1-3

Sabine Pass LNG T1-4

PNG LNG T1-2

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Yamal LNG T1-3

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Project delays versus cost overruns

Source: IHS Energy

Notes: All costs are in real 2014 dollars. Angola and Sabine Pass LNG CAPEX estimates only include liquefaction. Estimated repair costs at Angola LNG are also included. "Approximate months delayed" is calculated as the difference between projects' announced start dates at FID and the actual or latest announced commercial start date. Projects deemed to be "existing" have at least one train in commercial operations.

© 2016 IHS

Approximate months delayed

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How will the global LNG market balance?

• Most non-US producers will not shut-in production since variable costs are low.

• Europe will play a key role in managing excess LNG as the oversupply intensifies since other major importers are facing structural and economic demand constraints.

• US LNG will help balance the oversupply particularly towards the end of the decade. European gas prices will limit how much US LNG will be needed on the market.

• After multiple years of low prices, new demand markets are expected to materialize.

• With LNG and gas prices lower for a long period, we expect a hiatus in new, large-scale liquefaction FIDs. Some smaller-scale projects might be able to find a way to FID, but these are likely one-off instances.

• After the market returns to a more balanced state post-2022, liquefaction project developers will face a new norm in buyer behavior.

• Despite their supply-long position in the coming years, LNG aggregators will still play a critical role in underpinning new supply for when market shifts back into balance.

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Government Response to Low Oil Prices


Indicative global crude oil supply cost curve

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North America—tight oil Canada oil sands—in situ West Africa Norway and United Kingdom US—Gulf of Mexico Venezuela

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● New supply is gross additions —with the exception of tight oil and Canadian oil sands supply, which is net additions.

● Supply depicted in this figure represents more than 70% of total global supply from new projects.

Indicative cost curve of global crude oil supply from new projects in select areas to 2030

Source: IHS

Notes: This cost of oil is expressed by the Dated Brent price necessary for projects to break even, assuming a 10% internal rate of return. The low- and high-cost projects are chosen from among the more than 600 that IHS has modeled for our cost of oil analysis. For North American tight oil, the cost estimates are for subplays. The supply outlook is consistent with the IHS 2016 Global Crude Oil Markets Annual Strategic Workbook, released in April 2016. For each region, the supply additions are gross additions in 2016–30 from new projects, which are calculated by summing the maximum annual production of sanctioned projects, of unsanctioned projects, and of yet-to-find categories for the areas. Exceptions are North American tight oil, the tight oil components of other producing areas, and Canadian oil sands, all of which are net additions from 2015, using the maximum annual value. The global supply shown represents more than 70% of all global supply from new projects, as calculated by the method explained above. Global supply from new projects in all producing areas is not shown, in part so as not to reduce clarity of the figure. The break-even cost estimate for in-situ Canadian oil sands is based on a steam-assisted gravity drainage project. The Middle East includes Saudi Arabia, Kuwait, United Arab Emirates, Iraq, Iran, Oman, Qatar, and Bahrain. West Africa includes Nigeria and Angola. Break-even costs for groups of countries are weighted by volume.

© 2016 IHS

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Alaska Supply Outlook

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Low oil and gas prices create significant fiscal and current account pressures on major producing countries

Kuwait

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Saudi Arabia

Bubble size represents 2015 oil production

Fiscal and current-account deficits are a common theme across major producers

Non-diversified Non-core OPEC Frontier Diversified Net Importers Core OPEC

© 2016 IHSSource: IHS

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For non-diversified producers, investor “retrenchment” will help drive future improvement in terms

Lower Revenue

Limited Responses

Pressure Increases

Increased Opportunities

InertiaAs prices began to slide many producing countries adopted a wait and see approach until falling currency values and weakening budget and current account balances forced some of the more seriously affected undertook modest counter measures to temper the effects .

Financial preservationInitial steps include drawing down financial reserves to defend the currency and cutting spending and imports. Increased fiscal pressure prompts producers to focus on capturing additional rent through contract amendments to increase government takeand tightening fiscal terms to increase revenue. NOCs in some countries begin to cut

capex and to prune sell non-strategic upstream assets

Investor reactionAs prices remain low, the weakening of fiscal and current account balances and the gradual exhaustion of financial reserves, combined with cut backs in spending by hard pressed investors, convince some governments that different approaches must be considered if dramatically worse outcomes are to be avoided.

Government reversalAs pressures continue to mount some countries will be compelled to reverse earlier steps including the tightening of fiscal terms. Others may opt for different approaches including opening the upstream and privatizing non-core functions of the NOC to minimize cash outflows and maintain investment

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Government Reaction to Market ChangesLookback to the Future?

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Government Action v. Oil Price


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Increase of Government Take

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Changes in Fiscal TermsMixed reactions and varying degrees of impact and focus

Improved Terms Potential Improvement Mixed Measures Potential Mixed Measures Tightening of Terms Potential Tightening of Terms

Angola Argentina Alberta Brazil Malaysia Iraq Egypt Cameroon Alaska

Bolivia Colombia Ecuador Iran Nigeria Ireland Russia Newfoundland & Labrador

China Ghana Pakistan Peru Indonesia Uganda Uzbekistan US Federal

India Kazakhstan Venezuela

Mexico Norway US-North Dakota

UK Ukraine

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© 2016 IHS

UK Sector of North SeaGovernment Take and Investor Reaction

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Operator Confidence fall by 25 percentage points

Targeted incentives for:- small fields- West of Shetland deepwaterdevelopments- Brownfield allowance- Newfield allowance for shale gas etc.

UK Supplementary Charge rate reduced from 32% to 20% from January 2015 and to 10% from January 2016, reducing the marginal rate of tax for all but the oldest PRT-paying fields (see below) from 62% (2011-2014) to 40% (2016)NB: UK Ring Fence Corporation Tax rate unchanged at 30%

Basin Allowance (an uplift) equal to 62.5% of “qualifying investment capital” incurred after March 2015 is deductible for Supplementary Charge

UK Petroleum Revenue Tax (PRT) rate reduced from 50% to 0% (zero percent) from January 2016, reducing the marginal rate of tax for fields subject to this levy from 81% (2011-2015) to 40% (2016)

• Long period of underinvestment • While government revenue increased investment in North Sea declined• In 2013 and 2014 investment in brownfields in mature basins intensifies• The 2015 basin allowance is replacing all the various incentives introduced during the 2012-2014 period.

Introduction of Supplementary Charge of 10%

Increase Supplementary Charge to 20%

Increase of Supplementary Charge to 32%

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© 2016 IHS

North Sea Fighting The Storm With An Army of Sanctioned ProjectsDeclines to remain shallow in 2016 and 2017

Quad 204Edvard Grieg

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© 2016 IHS

Government Take of Select Peer Group

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Plans to change GOV take


Trends in Government Respond to Low Oil Prices

• Changes to fiscal terms in response to low oil prices have been muted:

• Governments face domestic pressures to making concessions for investors

• Introducing legislation for new E&P terms is typically a drawn-out process

• Some established producers have improved terms for investors:

• A major driver is maturity of the resources base

• Non-diversified (e.g. Russia) and less-established (e.g. Uganda) producers have failed to improve terms for investors:

• Non-diversified producers focusing on financial preservation; decline of E&P investment required to shift policy emphasis from near-term revenue to resource development

• Less-established producers lack understanding of investor decision processes and feel populist pressure to maximize domestic benefits

• Many governments contemplating reducing role of domestic NOCs


What Next?


Who wins and loses in energy’s future?

©2016 IHS

1. Many companies struggling to survive

2. Short-cycle oil—is it here to stay?

3. Long-lead time projects—such as large offshore projects—face severe challenges.

4. Onshore projects with short drilling to production times have the upper hand—at least for now

5. Global gas market has strong growth prospects, but not necessarily high upstream margins.

6. Consumers win—greater choice and competition among energy suppliers for market share

Points are numbered for ease of reference and not necessarily in order of importance.

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Will the future be different from the past?

� Fossil fuels have held a remarkably steady share of around 80% of the global energy mix for decades

� The high share of fossil fuels is due to their abundance, energy density, infrastructure, and competitive costs

� Oil’s future will be shaped by transport and the future of gas by power generation

� There will be more choices because of energy from wind, solar, and batteries – technology, price and policy will shape choices

41


Thank You!


For more information about this presentation and IHS Energy in general, please contact

Atul AryaSenior Vice President

IHS Energy

[email protected]

Ashley LeBlancSenior Account Executive

IHS Energy

+1-617-768-7185 [email protected]

fueling the future - alaska oil and gas association · 2020-01-03 · crude oil production from...

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