oil markets: investment and security challenges in a world in … · oil markets: investment and...

Plenary Session 1:

Oil markets: Investment and security challenges

in a world in transition

Background Paper

Bangkok | Thailand

The observations presented herein are meant as background for the dialogue at the 7th Asian

Ministerial Energy Roundtable. They have been prepared in collaboration with The Boston

Consulting Group and should not be interpreted as the opinion of the International Energy Forum

or The Boston Consulting Group on any given subject

Disclaimer

AMER7-Session -1-Oil-Market-Investments-2017-IEF.pptx 2

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Introduction

Market context Session objectives

Ministers are invited to review recent oil market

developments and the energy security

implications of:

• Three years of deferred investment in

conventional oil and gas production after the

price slump,

• Various transition pathways that will remain

reliant on the ready availability of sustainable

supplies of affordable hydrocarbons.

Strengthen policy cooperation and market

transparency among Asian oil market and clean

technology stakeholders, to mitigate risk along

energy transition pathways including enhancing

oil inventory data.

Energy markets and longer-term policy and

technology options are subject to growing

turbulence and uncertainty. This is, in part, a

consequence of a richly diverse range of opinion

as to the optimal pace and orientation of

transition, and differences in the energy policy

and market contexts of Asia’s interdependent

and globally interconnected economies.

Investment to compensate for decline rates in

the conventional fields has slowed for three

consecutive years. Unconventional supply

resilience, inventory build, and existing supply

may well prove too narrow a backbone to

shoulder demand growth expected to exceed

the 100 mb/d threshold by 2020.

Key question: How will Ministers help maintain oil market stability

in longer-term transition trajectories in Asia?


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Some technology step-changes and transition policy shifts

are already happening

Technology

Shale can now deliver more than 5 mmb/d

• Outside OPEC decisions, the most

responsive portion of supply

• Has increased Asian reliance on US imports

• Shale exists in many parts of the world, but

expensive to begin first production

Investment reduced, shifting

• Technology focus on lower cost solutions

• Shift towards shorter cycle projects

• Skew towards natural gas over oil

Impact

• More barrels can be delivered more quickly,

for less

• Changing region's energy security profile

Transition Policy

Reduced gasoline/diesel subsidies

• Increases demand elasticity

• Shift likely focus to alternative-fuel vehicles

Increased efficiency spending

• 2016: 21 bn additional spent in sector

• Asia accounted for 75% of increase

Push towards electric vehicles could upend

demand growth- and cause peak demand

• For now, largely prospective rather than real

– Country and company level goals made,

but details still being developed

• Most EVs and ICEs sold in Asia

Impact

• Limited to date

• Given big goals but unspecified policy, the

range of demand outcomes has widened


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Contents

How has investment responded to lower prices?

Technology: What are the risks associated with shale?

How are process and transition policies affecting demand?

Key questions and discussion


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Market context: Almost two years in a new price band

0

50

100

150

Jul 15Jan 12 Mar 13 May 14 Nov 17Sep 16

$/b

Rise of view that oil will

remain in "band" for the

foreseeable future

Sharp decline began

as supply overwhelmed

demand

Source: NYMEX, ICE, BCG CEI

WTI

Brent


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Supply increases from new projects

fall below demand growth post 2020

0

200

400

600

800

20152010200520001995

Upstream capital ($B)

North America

International

Beginning of

past 3 cyclical

inflections yoy

growth (%)

2003:

+10%

2010:

+11%

2017:

+9%

Upstream capex growth is increasingly

focused on North America

Historical demand growth

assumes $54/b Brent

A supply hole may be emerging as a resultUpstream investments fell by 44% in the 2 years from mid-2014

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

New project volume growth (mmb/d)

202020192018201720162015 20252024202320222021

OPEC

Non-OPEC

Note: Project volumes exclude tight oil. 2017 upstream capex figures are estimates. Project volumes are based on $54/bSource: Rystad Energy Ucube, Barclays, IEA


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The absolute and relative level of hydrocarbon investments

has been falling since 2014

0

20

40

60

802,000

1,500

1,000

500

0

%USD 2016 ($B)

201620142012201020082006200420022000

Fossil fuel supply

Fossil fuel power generation

Renewables

Nuclear

Electricity networks

Fossil fuel share of supply investment (right)


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.Source: IEA, Bloomberg, Rystad, BCG CEI analysis

Global decline at fastest

pace since 1992

Conventional projects

are becoming faster and smaller

0

1

2

3

4

5

0 100 200 300 400 500 600 700

Time to market (years)

Average size of sanctioned conventional resources (M Boe)

Other offshore

Global averageOnshore

Deepwater offshore

2016–172010–14

-6

-4

-2

0

An

nu

al d

eclin

e r

ate

201620112006200119961991

Decline rates are accelerating due to investment cuts...but in parallel, projects are getting smaller and faster to respond


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Contents






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Shale is responsive- but is it big enough?US shale changes do not remove energy security risks

0

20

40

60

2006 2008 2010 2012 2014 2016 2018 2020 2022

MMb/d

Shale in context: A small part of global supply

Other Supply- all

production outside

US shale and

OPEC- big volumes,

slow response time

Shale: Rapid

growth, but flexible

volumes likely

insufficient to be

sole balancer

OPEC- the

traditional balancer

Shale production needed to drop ~40% in early 2015

to balance the market... Since then, it has grown


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Shale growth depends on the PermianSince the price fall, all net growth has come from the Permian

2.5

2.0

1.5

1.0

0.5

0.0

Sep-17May-17Jan-17Sep-16May-16Jan-16Sep-15May-15Jan-15Sep-14

Eagle Ford

Bakken

Permian

Others

mmb/d

Source: EIA Drilling Productivity Report, August 2017

12

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Note: Monthly production change for net production (top line) and gross production (top line growth plus change in monthly decline) Source: EIA drilling productivity report, BCG analysis

AMER7-Session -1-Oil-Market-Investments-2017-IEF.pptx

The pace of growth neared 2014 levels in mid 2017...but net production growth has to overcome severe declines

-150

0

150

300

600

450

Jan-

15

Jul-

15

Jan-

16

Jul-

16

Jul-

11

Jan-

12

Jan-

10

Jul-

10

-36

-67

Jul-

13

Jan-

14

Jul-

14

kb/d

Jul-

12

Jan-

13

Jan-

11

Jan-

17

May-

17

Monthly US shale production growth

Gross

production

Net

production

13

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2,500

2,000

1,500

1,000

500

0

Sep-17May-17Jan-17Sep-16May-16Jan-16Sep-15May-15Jan-15Sep-14

Permian

Eagle Ford

Bakken

#

Note: DUC: Drilled but uncompleted wells. Graph rebases to October 2014, the beginning of the sharp price fall and activity Source: EIA DPR DUC report, Aug 2017, BCG CEI analysis

AMER7-Session -1-Oil-Market-Investments-2017-IEF.pptx

But concerns about shale are becoming more clearThe stock of drilled but uncompleted wells has risen continually since mid 2016

Drilled but uncompleted wells


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Concentration risks have risen with shaleUS Gulf exports now make up over 7% of global exports; 27 countries receive US crude

Source: EIA, BP statistical review 2017, BCG CEI

0

2

4

6

8

2

1

0

5

3

4

20072006

mmb/d

2005

%

2017201620092008 20112010 2015201420132012

Products

Crude Global

share


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Contents






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1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020

1,000

800

600

400

200

0

PJ

Energy transitions: Surprises can happenBut large technology or policy shifts would be required to sharply reduce oil demand

Animal inputs into the US energy system

Note: Draft animal energy inputs in the United States (18,900 calories per animal per day)Source: US Energy Transitions, 1780-2010, Energies Journal


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0

1

2

3

Jan

11

Jan

12

Jan

13

Jan

14

Jan

15

Jan

16

Jan

17

Jan

18

mmb/d

Regular upward demand revisions have

occurred during the price decline

But oil demand growth is accelerating in recent quartersDriven by a shift to larger vehicles and stronger GDP growth in many consumers

Source: IEA, BCG CEI

Quarter on Quarter, total annual oil demand growth


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A long-term fuel demand shift is underwayEastward and up the barrel

Demand is trending eastward...

Shift to eastern demand firmly established

• Chinese growth fueled price rise in 2000's

• Non-OECD > OECD demand in 2013

Asia demand has more room to grow

• Population still expanding sharply

• GDP is quickly rising

Western demand will remain lackluster

• Many countries have reached peak demand

for particular fuels

• GDP growth is positive, but limited on fuel

• Efficiency measures in place

...and will move higher up the barrel

Policies, efficiency measures push demand

away from bottom of barrel

• Reduction in power generation demand

(crude, fuel oil or diesel)

• IMO sulfur content requirements (fuel oil)

• Cement demand in China (diesel)

• Slowing dieselization

• Increased standards

Demand growth emphasize skews

towards top of barrel

• LPG and naphtha into petrochemicals

• Jet fuel into increased passenger miles

• Gasoline into growing number of vehicles

(often larger vehicles)


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Electric Vehicle sales depend on purchase incentives

or improving availability of public chargers

0 2 4 6 8 10 12 14 16 18 20

0.3

0.2

0.1

0.0

Norway

ChinaNetherlands

United States

France

Canada

Japan

United Kingdom

GermanyItaly

Average purchase incentive

per vehicle ($K)

Note: Bubble area is proportional to EV share of all new car sales (e.g., 30% in Norway and 7% in the Netherlands). Incentives based on tax exemptions are estimatedfrom average sales pricesSource: BNFF (2017) "EV policies dataset"; marklines (2017), "Automotive industry platform vehicle …

Public chargers per electric car


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80

100

120

2015

92.5

5.0

Freight

3.4

Passenger

vehicles

0.7

Power

Gen

103.4-1.6

Buildings

1.2

Steam

0.7

Aviation 2040Maritime

3.5

Other

0.5

Petchems

mmb/d

-2.5

But demand growth will be difficult to reverse without

substantial shifts and aggressive transition policies

Demand growth decomposition: 2015-2040

26% of total

demand

11.6% of

total demand

Growth is in areas where it is more

difficult to find alternative fuels


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Challenges of the new oil market environmentKey questions

1. What new policy measures will allow investment to move forward to avoid price spikes

in future?

• Reconsider tax and investment terms to redistribute risk with private and foreign

investors

• Enable cross border investment in the upstream and downstream sector among

consuming and producing countries to mitigate risk and diversify markets

• Enhance NOC-IOC cooperation to lock in efficiency gains achieved in the low oil

market environment

2. How does the shift to shorter cycle upstream oil investment and greater reliance

on financial market instruments influence oil market volatility?

3. How can ministers limit policy uncertainties associated with variable transition

pathways and market realities across Asian countries to ensure adequate investment

levels?

4. How can Ministers enhance oil market data transparency in Asian countries and

help improve data collection in the context of the Joint Organisations Data Initiative?

5. Does the price cycle of recent years put a fundamental stop to certain types of

development?

1

2

3

4

5


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Opportunities of the new oil market environment Key questions

1. What can Asian oil producers and consumers do to advance oil sector trade and

investment opportunities amongst themselves and enhance Asian oil market security?

2. How do consumer and producer country governments and industries create

win-win solutions in their quest for sustainability? Where do oil markets contribute to

transition?

3. How does the present oil market environment contribute to economic diversification

and sustainable development?

4. How can Asian Ministers use the IEF platform to enhance dialogue on the implications

of energy sector transition for national policy objectives and oil market security?

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2

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