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Global outlook for theoil and gas industry21 April 2015

Richard MallinsonGeopolitical AnalystEnergy Aspects

Oil and gas market outlookRichard Mallinson, April 2015

4 April 2015

Oil and gas prices have fallen sharply

Global LNG Prices$/mmbtu

Crude oil prices$/bbl

Source: Bloomberg, Energy Aspects

MARKET OVERVIEW (1/6)

LNG prices have also dropped sharply and generallyconverged due to weak demand and rising supplies

After rapidly falling by over 50% oil prices oil prices remainvolatile in the $50s per barrel range

0

5

10

15

20

25

11 12 13 14 15

Japan India UK US

0

50

100

150

11 12 13 14 15

Brent WTI

5 April 2015

The oil demand response is limiting stockbuilds

Global oil demand, y/y changeMb/d

Source: Energy Aspects analysis

Stocks are still building, but by much less than the marketexpected at the turn of the year

Global oil demand growth has picked up tremendously inrecent months – strength in Asia, the US and elsewhere

(1)

0

1

2

3

Jan 14 Jul 14 Jan 15 (2)

(1)

0

1

2

1Q11 1Q12 1Q13 1Q14 1Q15

F'cast

Global implied stock changesMb/d


6 April 2015

Oil and gas producers are responding to lower prices


US oil rig counts

Source: Baker Hughes, Company Reports, Energy Aspects analysis

Global cost curve (ex dividend or interest payments)$ / barrel

US rig numbers have fallen fast despite producer hedging,with even the best shale plays testing breakevens

Prices are still below far the levels needed to justify newinvestments in many parts of the world

700

900

1,100

1,300

1,500

1,700

Oct-14 Dec-14 Feb-15 Apr-15

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

0 10 20 30 40 50 60 70 80

Production (mb/d)

Non-OPEC

avg

Sa

ud

iA

rab

ia

Oth

er

OP

EC

Ru

ssia

Un

ite

dS

tate

s

Ka

za

kh

sta

n

Ch

ina

No

rwa

y

Bra

zil

US

sh

ale

Ca

na

da

Oil

Sa

nd

s

Oth

er

No

n-O

PE

C

Me

xic

o

OPEC

avg

Global

avg

7 April 2015

But non-OPEC supplies will only slow gradually

US crude productionMb/d

Source: EIA, Energy Aspects analysis


US output, which will be the first to respond to lower prices,has not reacted yet as there are time lags

4.5

5.5

6.5

7.5

8.5

9.5

11 12 13 14 15

Rest of World non-OPEC supplies, y/y changeMb/d

Record investment driven by high prices temporarilyreversed the declines across non-OPEC supplies outside theUS

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

04Q1 07Q1 10Q1 13Q1

ROW non-OPEC US

8 April 2015

For now a two-tier OPEC will not cut output


GCC countries have raised output as refinery demand hassoared and they have lowered OSPs to gain competitiveness

While cash-strapped members such as Iraq have seen theirrevenues collapse, leaving no option but to maximiseoutput

3

4

5

6

7

8

9

1.5

2.0

2.5

3.0

Jan Apr Jul Oct Jan

Export volumes, LHS (mb/d)

Revenue, RHS ($ billion)

Iraq crude exports and revenuesGCC crude productionMb/d

14.4

14.8

15.2

15.6

16.0

16.4

Jan 13 Jul 13 Jan 14 Jul 14 Jan 15

Source: EIA, IEA, Reuters, Bloomberg, Platts, Iraq Ministry of Oil, Energy Aspects analysis

9 April 2015

While lower prices add to existing geopolitical issues


Rising number of militant groups are spreading across theMENA region, limiting energy investments

Active militant groups in MENA

Source: EIA, IEA, Reuters, Bloomberg, Platts, Energy Aspects analysis

0.0

0.6

1.2

1.8

08 09 10 11 12 13 14 15

Lower revenues fuel the political and security issues thatare already disrupting output in countries such as Libya

Libyan oil productionMb/d

10 April 2015

DISCLAIMER

© Copyright Energy Aspects Ltd (2015). All rights reserved.No part of this publication may be reproduced in any manner without the prior written permission of Energy Aspects

This publication has been prepared by Energy Aspects Ltd (‘Energy Aspects’). It is provided to our clients for information purposes only, and Energy Aspects makes noexpress or implied warranties as to the merchantability or fitness for a particular purpose or use with respect to any data included in this publication

Prices shown are indicative and Energy Aspects is not offering to buy or sell or soliciting offers to buy or sell any financial instrument

Without limiting any of the foregoing and to the extent permitted by law, in no event shall Energy Aspects, nor any of their respective officers, directors, or employeeshave any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity orother financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents

Other than disclosures relating to Energy Aspects, the information contained in this publication has been obtained from sources that Energy Aspects believes to bereliable, but Energy Aspects does not represent or warrant that it is accurate or complete. Energy Aspects is not responsible for, and makes no warranties whatsoever asto, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference

The views in this publication are those of the author(s) and are subject to change, and Energy Aspects has no obligation to update its opinions or the information in thispublication. The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of anyother interests, including those of Energy Aspects and/or its affiliates. This publication does not constitute personal investment advice or take into account the individualfinancial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Energy Aspects recommends thatinvestors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of andincome from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The informationherein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results

This communication is directed at, and therefore should only be relied upon by, persons who have professional experience in matters relating to investments

Andrew MoorfieldManaging DirectorHead of EMEA EnergyScotiabank Europe plc

Mike BorrellSenior Vice President Europeand Central AsiaTotal

BIG CHALLENGES FACING NEW OIL & GASDEVELOPMENTS

Michael Borrell, Senior VP Europe and Central Asia, Total

Tuesday, 21st April 2015, Global Energy Sumit 2015, London

NEW O&GPROJECTS

Oil prices

No tolerance for accidents andenvironmental impacts

Higher expectations towardsacceptability of O&G operations

Strong human resources competition& local content requirements

OUR ENVIRONMENT

M. Borrell - Global Energy Summit 2015 – Big challenges facing new O&G developments 14

Importance of new players

High cost environmenteroding profitability

Resources abundant butincreasingly difficult to develop

World political instability

The oil and gas environment is rapidly changing

REQUIRED FUTURE PRODUCTION


Resources will be increasingly difficult to develop

Demand growth and decline rate driving the need for~50 Mb/d new production by 2030

Marginal supply requires high tech, continuousinnovation and significant investment

~20% of new volumes require >90 $/b in today’s costenvironment

Oil supply-demandMb/d

Decline ~50 Mb/dof incremental

production

+0.6%CAGR

60-90 $/b

<60 $/b

>90 $/b100

Oil demand

2013 2030

OPEC

NorthAmerica

CLOV

CLOV

COST INFLATION


Cost have reached unsustainable levels, even at 100$/b

20

60

100

140

100

140

180

220

* IHS CERA Upstream Capital Cost Index and UpstreamOperating Cost Index

Rising costs

BrentUOCIUCCI

2008 2011 20142004

Brent$/b

UCCI and UOCI*Base 100 in 2000

Cost inflation over the past decade has beendramatically impacting O&G companiesprofitability.

Reducing costs is a priority for Total, which haslaunched a major initiative at Group level.

Objectives are to control CAPEX, decreaseOPEX and maintain among the lowest technicalcosts in the profession

… while not compromising on safety.

These efforts will shape the way futuredevelopments are conceived:

o Development in sequence

o No gold plated approach / “good enough”design

o Innovation used as a key driver forlowering costs

ACCEPTABILITY


Expectations for “in-country value” will have to be optimized

Enhancingpartnerships

• Increased collaboration

• Better alignment

• Relations based on mutualtrust and knowledge

Improving environmentalperformance

• Promote gas, limit GHGemissions and reduce flaring

• Develop new energies (solar)

• Improve energy efficiency

Creating and sharing“in-country value”

• Revisit “local content”approach

• Education and training

• Contribute to the social andeconomic development

IMPACT ON NEW E&P DEVELOPMENTS


The least profitable projects will be either postponed or cancelled

Capital discipline

• Strict selection criteria forlaunching new projects

• Competition for capitalallocation

Focus on profitability

• Seek improvement in fiscalterms with host countries

• Work with suppliers in order tosimplify design , aim atstandardization, renegotiatecontracts

Portfolio management

• Review of asset portfolio,including assets atdevelopment stage

• Pursue opportunities torationalize

CONCLUSION


The O&G industry has to react, without over-reacting

Future E&P development are facing

… structural challenges

… and pressure from the present-day environment

Thank you for your attention

Rob CrossSenior Vice PresidentNatural Gas EuropeStatoil

The Future of Natural Gas in EuropeRobert Cross, SVP, Natural Gas Europe, Statoil

The power market is facing large challenges

• Diverging national policies are distorting markets

• Use of coal is jeopardising decarbonation efforts

• Renewable subsidies are increasing the costs for end

customers

• Uncertain economics for flexible plants are threatening

energy security

23

European policies are strongly diverging...

...leading to distortions and diverging wholesale prices

UK

Gas

Coal

Nuclear

Renewables

Shale gas

Poland

Gas

Coal

Nuclear

Renewables

Shale gas

Germany

Gas

Coal

Nuclear

Renewables

Shale gas

France

Gas

Coal

Nuclear

Renewables

Shale gas

Italy

Gas

Coal

Nuclear

Renewables

Shale gas

KEYVery

HostileHostile

Neutral/Mixed

Mildsupport

Strongsupport

0

10

20

30

40

50

60

70

80

2010 2011 2012 2013 2014 2015

EU

R/M

Wh

UK

NL

DE

Source: Lambert Energy Advisory

Sources: APX, N2EX, Epexspot,Statoil Analysis

A strong gas market is needed to ensure security

• Europe needs to attract new imports to replace falling

domestic production

• Large investments are needed in gas supply and

infrastructure

• European policy-makers are downplaying future role of

gas, creating uncertainty for investors

24

Gas demand is expected to recover

A growing need for imports

0

100

200

300

400

500

600

2010 2013 2020 2030

bc

m

Import need

LNG

Other

North Africa

Russia

Norway

EU

Demand

0

100

200

300

400

500

600

2010 2012 2020 2030

bc

m

Other

Buildings

Industry

Electricity

Sources: Cedigaz, IEA, Statoil Analysis

Source: IEA

What does a successful gas market look like?

• Gas remains backbone of heating and industry, and

provides Europe with flexible power

• A diversity of import routes, high interconnectivity and

liquid hubs in all regions

• A competitive and attractive market with incentives for

developing Europe’s own gas resources

• A market that is reinforced by strong energy

partnerships

25

A diversity of import routes

An integrated market across Europe

Gas vs coal - realities are about to sink in

• The UK

− Party leaders are unanimous on

emission reductions

− Joint pledge to “end the use of

unabated coal for power generation”

• Germany

− Growing acknowledgement that

emissions targets cannot be

reached with current policies

− Policy-makers are evaluating

possibilities for reducing coal

26

UK power mix:Coal phaseout gives opportunity for gas

Source of German power sector emissions2014

0%

20%

40%

60%

80%

100%

2013/2014 Late 2020s

Generation gap

Coal

Imports

Other

Gas

Renewables

Nuclear

Lignite

Hard coal

Gas

Oil

Sources: AG Energiebilanzen 2014, Statoil analysis

Source: Lambert Energy Advisory

• Europe continues to face challenges in balancing its energy priorities

• A well-functioning internal market is key

• Growing support for gas as a part of the solution

• A stable and predictable framework is essential

Concluding remarks

27

Simon WynnExecutive DirectorUpstream Natural ResourcesWillis Limited

WILLIS NATURAL RESOURCES

DENTONS GLOBAL ENERGYSUMMIT 2015

April 2015

Willis Natural Resources , April 2015

2014 LOOKS GOOD FOR THE MARKET

Lloyd’s Upstream Incurred Ratios 1993 – 2014 (as at Q4 2014)

0

50

100

150

200

250

300

350

400

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Upstream Property Incurred Ratios OEE Incurred Ratios

Generally accepted level at which theenergy portfolios remain profitable

Source: Lloyd’sNB - “Upstream Property” – combinationof ET/EC/EM/EN Audit Codes

- “OEE” – combination of EW, EY and EZAudit Codes

%

Ike

Katrina/Rita

Reinsurance-driven soft market

Lloyd’s Upstream portfolio generally makes money when there are no Gulf of MexicoWindstorm losses, and 2014 was no exception

ANOTHER RELENTLESS RISE IN CAPACITY


Upstream Operating insurer capacities 2000-2015 (excluding Gulf of Mexico Windstorm)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

USDm

Source: Willis

Estimated maximum realistic capacity

The amount of capacity now in play in the Upstream market bearslittle

relation to the amount available only five years ago

THE OUTLOOK FOR 2015


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

0

20

40

60

80

100

120

Upstream Capacities Average Composite Percentage of 1992 rates

USDmEstimated Average Rate Index

(1992=100)Upstream Capacity versus Rating Levels, 1993 – 2015

(Excluding Gulf of Mexico Windstorm)

The rate of capacity increase has accelerated since last year – as has the rateof overall market softening. But in comparative terms, Upstream rates have still

some way to go before reaching the historically low levels of the late 1990s.Source: Willis

IN SUMMARY…

Generally a profitable year:

Another Gulf of Mexico windstorm season come and gone

Little or no sign of truly catastrophic losses

Upstream has had an outstanding year, not a bad one for other sectors either

Capacities at record highs:

No sign of significant alternative capital havens

Minimal to negative interest rates

Biggest capacity increases:

- Upstream USD6.9 billion

Widened leadership choices and competition:

Following markets now offering lead lines to secure market share

Existing leaders under increased pressure

BUT…


THE COLLAPSE IN THE OIL PRICE.


No wonder….

Oil price collapse produces:

Cutbacks in Exploration and Production Activity

Increased mergers and acquisitions within the energy industry (BG/Shell)

Reduced risk management budgets

PREMIUM POOLS ARE ABOUT TO MELT...


WILLIS NATURAL RESOURCES

THANK YOU

April 2015

Global outlook for theoil and gas industry21 April 2015

global outlook for the oil and gas industry - dentons/media/pdfs/events/2015/april...global outlook...

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