Impact of a low oil price environment on supply, demand, stability - - PowerPoint PPT Presentation

Impact of a low oil price environment on supply, demand, stability & growth 6th IEA IEF OPEC Symposium on Energy Outlooks, Riyadh

16 February 2016

Alexander Pögl

Special Presentation

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Tuesday, 16 February 2016 www.jbcenergy.com Slide 2

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The current down cycle is unusually deep and long – although this is not unprecedented: Key questions are what to make out of the last decade of high prices (one-off anomaly vs. new norm?) as well as the industry losing out on ca $7billion on a daily basis compared to the period 2011-14 Tuesday, 16 February 2016 www.jbcenergy.com Slide 4

20 40 60 80 100 120 140 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Brent Spot Price (FOB)

Brent Spot Price (FOB)

Brent Spot Price FOB [$/bbl]

• 37.5% in

15 months

Source: EIA

• 49.6% in

8 months

• 57.4% in

28 months

• 42.5% in

14 months

• 23.6% in

9 months

• 69.9% in

5 months

• 66.0% in

18 months

The Current Picture

Supply

The question is how many of the marginal resources will be required going forward. Lower break-even costs are only one factor in the equation – the other is higher supplies from low-cost producers (OPEC & Russia). Equilibrium is also very sensitive to demand movements. Tuesday, 16 February 2016 www.jbcenergy.com Slide 5

0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 110.00 120.00 130.00 140.00 2 12 22 32 42 52 62 72 82 92 102 Supply 2016 Demand 2016 Supply 2014 Demand 2014

Source: JBC Energy

Cost to produce one barrel of oil Quantity of Oil Supplied / Demanded

Marginal Cost of Oil Production [million b/d; $/bbl]

Middle East Onshore North Sea Oil sands heavy US Shale Oil WAF Offshore FSU onshore Biodiesel Ethanol Arctic This is a snapshot of volumes supplied / demanded on an annualised basis. Short term outages as well as future developments are not reflected. Production costs (full cycle costs in this case) are only indicative as there are huge variations within each category. Oil sands upgraded Additional cheap crude

Cost reduction

Supply

For the long-term supply outlook it will be crucial to what extent lower spending will be counterbalanced by lower costs. (*ExxonMobil, BP, Shell, Total, Conco, Chevron)

Tuesday, 16 February 2016 www.jbcenergy.com Slide 6

12 24 40 60 80 100 120 140 160 180 200 2010 2011 2012 2013 2014 2015 2016 Upstream CAPEX Average 2010-2014 Development of UCCI (2010 = 100)

Big Six* IOCs Upstream CAPEX Cuts vs Cost Index [billion $; Index]

Source: Company information, IHS UCCI, JBC Energy

* BP, Chevron, ConocoPhillips, ExxonMobil, Shell, Total

Supply

The lower prices go and the longer they stay lower, the more pronounced will be the North American production slump. We could also imagine y-o-y declines to reach a level of 1.5 million b/d in H2, with a significant impact on the balance. Generally speaking America hosts a lot of high-cost output. Tuesday, 16 February 2016 www.jbcenergy.com Slide 7

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Implied stock change annual average Implied stock change annual average scenario Implied stock change Implied stock change scenario

North America Crude Supply Scenario [million b/d]

• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Mexico y-o-y Canada y-o-y US y-o-y Total North America y-o-y scenario Base case: - 550,000 b/d Scenario: - 1.1 million b/d

Supply

Efficiency gains and cost cutting measures could lower break even prices even further, which could spark a quick shale recovery. Also , higher prices (50-60 $/bbl range) could lead to a ramp up. However in longer term growth will become slower and will not compensate future shortfalls of conventional production.

Tuesday, 16 February 2016 www.jbcenergy.com Slide 8

• 426

755 706 382 265 208 163 149 134 116

• 1500
• 1000
• 500

500 1000 1500 2000 2500 3000

• 600
• 400
• 200

200 400 600 800 1,000 1,200 12 24 36 48 60 72 84 96 108 120 y-o-y change relative output change compared to 12 months before cumulative output change - right scale

US Shale Growth Dynamics ['000 b/d]

Source: JBC Energy

Demand

Oil consumer prices have fallen only by a fraction of the oil price fall, limiting price and income effects. The Middle East has even seen rising retail prices as governments curtail subsidies to counterbalance lower oil income.

Tuesday, 16 February 2016 www.jbcenergy.com Slide 9

• 70%
• 62%
• 70%
• 32%
• 17%
• 41%
• 18%

92%

• 28%
• 16%
• 38%
• 19%

46%

• 80.0%
• 60.0%
• 40.0%
• 20.0%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% Brent RBOB ICE gas oil China India US EU Middle East* Diesel Gasoline

Price Changes since January 1st, 2014 [%]

*Middle East data is an average of retail price changes in Saudi Arabia, Kuwait, Bahrain, Oman, and the UAE.

Sources: ICE, Various

Price changes were calculated using local currencies.

Demand

Overall, we do not see oil demand much higher than before the price fall, but gasoline demand is now cumulatively 1.4 million b/d higher, while gas

• il/diesel demand is 0.3 million b/d lower than assessed in early 2014. “Peak demand” is an issue – and limiting the upside for oil prices.

Tuesday, 16 February 2016 www.jbcenergy.com Slide 10

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2011 2012 2013 2014 2015 2016 2017 2018 Oil Demand Growth - 2016/01 Oil demand Growth - 2014/01

• 600
• 400
• 200

200 400 600 800 1,000 2011 2012 2013 2014 2015 2016 2017 2018 LPG Naphtha Gasoline Kero/Jet Gas Oil Fuel Oil Other

Title [unit]

Product by Product Revisions from 2014 to 2016

Revisions of Oil Demand Growth 2016 vs 2014 ['000 b/d]

Total Product Demand Comparison

Refining

We assess global spare refining capacity to have tightened further in 2015 in line with strong demand, among other factors. We do not expect a reversal of this trend in 2016. CDU shutdowns of 6.8 million b/d in 2009-2015 have provided key support.

Tuesday, 16 February 2016 www.jbcenergy.com Slide 11

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Theoretical Spare Capacity Absent due to Maintenance Seasonality Non-Swing/Non-Operable Available Spare Capacity Europe FSU Asia Middle East Africa North America C&S America

Actual Spare Capacity in the Global Refining System in 2015 ['000 b'd]

Refining

CDU capacity additions are struggling to meet demand growth over the current years. Delays and cancellation of projects have tightened the refining market. Low oil prices lead to further investment cuts, while China and India are in a low-investment cycle.

Tuesday, 16 February 2016 www.jbcenergy.com Slide 12

• 500

2014 2015 2016 2017 2018 2019 2020 Chart Title Europe FSU Asia Middle East Africa North America C&S America Total Demand Growth

Annual CDU Capacity Increase vs Demand Growth ['000 b/d]

• 500

500 1,000 1,500 2,000 2014 2015 2016 2017 2018 2019 2020 Forecast fromQ3 -2014 Current Projection

Balance

After an unprecedented 10 quarterly stock builds, the market will start to tighten in H2 2016. But we now see a lengthening of the balance again in H1 2017, before things begin to improve on a more constant basis.

Tuesday, 16 February 2016 www.jbcenergy.com Slide 13

• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16 Q1 17 Implied stockchange - right scale World oil demand Total liquids supply

World Oil Balance [million b/d]

Talking Points

• Peaking Supply Growth?

– CAPEX by big six IOCs has peaked in 2013, while production levels fall since 2010 – Question of how much costs fall compared to spending cuts – Shale oil will not save us from a potential shortfall in traditional supplies in case of persistent underinvestment

• Peaking Demand Growth?

– Low oil prices will fail to provide much demand stimulus in the medium to long term

• Other energy prices are also low
• Green revolution, substitution & efficiency improvements move ahead

– besides strong upward revisions for 2015, going forward we don’t see oil demand much higher than before – exception: gasoline (cumulatively +1.4 mbpd), while gas oil/diesel -0.3 mbpd compared to 2014

• Peaking Refining Spare Capacity?

– Investment cuts do not only affect oil & gas upstream. (National) Oil Companies in cash strains do also cut back investments in refining, petchem, LNG & other mid- and downstream segments  Refining sector will maintain reasonably healthy margins

• Oil market balance is de facto unpredictable for the coming years?

– Clearly current information favours surplus to continue well into 2017 – But geopolitical risk, potential OPEC policy changes and turning supply-side dynamics in high-cost areas can easily change the balance upside down amid historically low spare capacity levels

Tuesday, 16 February 2016 www.jbcenergy.com Slide 14

Thank you!