John WestwoodIECO Londonieco.org/Documents/John WestwoodIECO London.pdf · •Market research & analysis •Commercial due-diligence •Business strategy & advisory •Published market

1ICEO – London 24 March 2009

Global ProspectsGlobal ProspectsIECO, London, 24 March 2009 IECO, London, 24 March 2009

John Westwood John Westwood john@[email protected]

picture: Rowan

2ICEO – London 24 March 2009 2

Established 1990Offices in Aberdeen, Canterbury &

New York

Activities & service lines•Market research & analysis•Commercial due-diligence•Business strategy & advisory •Published market studies

Industry sector coverage•Oil & Gas •Power•Renewable Energy

Clients in 50 countries •>550 projects completed for: • government agencies• energy majors and their suppliers• investment banks & PE firms

About Us

LNG

offshore

onshore

downstream

power

LNG

renewables

3ICEO – London 24 March 2009 3

Published Market Reports

• The source of many of the forecasts in today’s presentation


Oil & Gas Trends

Offshore Oil & Gas

Offshore Renewables

The Future


Two amazing yearsTwo amazing years

• The rise and fall of oil prices• The financial crash and stock market collapse• The oil & gas sector has still greatly outperformed the market• How should we interpret recent events?

Source: Barclays Stockbrokers


Recessions are not unusualRecessions are not unusual

• Recessions happen about every five years (e.g. 20 in past century)

• It is the relatively unbroken prosperity of the past 25 years which is unprecedented

• Most last about 18 months

• This is a very serious recession—probably among the worst 3-4 in the last century

• But oil demand recovers strongly after recessions


The nearThe near--term oil demand impactterm oil demand impact

• North American oil demand contracted by 1.3 million bpd in 2008• Europe & N America further demand destruction of 0.5 M bpd in 2009? • Developing economies demand continues to grow albeit at a slower rate

109

-1,345

-3372007 2008 2009

441341 331

2007 2008 2009283

253199

2007 2008 2009

-370

-49-206

2007 2008 2009

295

427

300

2007 2008 2009

113

52 49

2007 2008 2009

66

119100

2007 2008 2009

North America

Latin America

Africa

Europe

Middle East

Asia

FSU

Source: IEA OMR 11/12/2008


Recession and oil demand in perspectiveRecession and oil demand in perspective

0102030405060708090

100

1965

1968

1971

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1977

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1983

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1992

1995

1998

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2007

mill

ion

barre

ls /

day

world oil demand

• Oil is now more affordable

• US demand – some recovery?

• World demand to fall 1.1% in 2009?

• Decline is a small % on a long term view


The longThe long--term oil supplies issue has not gone awayterm oil supplies issue has not gone away

• ‘The effects of peak oil will be felt in the next five years’

• ‘Risks far greater than terrorism’• ‘The impacts are more likely to arrive

before climate change’

World will struggle to meet oil demand

FT page 1 headline Oct 29 2008 (re IEA Report)


Is peak oil on the way?Is peak oil on the way?

0

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1995 1999 2003 2007 2011 2015 2019 2023

milli

on b

arre

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ay

BIOFUELS

CTL

GTL

OIL SHALES

OIL SANDS

REFINERY GAIN

OFFSHORE DEEP

OFFSHORE SHALLOW

ONSHORE

<200252

countries past peak

by 200866

countries pastpeak

• Global peak revised down by 4 Mbpd to 89 Mbpd (Total CEO,16 Feb ‘09)

• We need to find and get into production one NEW Saudi Arabia every THREE years just to offset production decline!

• IEA warns of ‘serious supply crunch from 2010 due to delayed investment’ 16 Feb

Source: Energyfiles


‘‘Easy oilEasy oil’’ has gone alternatives are challenginghas gone alternatives are challenging

Nigeria

Arctic

Canadian oil sands

Indonesian palm oil


Many OPEC membersMany OPEC members’’ budgets need oil prices >$50budgets need oil prices >$50

91.0

57.3

42.9 43.633.5

16.9 14.8

0102030405060708090

100110

Vene

zule

a

Iran

Saud

i Ar

abia

Kuw

ait

UAE

Alge

ria

Qat

ar

2000

2008

2010

• OPEC members have invested trillions of dollars in recent years• Production cuts of 4.2 mn bpd • But only 79% compliance


• A ‘clean’ fuel

• Local depletion (e.g. UK, US GoM)

• Strong demand growth

• Major investments ongoing

• But ….most remaining reserves

controlled by NOCs & Russia

• Will GOPEC happen? (RIQ own 55%

of the world’s reserves)

• Long-term gas supply security a threat

as demand rises (IEA 7 Oct 08)

NATURAL GAS NATURAL GAS –– huge global reserves / local shortageshuge global reserves / local shortages


EUROPE EUROPE –– Increasing gas imports as reserves depleteIncreasing gas imports as reserves deplete

42% of from Russia

24%

Nor

way

18% A

lgeria

• 61% of EU’s gas is imported. Russia largest supplier• Security of supply issues (winter 08/9 ‘thousands without fuel’)• Imports to rise to 73% by 2030• UK particularly exposed – NS decline. Only 4% storage. (G 21%, Fr 24%)

16% others 0102030405060708090

100

Top European gas markets (bcm)

$7.9 bn Nabucco line onstream 2013?


Oil & Gas Trends

Offshore Oil & Gas

Offshore Renewables

The Future


Offshore oil & gas production & spend to growOffshore oil & gas production & spend to grow

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Cap

ex &

Ope

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billi

ons)

AfricaAsiaAustralasiaEastern Europe & FSULatin AmericaMiddle EastNorth AmericaWestern Europe

Source: EnergyFiles

• Most regions to see growth

• W Europe to decline

• Strong underlying Opex growth as a function of both increased volume of activity and complexity

• Capex to dip by 3% from $157bn to $152bn in 2009

• But total spend to grow from $260 bn (2008) to $360 bn (2013)


Offshore drilling Offshore drilling –– deepwater to show strongest growthdeepwater to show strongest growth

• Surge in expenditure driven by escalating oil prices / rig shortages• 2007 spend of $71.7 bn. To reach $89.3 bn in 2013• Deepwater spend to grow by 57% • Petrobras, Mitsubishi plan $830 million drillship (Feb ‘09)

• Growing importance of deepwater gasSource: “ World Offshore Drilling Spend Forecast 2009-2013”

EnergyFiles & Douglas-Westwood


Deepwater Capex to reach new highsDeepwater Capex to reach new highs

• Deepwater production: to grow 99% (shallow water 20%)

• Future deepwater investment:$137 billion over the next five years

• Most Brazil sub-salt spend likely to be beyond 2013

Source: “The World Deepwater Market Report 2008-2012” Douglas-Westwood

$0

$5

$10

$15

$20

$25

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$35

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exp

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ture

($bi

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AfricaAsiaAustralasiaLatin AmericaOthersNorth AmericaWestern Europe


Subsea production to double. Capex growth to continueSubsea production to double. Capex growth to continue

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ap

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AfricaAsiaAustralasiaLatin AmericaNorth AmericaWestern EuropeOthers

• Deepwater – increasing activity, most deepwater wells are subsea• Marginal fields – tiebacks to existing infrastructure• Fast route to first oil – tiebacks enable early production• Development of complementary technology – e.g. subsea processing• Gas developments – ‘subsea-to-shore’ developments

Source: Douglas-Westwood


Oil & Gas Trends

Offshore Oil & Gas

Offshore Renewables

The Future


• UK became world-leading market in 2008, surpassing Denmark• Emerging Asian market – both in projects and supply chain• High costs, long lead times, installation vessels, low investor confidence • Developers chosen for 10 Scottish sites totalling 6 GW. EIAs beginning• UK Round 3 – 40 bids from 18 companies• Repower signs EUR2 bn deal with RWE for 250 offshore wind turbines

0

1

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Cap

ex ($

bill

ion)

Others

UK

Sweden

The Netherlands

Germany

Denmark

Belgium

Offshore WindOffshore Wind



Wave & tidal Wave & tidal –– developing sectorsdeveloping sectors

0

5

10

15

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25

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ann

ual i

nsta

llatio

ns M

W

Others

USA

UK

Spain

Portugal

Ireland

France

Canada

Australia

• Many concepts

• Commercial projectsonly now being installed

• 95 MW installed capacity by 2013

• UK to be world-leading market

• N America & Australia emerging

• Will the Severn Barrier happen?


Offshore renewables Offshore renewables –– global Capex in contextglobal Capex in context

0.2 2

47

152

0.6 5.2

200

0

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4060

80100

120

140160

180200

Marine Renewables

Offshore Wind

All Wind Offshore O&G

Capex ($ billion)

2009

2012

• Offshore still a ‘new’ sector

• Small markets in 2009, but high growth expected

• Still subsidy dependent

• Major $4bn ‘pan-European’offshore power grid under consideration (10 cables)

• UK plan to invest £4.7bn in grid includes £1.5 bn subsea cables from Scotland to England (2012)

Source: Douglas-Westwood• Offshore renewables is very important with strong growth

• But offshore oil & gas Capex will still be 30x bigger in 2009


Oil & Gas Trends

Offshore Oil & Gas

Offshore Renewables

The Future

• Huge potential reserves• Major technical challenges• Deepwater + extreme environment• Very high costs• National borders still uncertain

Arctic offshoreArctic offshore


Brazilian subBrazilian sub--saltsalt

• ‘Development of Brazil's promising subsalt oil deposits in the Santos Basin will require investments of approximately $400 billion over 10 years’ National Petroleum Agency, Nov12, 2008

• Speculation that Angola subsalt may offer similar prospects


• Challenges: capital cost, plant size & weight, motion problems• Vessels now on order• Shell out to tender for large-scale unit

“We have devoted substantial engineering hours to FLNG and we now believe that its time has come……., this technology increases the rate at which we can expect to get LNG into the world’s energy-hungry markets" Jon Chadwick, VP Shell

FLNG FLNG –– floating liquefaction & regasificationfloating liquefaction & regasification


• Sept – Nov: OES shows strong fall• But some recovery since December

Past 3 years: • E&P fairly flat despite high oil price• Contractors boom time• OES index doubles in value, then• dramatic July crash

Are the prospects looking up?Are the prospects looking up?


• ‘Will keep investing for the eventual return of demand for oil and refined products once the current recession ends’. Clarence Cazalot CEO Marathon Oil

• ‘Demand for rigs that can fetch more than $600,000 a day to rent hasn't diminished’ Gregory Cauthen, CFO Transocean, 10 Feb ’09

• ‘Our capital spending plans ….are unaffected by the recent reduction in oil prices’. Alan Jeffers. Exxon Mobil, 10 Feb 09

• Petrobras plans $174 bn 5-year total spend (54% increase) 28 Jan ’09

• Hunting to invest >$100 m in ‘bolts & widgets’ acquisitions ‘related to deep-sea drilling’ 27 Feb ‘09

• ‘Sonatrach boosts 5-year ivestment by 45% to $63 bn. In anticipation of recovery in demand’ 18 March ’08

• ‘Global economic recovery could start middle of next year’John Lipsky, first deputy MD, International Monetary Fund

So itSo it’’s not all bad newss not all bad news


• 17 Feb – Russia: Beijing to lend $25 bn in return for agreeing to supply 300,000 b/d

• 19 Feb – Brazil: China to loan $10 bn for supply of up to 160,000 b/d

• 20 Feb – Venezuela: China to contribute $8 billion to a strategic fund for oil development which aims largely to increase Venezuelan oil exports to China 2015 by 650,000 b/d

The return of the dragon The return of the dragon –– China invests in future suppliesChina invests in future supplies

image: earthstarshop


Two decades of underinvestment Two decades of underinvestment –– will the same happen again?will the same happen again?

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1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

Newbuild Drilling RigsOil Price ($2007)

• The world cannot afford another energy investment famine

Offshore rig builds & oil price

"It is unrealistic to think that 5 years of increased spending in

an inflationary environment can compensate for 20 years of

underinvestment" Andrew Gould, CEO Schlumberger


‘The industry will need to invest $400 -500 billion/year through 2030’ David O'Reilly, chairman and CEO Chevron


• 2000-07: major recruiting success

• 2008: the bubble burst ……….

• ConocoPhillips, cutting 4% of its overall workforce – 1,300 jobs

• Schlumberger net income falls; job cuts affect 5,000

• The ‘grey tidal wave’ moves on

People will again be the key issuePeople will again be the key issue


What happens next?What happens next?

Short term (2-3 years)• Many projects underway – more production coming onstream• Oil prices will be determined by OPEC production cuts• E&P co’s beginning M&A again (e.g. BG takes 22% in Venture)• Consultants cut….. Staff cut….• Some OES companies reasonably protected by large backlogs• But contractors costs have to fall (‘$60 costs v $50 oil prices)• The recession will end


And then?And then?

Longer term (4-10 years)• The Douglas-Westwood view is unchanged• Oil demand will increase• Non-OPEC production will fall and oil prices will rise• And all energy costs will increase• Well positioned oil equ & services companies will outperform • And there will again be a scramble for qualified people……


www.douglas-westwood.com

Thank Youwww.douglas-westwood.com

Thank You

• The financial meltdown has resulted in recession• Oil demand has fallen as new capacity comes onstream• But the underlying issues have not gone away• We need massive investment in facilities and people• Low oil prices will restrict investment and impact on skills (again!)• Thereby accelerate the onset of peak oil• And fuel the next oil price explosion• Oil is a cyclical business – long-term views are essential• 2009 could be a great time to invest