OIL & GAS MARKETS OUTLOOK - Occupier Metrics · Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017 Q4 2018 ffffififlffififfififififi World production (left axis) million barrels per

OIL & GAS MARKETS OUTLOOK

2017

Over the last two-and-a-half years, the decline in oil price from more than $100 to less than $35 per barrel has had profound implications on the energy sector. Despite the recent rally with prices now back above $50 per barrel pricing is still well below the post-recession $115 per barrel high-water mark of 2011.

Currently, any renewed optimism is met with caution with oil industry operators in the upstream oil and gas sector still coping with changes implemented throughout the downturn and a shifting supply landscape, one plagued with uncertainty.

As we move into 2017, business models are anticipated to come under further scrutiny with oil industry operators having to adapt and reposition themselves quickly in order to embrace the new environment.

While higher oil prices are anticipated throughout 2017 any adjustment will likely be slow paced in nature and perhaps unsustainable with new, more affordable extraction techniques adding to the prospects of a sustained period of oversupply in the future. In response it is thought that supply streams may be constrained further to sustain a higher price point. This may be done in two ways. Firstly the cutbacks in reserve development projects implement over the last few years will begin to have an impact should demand remain resilient and secondly OPECs agreement to limit production, a decision made in November 2016 which will be reviewed in the latter half of 2017.

With operator margins under pressure, it will be down to the industry to sustain and push for further efficiency improvements in cost bases. The companies that will succeed will be those that have learned how to execute activity at a lower price point than previously attainable, by working with the supply chain in new ways, taking on board new technology and making operating models more efficient.

While many of the oil and gas industry operators have survived an especially tough few years, with weak demand and low prices, it has been difficult to make or implement strategic decisions and plan ahead for the longer term. Only now, with oil prices back to more stable grounds is the sector beginning to emerge from its prolonged period of upheaval.

While spending cuts made during the downturn may continue to hamper expansion plans in the immediate term for some, occupiers will be required to respond and reposition quickly in anticipation of a further squeeze on operator margins in months to come.

– James Taylor, Global Occupier Services, EMEA Energy Sector Lead

LOWER FOR LONGER?

-2

-1

0

1

2

3

86

88

90

92

94

96

98

100

102

Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017 Q4 2018

GLOBAL OIL PRODUCTION AND CONSUMPTION

World production (left axis) million barrels per dayWorld consumption (left axis) million barrels per dayImplied stock change and balance (right axis) millions barrels per day

FORECAST

Source: EIA, IEA

0

20

40

60

80

100

120

140

Jan

2013

Jul 2

013

Jan

2014

Jul 2

014

Jan

2015

Jul 2

015

Jan

2016

Jul 2

016

Jan

2017

Jul 2

017

Jan

2018

Jul 2

018

$ pe

r bar

rel

GLOBAL OIL PRICE

WTI Spot Average Brent Spot Average

FORECAST

Source: EIA Short Term Energy Outlook

2

During the downturn lower oil prices led many producers to review their budgets and implement severe cost cutting programs, a clear indication of unsettlement and prolonged period of uncertainty anticipated. Cost mitigation schemes included realignment of operations and selective reorganization through Corporate Real Estate (CRE) management. The ability to adapt and become more efficient and more importantly productive and capture lower prices from goods and services due to current market conditions were also beneficial.

As a result, the global oil industry has witnessed a 45% reduction in global Capital Expenditure spend since 2013, evidence of the sheer scale of retrenchment at play. These cut backs have meant most energy-producing office markets have seen a slowdown in local economic growth over the past year with lower occupancy levels also an indication of an industry subject to uncertainty. While office rents have fallen in a number of oil hubs due to limited demand opening up opportunities for some occupiers, a more robust economic environment in alternate non-oil centric markets has restricted opportunities to trade up accommodation due to stronger rental performances.

Despite a tough two years, the sector has successfully brought costs down in order to operate in an environment of radically lower oil prices - but what impact has this had on the overall cost burden for industry operators?

BUT WHAT IMPACT DID THE DOWNTURN HAVE ON SECTOR SPENDING?

THE GLOBAL OIL INDUSTRY HAS WITNESSED A

45%

REDUCTION IN GLOBAL CAPITAL EXPENDITURE SPEND SINCE 2013.

Source: McKinsey: Quarterly perspective on oil field services and equipment

OIL & GAS MARKETS OUTLOOK 2017 / 3

According to research by consultancy firm Mckinsey, overall production costs have fallen by an estimated $44 billion (-29%) since 2014, in contrast to the steeply rising costs seen in the previous years.

For example, between 2008 and 2014, $60 billion was added to production costs across global operators. The recent reduction in production cost brings the 2016 operating expenditure back to the level last seen in 2010.

The more efficient and productive means of operating and extraction are saving not just costs but also providing an added boost to non-OPEC supply levels. This is no more evident than the healthy U.S. Shale industry which is once again challenging the OPEC cartel. While a number of Shale extractors having gone under since the start of 2015, the companies that survived have reshaped themselves into more resilient and leaner businesses that can succeed with oil prices far lower at c. $50 per barrel. Now, it would appear that this new breed are stronger placed to succeed whereas OPEC producers are now having to seek solutions and drive prices up in a push to repair the economies of the countries it serves.

This step change has been a result of heavy cash investments in new means of efficiency but also higher productivity when it comes to extraction. Far more efficient ways to drill exist now than in the past few years with oil companies benefiting from lower service costs, but it is clear that the capital investment streams that enable these means of operation must keep coming.

FALLING PRODUCTION COSTS AND TECHNOLOGICAL EFFICIENCIES TO EASE BUT NOT ERASE THE COST BURDEN

2008 2009 2010 2011 2012 2013 2014 2015 2016E2

200 30

20

10

0

-10

-20

-30

150

50

100

0

$ billions

1 Based on publicly reported imformation of 37 oil and gas companies with continuous data from 2008 and representing over a third of total industry spend.

2 Estimated based on quarterly reported data of 22 companies.

Annual production cost 1 Year-on-yearchange, %

Majors NOCs Integrated IndependentsYoY change

-29%

Source: McKinsey: Preserving the downturn’s upside Energy Insight

+$60bn

PRODUCTION COST INCREASE BETWEEN 2008-2014

4

4,000$500

400

7.3%

300

200

100

02015

GLOBAL OIL AND GAS CAPEX

US$ billionsJune 2014 - December 2016

U.S.CanadaAsia PacificMiddle EastAfricaEuropeLatin America

Source: Barclays 2017 E&P Spending Outlook, Baker Hughes, Strategy & Research

NUMBER OF GLOBAL RIGS

2016 2017 201620152014

3,500

3,000

2,500

2,000

1,500

1,000

500

0

For example, Shell indicates it can drill a well today for approximately $5.5 million, down a staggering 56% from 2013. And the new wells, thanks to more powerful fracking techniques, are yielding more barrels. The average Permian well now produces 668 barrels per day, compared to just 98 barrels four years ago, in accordance to government data. To capitalise on this it is a case of who has the scale to adapt and act quickly. It’s now a matter of rig numbers, manufacturing and operation as to the supply levels that will be achieved and no longer the availability of natural resources.


While organizations that have reshaped themselves into fitter, leaner and faster versions that can thrive with oil at $50 a barrel remain well positioned, inevitably further rounds of investment will have to return in order to sustain this pace of development. According to Barclays’s latest E&P Spending Survey, oil and gas industry capital expenditures are expected to increase by as much as 7% in 2017 as a result, following the cut backs of the past 2 years.

For example, oil-field services companies will likely start taking back price concessions they gave international oil companies when the market collapsed. This could add as much as 15% to the price of producing a barrel of oil, which in turn would allow services company operations to get back to break-even levels. New means of taxation could also add additional costs to bottom lines.

With this in mind upstream companies will have to be industrious about containing other expenditure increases, particularly in the supply chain and resource development, with Corporate Real Estate positioning remaining a key part of this.

That may prove difficult, because the wave of worker layoffs during the downturn eliminated significant experience, knowledge, and skills. The loss of these capabilities could push development project costs up substantially if they are not carefully monitored, with new recruitment and talent attraction strategies commanding heavy investment in talent programs and working environments to meet the needs of new labour accordingly.

Smarter firms will embrace new digital initiatives as a means of offsetting expense escalation and in an attempt to add further to the cost and efficiency improvements they have already achieved. They will also need to engage with recent graduates and collaborate with education practices able to provide the skilled labour required armed with new ideas that will make the future easier to navigate. With so much innovation in the sector, it shouldn’t be hard to engage younger employees, but companies need a clear and attractive talent agenda aligned with overarching business plans to do so.

AS OIL PRICES RECOVER, CAN INTERNATIONAL OIL COMPANIES HOLD ON TO THE BENEFITS OF COST REDUCTION?

6

The net oversupply of oil over the past 2 years has been considerable at between 1.5 million barrels per day and 2.6 million barrels per day. While last year there was a brief period in which demand caught up to supply this was only short-lived, the trend reversed again as Iran’s production hit the global market during a period of lower demand.

The higher production levels sustained in U.S. has now made the region one of the world’s largest producers. Added to this Iranian production coupled with lower demand levels as renewable energy forms rise, have together contributed to a sustained lower oil price environment without a largely negative GDP factor.

Today we continue to witness mounting market shares for Russia and the Middle East, and declining costs for American shale – with a trend emerging where the oil price could stay, in relative context lower for much longer. Last November’s OPEC agreement to limit production by 1.8 million barrels per day could very well be negated by the increased production of shale gas in the United States.

The second half of 2017 will see OPEC take a decision on whether or not to continue the production cuts. North American shale production has demonstrated remarkable resilience in a low price environment. Without a continuation of production cuts, its likely oil prices could decline again. In such an event, we could inevitably see a rapid increase in defaults and further cost cutting among industry players, especially within oil producing economies which would likely suffer further pressure on economic performances.

OPEC: TO CUT OR NOT TO CUT, THAT IS THE ONGOING QUESTION

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

OPEC SURPLUS CRUDE OIL PRODUCTION CAPACITY

OPEC surplus capacity

5

4

3

2

1

0

million barrels per day

Source: Short-Term Energy Outlook, March 2017Note: Shaded area represents 2006-2016 average (2.3 million barrels per day)

projections

The cost curve has massively flattened and extended as a result of “shale productivity” driving oil breakeven in the U.S. from $80 to $50-$55, in the process sweeping Saudi Arabia away from the post of global oil price setter to merely inventory manager.

This is the key ingredient of the shift to a new “structural deflationary change in the oil cost curve”.

– Goldman Sachs


CAN SHALE PRODUCTION SUCCESS BE SUSTAINED?

Easy access to capital has fuelled the shale revolution of years gone by. But too much capital led to too much oil production, and prices plummeted as a result. With shale production remaining high the sector is and will continue to be financially stress-tested. Many shale producers depend on capital market injections to fund ongoing activity because many have spent beyond their means. Injections that will inevitably dictate oil pricing over the months to come.

Future spending will depend on the ability to sustain existing production volumes economically and take advantage of new opportunities at lower energy prices. These drivers will depend largely on oil price, as that determines what activity is economic, and subsequently influences demand on the supply chain. However, spending is also affected by other factors such as regulatory compliance, technological advances, as well as company-specific initiatives such as the ability to sustain and improve efficiency gains and contain other costs.

Following the retrenchment in oil operator expenditure it’s clear that spending will be higher this year than last, especially in the U.S. as producers in these higher-cost environments look to take advantage of the rebound in energy prices and replenish reserves. Some industry research firms are projecting expenditure will increase globally by an average of 6-10%, with a higher growth rate of nearer to 20% anticipated in the U.S.

The return of capital investment is also likely to generate further rounds of M&A activity as businesses look into ways to reposition quickly, minimizing new expenditure volumes and reshaping portfolios for future growth. For upstream companies, M&A opportunities represent a critical part of portfolio re-evaluation. This approach can be used to divest noncore assets and to refocus company strategies to best capitalise on the wave of changes disrupting the industry.

8

WHERE ARE THE ENERGY-CENTRIC MARKETS?

When studying energy markets we can classify locations into two different categories, energy-dependent cities and corporate hub cities.

The energy-dependent cities in our study are very reliant on the oil and gas industry to drive their economies and property sectors, as determined by the contribution of energy-related sectors to the broader local economy. Example cities include Aberdeen, Houston and Calgary. Corporate hub cities, which are favored locations for energy company headquarters, are noticeably less reliant on the oil sector. In our study, these cities include Denver, London, Mexico City, Beijing, and Singapore.

Source: IEA

OECD RoW Africa India Middle East Other Asia China

3

2

1

-1

0

million on b/d

IEA PROJECTED GROWTH IN OIL DEMAND 2015-2021 & SHARE OF GLOBAL GROWTH

33%

24%

18%15%

13%11%

-14%


Oil companies are weathering the fall in crude prices and its effect on the economy, becoming increasingly conscious of both real estate and staff costs. Energy sector demand for office space across EMEA is likely to face further cut backs as a result, but the impact of this will diverge at the city level. The outlook for the Russian economy remains weak but the rate of contraction is slowing and 2017 should bring further improvements. Current sanctions have significantly weakened trade and financial linkages with Europe, however, which is negatively affecting the appetite of foreign occupiers and investors for the Russian real estate market. Nevertheless, the general consensus is that the office sector has reached its trough and some improvements are expected in 2017, albeit at a slow pace and from a low base.

The high number of energy employees in Abu Dhabi and the high proportion of energy employees in Aberdeen leave both cities still exposed to the risk of increased vacancy and stagnant rental growth.

Aberdeen saw occupier demand fall significantly during 2014/15 as oil prices plummeted. Since then availability has risen from to 2.7m sq ft as occupiers have consolidated and vacated stock. Some of the city centre schemes being speculatively developed (which went under construction around the time the market stalled) will add further to an already over supplied market. Rents are falling, particularly for secondary stock. Signs that the market has bottomed out as the Oil & Gas sector starts to look at increased levels of investment in the North Sea but little in the way of increased demand for office space as yet.

EMEA

10

Prime Rent Q4 2016 (USD per sq ft/year)

2017 Rental Growth Forecast


EMEA

Vacancy Rate (%)

Pipeline (Completions due 2017-2019 - million sq ft)

LONDON (WEST END)

10%15%20%25%

0%5%

0%5%

10%

15%20%

0%5%

10%

15%20%

10%15%20%25%

0%5%

MOSCOW

0%5%

10%

15%20%

-4%

ABU DHABIABERDEEN

10%15%20%26%

0%5%

10%15%20%27%

0%5%

0%5%

10%

15%20%

0%5%

10%

15%20%

-6%

10%15%20%25%

0%5%

RIYADH

$51.0$148.0

Prime Rent % Change (Q4 2016 - Q4 2015)$29.5 $42.0 $47.5

CORPORATE HUB CITIES ENERGY-DEPENDENT CITIES

5.77 4.50 6.333.250.30


The U.S. has seen a production surge as hydraulic fracturing technology allowed producers to tap into shale oil reserves and nearly double domestic output. While recent oil price declines have led to lower output, U.S. oil production remains near record highs.

Job losses in key industries such as energy and manufacturing still hamper occupier demand volumes in some oil centric hubs and remain a concern as these tend to be higher-paying positions that create economic activity throughout the wider economy. Despite this, with signals of healthier forward movement and somewhat less volatile outlook for the energy sector, we expect the strongest CBD office markets to rebound in 2017 from the challenges incurred over the past two years and we are already seeing indications of this in a number of sector specific lettings as operators re-position themselves for the this new environment.

In Latin America, the investment environment is improving. Some domestic oil and gas industries are on the upswing, creating jobs. A prime illustration is Mexico, where energy reform is opening the door for non-traditional operators to establish a presence in the country. In the recent deepwater auction in that country, companies successfully bidding for acreage included China’s Offshore Oil Corporation, Australia’s BHP Billiton, France’s Total, American firms Chevron and ExxonMobil, and Japan’s Inpex.

AMERICAS

12





AMERICAS

Vacancy Rate (%)


HOUSTON

10%15%20%25%

0%5%

0%5%

10%

15%20%

-2%

$44.5

1.60

10%15%20%25%

0%5%

CALGARY

0%5%

10%

15%20%

-11%

$48.7

3.51

0%5%

10%

15%20%

10%15%20%25%

0%5%

PITTSBURGH

$28.8

0.36

0%5%

10%

15%20%

DALLAS

10%15%20%27%

0%5%

$33.0

6.98

DENVER

10%15%20%26%

0%5%

0%5%

10%

15%20%

$36.3

4.29

0%5%

10%

15%20%

-6%

10%15%20%25%

0%5%

MEXICO CITY

17.88

$27.9

0%5%

10%

15%20%

10%15%20%25%

0%5%

BOGOTA

2.40

$24.4

0%5%

10%

15%20%

-3%

10%15%20%25%38%

0%5%

RIO DE JANEIRO

2.21

$32.9

Prime Rent % Change (Q4 2016 - Q4 2015)






ASIA PACIFIC

Vacancy Rate (%)


SINGAPORE

10%15%20%25%

0%5%

0%5%

10%

15%20%

0%5%

10%

15%20%

10%15%20%25%

0%5%

MUMBAI

0%5%

10%

15%20%

-11%

BEIJINGKUALA LUMPUR

10%15%20%26%

0%5%

10%15%20%27%

0%5%

0%5%

10%

15%20%

0%5%

10%

15%20%

-3%

10%15%20%25%

0%5%

SHANGHAI

$49.6$75.0


3.80 10.7 13.036.74.90

ASIA PACIFIC & GREATER CHINA

Generally, markets in the Asia Pacific region have benefited from the weakness in oil prices. The filtering down of lower oil prices to lower food and fuel prices has subdued inflationary pressures, boosted consumer spending, and given Asian central banks greater scope for monetary easing. Although APAC’s direct exposure to the energy sector is relatively small, certain pockets within the region are oil and gas producers, and those areas are being negatively impacted. Low oil prices have primarily affected companies in the offshore and marine sector, with many downsizing to stay afloat.

In Greater China, exposure to the oil sector has come at some cost to those corporations directly affected by low oil prices. In a country which is the world’s largest net importer and second largest consumer market globally, oil related office occupiers have witnessed pressure on employment growth in varying city-level markets. Cost cutting is likely to continue within the industry in China over the next two and a half years despite oil prices now slightly higher than this time last year. Pressure on office market vacancy, however, isn’t likely to be much affected by a slowing of any space expansion plans by oil-related corporates. What is likely to have a greater effect on vacancy rates, though, is the substantial amount of office supply expected to complete in a number of city-level markets across the country over the next two to three years.

14





ASIA PACIFIC

Vacancy Rate (%)


SINGAPORE

10%15%20%25%

0%5%

0%5%

10%

15%20%

0%5%

10%

15%20%

10%15%20%25%

0%5%

MUMBAI

0%5%

10%

15%20%

-11%

BEIJINGKUALA LUMPUR

10%15%20%26%

0%5%

10%15%20%27%

0%5%

0%5%

10%

15%20%

0%5%

10%

15%20%

-3%

10%15%20%25%

0%5%

SHANGHAI

$49.6$75.0


3.80 10.7 13.036.74.90


BUSINESS CONTACTS

RESEARCH

Andrew [email protected]

AMERICAS Martin [email protected]

EMEA James [email protected]

APAC Christopher Browne [email protected]

Copyright © 2017 Cushman & Wakefield. All rights reserved.

This report has been produced by Cushman & Wakefield LLP (C&W) for use by those with an interest in commercial property solely for information purposes and should not be relied upon as a basis for entering into transactions without seeking specific, qualified professional advice. It is not intended to be a complete description of the markets or developments to which it refers. This report uses information obtained from public sources which C&W has rigorously checked and believes to be reliable, but C&W has not verified such information and cannot guarantee that it is accurate or complete. No warranty or representation, express or implied, is made as to the accuracy or completeness of any of the information contained in this report and C&W shall not be liable to any reader of this report or any third party in any way whatsoever. All expressions of opinion are subject to change. The prior written consent of C&W is required before this report or any information contained in it can be reproduced in whole or in part, and any such reproduction should be credited to C&W.

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OIL & GAS MARKETS OUTLOOK - Occupier Metrics · Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 2017 Q4 2018 ffffififlffififfififififi World production (left axis) million barrels per