Oil Price Update Q2 2016 - PwC · economies with China forecast to continue its decline to 6.5% in 2016 (from 6.9% in previous year) •China’s transformation continues to be a

Light at the end of the tunnel for oil prices?

Oil Price Update Q2 2016

April 2016 Briefing Document

Strategy&

• Executive Summary

• Macro Economic Context

• Oil Supply and Demand

• Oil Price Dynamics

• Industry Response

• M&A Trends

• Impact on OFS Sector

• Impact on UK North Sea Sector

• Geopolitics of Oil

• Oil Price Forecasts

• Appendices

1

Strategy&

Executive summary

• Oil price has recovered by some 40% in recent weeks suggesting perhaps the decline has bottomed out

• Global economic growth still sluggish with China’s economy facing potential ‘hard’ landing

• In H1 2016 markets to remain oversupplied, as US crude production only beginning to ease off (5% down), major Middle East producers maintain output (KSA, Iraq) and others beginning to grow (Iran). Inventory levels remain high

• Demand forecast to strengthen in H2 2016 underpinned by Asian oil net importers

• Industry retains laser focus on cost reduction (capex cuts, headcount reduced, project deferrals and cancellations). Question mark hangs on future of US producers as banking covenants reviewed in Spring

• Significant M&A consolidation remains elusive, some oil services players explore transformative plays, and UK North Sea receives some support from the UK government (tax relief)

2

Strategy&

Oil price witnessed a brief rebound and hovering at US$40/bbl – market sentiment becoming more bullish

3

20

40

60

80

100

120

140

160

20142013 2015 2017201620102006 20092007 2011 20122008

-76%

US$/bbl

+38%

-74%

Brent Crude Daily Price January 2006 – April 2016

Source: Bloomberg; Strategy& research

Recent price decline

similar order of magnitude

post financial crisis

Brief recovery in oil price

but potentially ‘false

dawn’?

Strategy&






• M&A Trends





• Appendices

4

Strategy&

Modest global economic growth outlook with China in decline

5

0

1

2

3

4

5

6

7

8

2018 20192017

%

20152014 2016

World Eurozone ChinaUS

Selected GDP Forecasts 2014 - 2019

Comments

• Global economic growth forecast to slow slightly from 2.5% in 2015 to 2.3% this year

• Modest upticks in US and Eurozone economies with China forecast to continue its decline to 6.5% in 2016 (from 6.9% in previous year)

• China’s transformation continues to be a major force in shaping global economy, as its economy rebalances from exports and public investment to consumption, and from manufacturing to services

Source: Oxford Economics; Strategy& research

Strategy&

Equity markets have recovered a little following steady decline since 2015

6


Performance of FTSE All World Index 2006 – 2016

100

150

200

250

300

01.01.201801.01.201601.01.201401.01.201201.01.201001.01.200801.01.2006

+12%

Strategy&

Japan

earthquake

&

Fukushima

accident

VIX index spiked since end of 2015 underpinned by geopolitical events, albeit a decline in recent weeks

7

0

10

20

30

40

50

60

70

80

90

2016201520142013201220112010200920082007200620052004200320022001 2017

Index

Collapse of

Lehman Brothers

Eurozone sovereign

debt crisis

CBOE Volatility Index January 2001 – April 2016

Note: The CBOE Volatility Index is a measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX

has been considered a barometer of investor sentiment and market volatility.

Source: Bloomberg

Pre Crisis Crisis EraRecovery or

Crisis Return?

Between 2008 – 2012 average VIX was 26.

Average in 2013 was 14 and in 2014 was

14.5. In 2015 it was 16.7 and in 2016 YTD it

was 21.2

Paris-Brussels attacks,

rising tension between

KSA and Iran, suspension

of share trading in China

Strategy&

China’s economic growth is slowing down and there are other indicators of economic malaise…

8

0

2

4

6

8

10

12

14

16

2017

2009

2000

2011

2005

2015

2013

2010

2001

%

2012

2007

2014

2006

2003

2002

2008

2016

2004

2020

2019

2018

China Real GDP Growth 2000 – 2020

Comments

• Chinese GDP growth continues a downward trajectory from 6.9% in 2015 to 6.5% in 2016

• China’s GDP forecast to decline to 5.9% by 2020

• In January 2016 Chinese share trading was suspended following a 7% fall in the country's main index

• Rising concerns about whether this financial turbulence highlights broader issues about the economic slowdown in China - is economy heading for "hard landing“?

• Chinese central bank also moved to devalue the yuan. Designed to boost exports by making Chinese goods cheaper outside the country. But also indication that consumer demand in China may be slowing more sharply than feared. May also make oil imports more expensive, dampening demand

Source: Press; Oxford Economics; Strategy& research

Strategy&

2%Iran

34%Others

Japan

Canada

2%

Germany

18%

2%

Brazil

2%

3%

South Korea

India

Russia4%

5%

US

China

5%

23%

Primary Energy Consumption Major Countries 2014

Total = 12,928m toe

0

2

4

6

8

10

12

14

16

18

20082004 20142000 2002 2010 20122006

%

Chinese Energy Demand Annual % change

…which is significant given China’s consumption of energy, albeit its rate of demand growth continues to decline…

Source: BP Statistical Review of World Energy June 2015; Strategy& research.

Slowing growth rate reflects

weakening GDP growth rate,

and reduced focus on

industrialization

9

Strategy& 10

…with energy demand decoupling from GDP

0

20

40

60

0

3,000

6,000

9,000

202020132000

GDP PPP

Real US$trn

Energy Demand

Million toe

20402030

GDP (Trillion dollars, PPP)Energy Demand (Mtoe)

Source: IEA World Energy Outlook 2015; Oxford Economics; Strategy& analysis

Energy Demand and GDP in China 2000 - 2040 New Policies Scenario

Strategy&

Baltic Dry Index continues a downward trajectory, with major commodity indices reflecting more dramatic drops

11

20082006 2012

8,000

10,000

4,000

20182016

12,000

2,000

0

6,000

2010 2014

-66%

-94%

Index

Baltic Dry Index January 2007 – April 2016

150

200

250

300

350

400

450

500

2006 20182008 2012 201620142010

Index

-57%

-45%

RJ CRB Index January 2007 – April 2016

Note: Reuters Jefferies CRB index contains 19 futures from 4 different raw material categories. BDI is a shipping and trade index that measures changes in the cost to

transport raw materials by sea

Source: Bloomberg

Downturn in dry bulk shipping

worsened significantly in recent

months as demand for iron ore and

coal has declined in response to

slower economic growth in China.

Surplus of vessels has exacerbated

situation

Strategy&






• M&A Trends





• Appendices

12

Strategy&

In 2015 supply outstripped demand with surplus production bolstering OECD stocks to historic highs

13

1.6

0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8

Million bbls/d

World

Supply2.7

World

Demand

World Oil Supply and Demand Growth 2015 vs. 2014

Non OPEC

Crude

OPEC

Crude

OPEC

NGL

World OECD Commercial Stocks 1996 - 2016

Source: IEA Oil Market Report February 2016; EIA; Strategy& research

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

3,200

1996 2000 2005 Mar.

2016

2010

+23%

Million bbls

Strategy&

Rig count in N America has declined substantially and is beginning to level off in US, with US oil rigs down by 70%+

14

0

500

1,000

1,500

2,000

2,500

Nov-1

4

Oct-

14

Sep-1

4

Aug-1

4

Jul-14

Jun-1

4

No. Rigs

Mar-

16

-75%F

eb-1

6

Oct-

15

Sep-1

5

Aug-1

5

Jul-15

Jun-1

5

May-

15

Apr-

15

Mar-

15

Feb-1

5

Jan-1

5

Dec-1

4

Dec-1

5

Nov-1

5

Jan-1

6

US and Canada Rig Count June 2014 – March 2016

Source: Baker Hughes; Strategy& research

U.S.Canada

US Rigs by Oil & Gas June 2014 – April 2016

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Jul-15

Sep-1

5

Sep-1

4

Nov-1

4

Jul-14

May-

14

Jan-1

5

Mar-

15

May-

15

Nov-1

5

Jan-1

6

Mar-

16

May-

16

No. Rigs

-75%

-77%

GasOil

Strategy&

US production is finally easing off, 515k bbls/d down in 2016 from April 2015 high

15

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2006 20172016201520142013201220112010200920082007

000s bbls/d

-5%

US Crude Oil Production January 2006 – January 2016

Source: EIA; Strategy& research

Strategy&

Aside from Permian, all other tight oil basins are in decline

16

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Jan-

15

Jan-

14

Jan-

08

Jan-

13

Jan-

12

Jan-

11

Jan-

10

Jan-

09

Jan-

07

Million bbls/d

Jan-

16

Eagle Ford

Bakken

Niobrara

Haynesville

Marcellus

Utica Permian

US Crude Oil Production By Core Regions Core Tight Oil Regions By Core Regions

The seven regions

accounted for 92% of

domestic oil production

growth

Source: EIA; Strategy& research

Strategy&

Cost reduction and technology have underpinned resilience of US tight oil production to date

17

Example Comments

• Longer

laterals

• Early shale development used laterals of

1,500 feet. Now 10,000+ feet

• Fewer

strings of

casing

• Two strings of casing instead of three

increasingly used

• Pioneer Natural Resources shifted to 2 string

casing design in Eagle Ford which reduces

per well costs by between US$500k - US$1m

• Pad drilling • Industry shifted from single well drilling to pad

drilling allowing multiple wells to be drilled in

shorter time

• Skidding

systems for

rigs

• Rigs using skidding or walking systems, so

pad drilling improved as rig can move

efficiently from well to well

• Increasing

Rates of

Penetration

(ROP)

• Using downhole motor behind rotary

steerable system, allows drillbit to rotate

faster than currently rotates from surface

drive equipment alone. Can double RPM and

reduce days on location by 15%-20%

Examples of Productivity Gains US Tight Oil

0

10

20

30

40

50

60

2012

Days

Perfect

Well Target

2014 2015

Statoil Average Drilling Time per Well Eagle Ford

Statoil drilled fastest well to date

in Eagle Ford in May 2015.

Regmund Family Trust GU1-2

well took 7.67 days from spud to

final total depth

Source: Upstream – Technology feature; Strategy& research

Strategy&

3,000

01.01.201501.01.2013 01.01.2017

11,000

9,500

10,000

01.01.2016

4,000

3,500

10,500

2,500

0

01.01.2014

4,500

2,000

1,500

1,000

500

000s bbls/d

Iran

Libya

KSA

Iraq

Middle East Oil Production Jan. 2013 – March 2016

Iraq and KSA continue to pump at high levels with more Iranian oil likely onstream in H1 2016

Source: Bloomberg; IEA OMR March 2016; Strategy& research

18

Comments

• Iraqi output growing to 4.4m bbls/d. This in spite of security issues. Falling oil revenues and budgetary strain oblige federal government to slash IOCs’ budgets developing southern oil fields

• Saudi production levelled off to 10.2m bbls/d as KSA focuses on market share and meeting domestic demand

• Iranian oil output rising to 3.2m bbls/d. Government says it will deliver 500k bbls/d to world markets. Production already up by 400k bbls/d since Jan. 2016

• Libyan oil production steady at 330k bbls/d. Battle between officially recognised government in east and Libya Dawn administration in Tripoli has shut operations at strategic oil terminals and fields

• Kuwait's output dropped to 1.1m bbls/d from 2.8m bbls/d due to worker strike

Strategy&

As for US crude stocks, they have returned to historic highs

Note: SPR = Strategic Petroleum Reserve

Sources: EIA (Weekly U.S. Ending Stocks excluding SPR of Crude Oil), Bloomberg Business

19

300,000

350,000

400,000

450,000

500,000

550,000

06/01/201201/01/2011 02/01/2015

000’s bbl

Ø 385,078

+40%

03/01/201404/01/201301/01/2010

US Crude Oil Inventory exc. SPR January 2010 – March 2016

Historic Low Since 1982

23.01.2004

263.7m bbls

25.03.2016

534.8m bbls

According to CNN, there was "traffic jam" of oil tankers waiting

to be offloaded off U.S. Gulf Coast in Nov. 2015 because

there was nowhere to store the crude

01.01.2016

Strategy&

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

000s bbls/d

1.5%

5.3%

Non OECD

OECD

201420102005200019951990198519801975

0.9%

19701965

Global Oil Demand OECD vs. Non OECD


With regard to global oil demand, in recent years tracking at 1.5% CAGR with modest increase in 2014 vs. 2013

20

Strategy&

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2000 20142010

000s bbls/d

199019801970

World Oil Demand by Leading Countries 1970 - 2014

Russia

Brazil

South Korea

RoW

Germany

Saudi Arabia

China

Canada

US

India

Japan

In past 15 years China has been a major driver of oil demand but this is easing off


21

Strategy&

While absolute demand for oil has risen, year on year growth has been in decline

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

YoY Growth

%

19901985198019751970 20142010200520001995

Year on Year Growth in Global Oil Demand 1966 - 2014

Source: BP Statistical Review of World Energy June 2015; Strategy& research

22

Strategy&

87

88

89

90

91

92

93

94

95

96

97

Q3

2016

Q2

2016

Q1

2016

Q4

2015

Q3

2015

Q2

2015

Q1

2015

Q4

2014

Q3

2014

Q2

2014

Q1

2014

Q4

2013

Q3

2013

Q2

2013

Q1

2013

Q4

2016

Million bbls/d

DemandSupply

Global Oil Supply and Demand Q1 2013 – Q4 2016

Note: Q1-Q4 2016 assumes OPEC production of 32.1mbbl/d with variable NGL levels

Source: IEA Oil Market Report March 2016

Looking ahead, supply overhang to continue until H2 2016, and demand forecast then to recover

23

While demand strengthens, still

significant inventory to deplete

on supply side (which is not

reflected in supply total)

Demand growth in many of big Asian net oil-importing

economies, e.g. Korea, India and the Philippines

Strategy&






• M&A Trends





• Appendices

24

Strategy&

0

20

40

60

80

100

120

140

US$/bbl

100

-66%

30

/03

/200

7

31

/03

/200

8

31

/03

/200

9

31

/03

/201

5

31

/03

/201

6

31

/03

/201

4

31

/03

/201

2

31

/03

/201

0

31

/03

/2011

31

/03

/201

3

29

/03

/200

2

31

/03

/200

3

31

/03

/200

5

31

/03

/200

4

31

/03

/200

6

31

/03

/199

9

30

/03

/200

1

31

/03

/200

0

31

/03

/199

8

31

/03

/199

7

29

/03

/199

6

31

/03

/199

5

31

/03

/199

4

31

/03

/199

3

31

/03

/199

2

29

/03

/199

1

30

/03

/199

0

31

/03

/198

9

31

/03

/198

8

31

/03

/198

7

31

/03

/198

6

29

/03

/198

5

30

/03

/198

43

0/0

6/1

98

3

Brent Dated BFOE Crude Spot Price Q2 1983 – Q1 2016 (Quarterly Average)


Q1 2016 saw quarterly average price of Brent decline further to US$35/bbl…

25

Strategy&

…with markets witnessing an increase in price volatility

26

0

2

4

6

8

10

12

14

Jan 2002Jan 2000 Jan 2016 Jan 2018Jan 2008Jan 2004 Jan 2014Jan 2006 Jan 2010 Jan 2012

US$/bbl

Daily Difference Between High & Low Price for BFOE Spot January 2001 – April 2016


Significant spike in price

volatility in recent

months

Strategy&






• M&A Trends





• Appendices

27

Strategy& 28

Companies are pulling multiple cost reduction levers in an over supplied market

IOCs NOCsEPC /

OFS

Cost Ta

ke

-out a

ctio

ns

Reduction in 2015

CAPEX () ()

Deferment /

abandonment of

investments () ()

Reduction in

headcount / pay-

freeze()

Reduction in

Contractor rates ()

Changes in business

model / processes() ()

IOC, NOC and EPC/OFS Cost Reduction Focus

Focus for most companies

Focus for some companies()Source: IEA; Strategy& research

Comments

• Since September 2015 oil and gas companies have explored diverse efficiency improvements

• Changing shift patterns on platforms to ‘three weeks on three weeks off’ (N Sea)

• Reducing issuance time for ‘permits to work’ for maintenance (N Sea)

• Smaller operators forming ‘rig clubs’ to aggregate spend to hire drilling rigs more cheaply (N Sea)

• Achieving transport savings by merging multiple helicopter suppliers and contracts into one (Enquest). Supply ships travelling slower to save on fuel (Total)

• Increasing shift to standardization, such as Statoil agreeing common specifications with companies for subsea steel forgings

Strategy&

Global E&P capex is forecast to decline further in 2016…

29

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2013 2015 2016 2017

US$m

2014 2018 2019 2020

-39%

+13%

Global E&P Capex Spend 2013 – e2020

• Global oil and gas investments are expected to fall further in 2016

• According to Rystad Energy, global capex levels will fall to ~US$460bn in 2016, a 40% decline since 2014

• While operators are cutting capex, companies will be expected to borrow more to preserve the dividends demanded by investors

Comments

Source: Rystad Energy April 2016; Strategy& analysis

Strategy&

0

5

10

15

20

25

30

35

40

US$bn

ExxonShell

-57%

-40%

-13%

-25%

-11%

-29%-29%

-25%

Murphy

Oil

EncanaEcopetrolConocoBPTotalChevron Marathon

Oil

+14%

-25%

Recent Capex Announcements Selected Examples from Q3 2015 – Q1 2016

…as players across the sector retrench…

Note: 1) Shell 2016 capex represents combined capex spend of Shell and BG. 2) In 2017-18 Chevron expects capex of US$20bn-US$24bn p.a. Chevron’s exploration budget

cut from US$3bn in 2015 to US$1bn in 2016. 3) Total estimated US$20bn – US$21bn in 2016. 4) BP expected range of between US$17and 19bn. 5) 95% of 2016 capital

invested in core four assets, with ~50% directed to Permian

Source: Bloomberg; Press; Strategy& Research

30

2015

2016

2014

1 2 3 4 5

Strategy&

…and major projects are deferred or cancelled and frontier activity ended

31

Project / Location OperatorValue

US$bnStatus Comments

• Johan Castberg • Statoil • 10.3 • Deferred • In September 2015 investment decision

put back until 2017

• Mad Dog 2, Gulf of Mexico • BP • 10 • Deferred • In October 2015 BP said it would defer

FID until middle 2016

• Mariner, North Sea • Statoil • 7 • Deferred • In October 2015 start date of project

pushed back to H2 2018

• Snorre 2040 • Statoil • 6.5 • Deferred • Decision on hold until 2016

• Carmon Creek, Canada • Shell • 2 • Cancelled • In October 2015 Shell announced would

take a US$2bn writedown after cancelling

oil sands project

• Alaska offshore • Shell • - • Ended • In September 2015 ended US$7bn

exploration effort in Chukchi Sea

• Alaska offshore • Statoil • - • Ended • In November 2015 Statoil announced

abandoning Alaska oil projects.

Withdrawing from 16 exploration leases in

Chukchi Sea

Examples of Upstream Project Delays & Cancellations Selected Announcements 2015

Source: Press; Wood Mackenzie; Strategy& analysis

According to Wood Mackenzie report in

January 2016, some US$380bn of capex

deferred globally

Strategy&

As cost reduction takes precedence, exploration spend in decline (against backdrop of smaller discovery volumes)

32

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

-24%

Exploration Capex

US$m

O&G Resources

Million bbls

20152014201320122011201020092008200720062005

Russia

Europe

America N

America S

Africa

Middle East

Asia

Australia

Exploration Spend

Global Offshore Discovered Resources and Exploration Spend 2005 - 2015

Source: Rystad Energy; Strategy& research

Strategy&

Retrenchment is resulting in upstream costs coming down dramatically in a low oil price environment

80

100

120

140

160

180

200

220

240

20

04

20

01

20

02

Q3

20

11

Q2

20

11

Q3

20

09

Q1

20

11

Q3

20

07

Q1

20

07

Q4

20

10

Q2

20

10

Q4

20

09

Q3

20

08

Q3

20

06

Q3

20

10

Q1

20

09

Q1

20

08

Q1

20

10

Q2

20

09

Q4

20

08

Q1

20

06

Q3

20

05

Q4

20

11

Index

Q3

20

15

Q2

20

15

Q4

20

14

-24%

Q4

20

13

Q3

20

12

Q2

20

12

Q1

20

12

Q2

20

14

Q3

20

13

Q1

20

15

Q1

20

14

Q2

20

13

Q3

20

14

Q1

20

13

Q4

20

12

20

00

20

03

Q1

20

05

Q4

20

15

IHS Upstream Capital Costs Index (UCCI) 2000 – Q4 2015

Costs coming down as oil price

decline as of Q3 2014

Source: IHSEnergy

33

Strategy&

Some 230,000 jobs were lost in the oil and gas sector in 2015 with oil services making the severest cuts

34

Announced Lay Offs by Company Selected Examples 2015 / 2016

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

0

10

20

30

40

50

Wood G

roup

Technip

Chevro

n

Baker

Hughes

Halli

burt

on

Schlu

mberg

er

Weath

erf

ord

% of WorkforceTotal Lay Offs

Shell

Total Lay Offs

% of Workforce

Comments

• A report by recruiting firm Swift Worldwide Resources, has suggested some 230,000 jobs have been lost in the sector and could rise to 250,000 by end of 2015

• To date oil services have made the most radical cuts and it is expected that 2016 will see oil operators make more dramatic cuts

• Segments most affected by the job cuts are engineering, procurement and construction firms, subcontractors and contingent labour providers

Source: Upstream; Press; Strategy& research

Strategy&

As for OPEC, its influence continues to wane, as April 2016 meeting fails to deliver production freeze

28,000

30,500

32,000

31,000

30,000

29,000

28,500

31,500

29,500

32,500

33,000

33,500

30

.11

.2015

30

.06

.201

5

31

.01

.201

5

30

.06

.201

4

31

.01

.201

4

30,000

000s bbls/d

31

.03

.201

6

Total OPEC Oil Production January 2014 – March 2016

Comments

• In November 2014 and December 2015 OPEC decided not to cut production in favour of KSA’s strategy to go for market share

• Current production output at 33m bbls/d

• In April 2016 most OPEC members met in Doha, to discuss the Saudi recommendation to freeze output at January 2016 levels

• Iran did not join and remains opposed to any initiative that impacts its desire to grow production

• The meeting failed to achieve production freeze. However, positive indicator that OPEC starting process to rally and co ordinate decisions

• Next OPEC meeting scheduled for June 2016

Official production

ceiling

since 2011

Source: Bloomberg; Press; Strategy& research

35

Strategy&

At current oil price all OPEC producers are struggling financially, forcing some to balance budgets in other ways

36

100

20

80

40

0

280

60

120

Nig

eria

Ve

ne

zu

ela

US$/bbl

Qa

tar

Alg

eria

US$40/bbl

An

go

la

Ku

wa

it

Ira

q

UA

E

Ecu

ad

or

KS

A

Ira

n

Lib

ya

OPEC Break Even Prices 2015

Comments

• Saudi Arabia considering listing shares in Saudi Aramco. One possible step in plan to balance the budget and open country’s closed economy

• Options under consideration range from listing some of petrochemical and other “downstream” firms, to selling shares in the parent company, which includes the core upstream business

• Talk of first floating part of company perhaps 5%. In time that could rise, though the kingdom would continue to exercise control over the company

• Angola approached IMF seeking to negotiate financial assistance

In January 2016 KSA floats

concept of listing shares in

Saudi Aramco

Source: Bloomberg; IMF; The Economist; Strategy& research

Strategy&

-60,000

-40,000

-20,000

0

20,000

US$m

Q1

2014

Q3

2014

Q2

2014

Q2

2015

Q3

2015

Q4

2014

Q1

2015

3

2

147

0

1

3

Drawndown

144

Uncommitted Total Unfunded

Loans

147

US$bn

As for US Independents, some are financially distressed with growing concerns about banks’ exposure to sector…

37

Net Profit / Loss of US Independents Q1 2014 – Q3 2015

Note: 44 US independents selected

Source: Bloomberg; Wall Street Journal; Strategy& research

Comments

• According to Barclays research, there are ~US$147bn of unfunded loans promised to energy companies in US

• In Q1 2016 handful of borrowers have drawdown US$3bn

• With low oil prices banks setting aside billions in provisions to mitigate loans going bad. In spring 2016 many of these loans will go through redetermination process (as part of biannual review)

• According to survey by law firm Haynes & Boone, banks expected to cut credit lines of energy firms by average of 30%

• Several companies have tapped their unfunded loans facility including Bonanza Creek Energy and Tidewater

Unfunded Loans to US Energy Selected Providers 2016

Strategy&

...while lower prices and production have also adversely impacted US midstream players

38

20

40

60

80

100

120

200

250

300

350

400

450

500

550

01/01/201601/01/201501/01/2014 01/01/2017

WTI Spot

US$/bbl

Alerian MLP

Index

-49%


Alerian MLP Index vs. WTI Spot January 2014 – March 2016

WTI Spot

Alerian MLP Index

Comments

• US pipeline companies have seen their value decline. Companies in US invested in infrastructure growth to support rising production levels

• With lower oil price, US production, particularly oil is in decline, resulting in fewer barrels to transport. Oversupply in market with weak demand, also resulted in higher inventory levels, again weakening pipeline capacity

• US$2.3bn Marketlink pipeline opened in 2014, linking storage hub at Cushing with Texas coastline is only 60% full according to market analysts

• Growing concerns that pipeline ‘take or pay’ contracts signed by shippers with pipeline owners may not be honoured. Unclear on legal ramifications if producer goes bankrupt and seeks to abandon contract

Strategy&

All oil majors reported decline in earnings but to varying degrees

39

-56

-58

-117

-130

-80

-50

-76

-164

-170-160-150-140-130-120-110-100-90-80-70-60-50-40-30-20-100

%

Chevron

Shell

BP

Exxon

2015 vs. 2014Q4 2015 vs. Q4 2014

Decline in Earnings Among Majors Q4 2015 and Full Year 2015

Source: Corporate website; Strategy& research

Strategy&

Ensuring dividends was a focal point among others…

40

BP Chevron Exxon Shell

Capex From US$18.7bn (2015) to range

between US$17-19bn in 2016

Reduced 22% from $34bn to

$26.6bn

Reduced by 25% to

US$23.2bn

US$29bn in 2015 for Shell.

US$33bn combined with

BG for 2016

Dividend1 Promise to maintain Promise to maintain Promise to maintain Promise to maintain

Writedown US$2.6bn of impairment and

restructuring charges Q4 2015

(Angola, N Sea)

US$500m for cancelled Buckskin

Moccasin project in GoM. Overall

US$1.1bn impairment Q4 2015

- -

Gearing 21.6% - - 14%

Headcount Announced 3000 more in

downstream by 2017

Announced lay offs of 4000 None announced to date 10,000 annoucned

Reserves

Replacement

Ratio

61% (2015) 107% (2015) - -20% (2015)

Integrated

Model

Reaffirmed benefits with record

year for downstream earnings

US$7.5bn

- Higlighted strengths of

integrated model

-

Comments Record Downstream earnings for

2015 buoyed by trading

- Share buybacks put on hold -

Key Themes from Q4 and Full Year 2015 Results Selected

Note: 1 ConocoPhillips has become the first major US oil company to reduce its dividend. Announced in Q4 2015 results

Source: Strategy& research

Strategy&

…with announcements by CEOs suggesting oil fundamentals will improve as will price

41

“As this all starts working together to improve the fundamentals, I might characterise the outlook as being ‘lower for longer, but not lower forever’.”

Bob Dudley, CEO of BP

February 2016 Results Presentation

“These trends suggest that supply may converge with levels of demand sometime in the second half of this year…we expect demand may well start to exceed supply…”



“The fundamentals do indeed point at higher oil prices than what we are seeing today …Can oil prices go lower? I’m sure they can. Will they go lower? I don’t know. If you look over the slightly longer run, you are not going to see structurally lower oil prices in the $30s.”

Ben van Beurden, CEO of Shell


“While our financial results reflect the challenging environment, we remain focused on the business fundamentals, including project execution and effective cost management…The scale and diversity of our cash flows, along with our financial strength, provide us with the confidence to invest through the cycle to create long-term shareholder value.”

Rex Tillerson, CEO of Exxon


Value of

integrated

model

Optimism for oil

price recovery

Oil prices will

recover

Have we hit the

price floor?

Strategy&

Exxon and Chevron have best weathered downturn in oil price

42

20

40

60

80

100

120

140

160

01/01/201301/01/201201/01/2011 01/01/201701/01/201601/01/201501/01/2014

Index

Exxon

Brent

Chevron

Bloomberg World O&G Index

Shell

BP

Note: Index rebased. All in US$


Share Price Performance of Majors vs. Brent and Bloomberg Jan. 2011 – Feb. 2016

Strategy&






• M&A Trends





• Appendices

43

Strategy& 44

Consolidation is possible but challenging…

Source: Bloomberg; Rystad Energy; Strategy& research

Comments

• Low oil prices and financially distressed players would suggest industry ripe for consolidation

• If you are of view that price trough has been reached and medium term trend is a price recovery, then now is optimum time to acquire assets

• However, volatility in oil price an obstacle. With price changing rapidly it is harder for sellers and buyers to agree on valuations

• Moreover, some sellers reluctant to dispose of assets because of low prices. Further complicated by financially distressed companies trying to make disposals to raise cash – potentially crowded market

• Some major deals reversed. Anadarko abandoned bid for Apache – speculation this was defensive move by Anadarko to void being target of hostile bid

0

10

20

30

40

50

60

70

80

90

100

110

20202014 20192015 201820172016

US$/bbl

Brent Oil Price Forecast (Rystad) 2014 - 2020

Strategy&

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

450.000

0

50

100

150

200

250

300

350

400

450

500

550

600

650

2014 20152013

Deal

Number

Deal Value

US$m

201220112010200920082007

-34%

Global M&A in Oil and Gas By Deal Type 2007 – 2015

Completed

Deal Number

Pending

Note: Upstream, Midstream, Downstream, OFS, Integrated covered. All deals >US$10m. Completed and Pending only


…hence heralded wave of consolidation yet to materialise -completed deal values down by ~35% & deal numbers down

45

Oil price collapse in 2014

has led to decline in

transactions

Strategy&

0

100

200

300

400

500

600

700

800

900

1.000

0

50

100

150

200

250

300

350

400

450

500

550

600

650

20112008 20092007 20132012 20152010 2014

Deal

Number

Deal Value

US$m

Average Deal Size in Global M&A in Oil and Gas Completed & Pending 2007 – 2015

Deal Number

Average

Deal Value



However, while number of transactions have declined, average deal values have doubled in recent years

46

Strategy&

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

450.000

Deal Value

US$m

20152013 2014201220082007 201120102009

Global M&A in Oil and Gas By Segment 2007 – 2015



In recent years Upstream and Pipelines have driven deal flows with contributions from OFS

OFS

Other

Integrated

Midstream

Drilling

Downstream

Upstream

Several N American pipeline

transactions in 2014 and 2015

driving share of Midstream

Halliburton - Baker Hughes

US$35bn merger now being

challenged by US Dept. of

Justice on anti-trust grounds

47

Strategy& 48

Aside from the Pipeline deals, there have been some transactions around capability plays

Target Acquirer Sector Value

US$bn

Status Comments

• BG • Shell • Upstream • 79.3 • Completed • Stand out deal since super majors consolidation

• Capability play around gas (LNG, trading)

• Williams Co. • Energy

Transfer

• Pipeline • 58.1 • Pending • Intent is to create major pipeline company in US

• SK Holdings • SK Holdings • Downstream • 26.7 • Completed • Merger of S Korean entities within same

conglomerate

• Regency

Energy

• Energy

Transfer

• Pipelines • 17.4 • Completed • Energy Transfer already controlled RE but

acquired additional stake

• Cameron • Schlumberger • OFS • 15.2 • Pending • Schlumberger becomes one-stop shop adding

Cameron’s valves, pumps and BOPs

• MarkWest

Energy

• MPLX LP • Pipelines • 13.7 • Completed • Marathon Petroleum Corp. MLP acquires gas

processing business in US

• Targa

Resources

• Targa

Resources

• Pipelines • 11.4 • Completed • Deal aimed at simplifying group structure

Top (US$10bn+) M&A Deals Ranked by Deal Size 2015

1

2

3

4

5

6

7


Strategy& 49

However, many of IOCs do not possess sizeable war chest for M&A plays

-40,000 -10,000 0-20,000-30,000

Repsol

Shell

Chevron

Eni

BP

Statoil

US$m

Exxon

Total

Available Cash For Acquisitions Selected Players Q3 2015

0 10.000 20.000 30.000 40.000

Exxon

Statoil

Chevron

Eni

Total

Repsol

US$m

BP

Shell

Cash & S/T Investments Selected Players Q3 2015

Note: Cash for acquisitions derived by taking (Cash + Short Term Investments) – (Short and Long Term Debt)


Strategy&






• M&A Trends





• Appendices

50

Strategy&

450,000

500,000

200,000

250,000

400,000

300,000

0

100,000

50,000

350,000

150,000

20

07

20

06

20

05

-6%

20

12

20

08

20

11

20

13

e2

01

6

20

14

US$m

-16%

-26%

20

15

12%

20

09

20

10

Global Oilfield Services Market by Sales 2005 - e2016

Global OFS sector has seen robust growth in recent years but oil price decline triggered significant decline

Source: Spears & Associates Oil Market Report 2005 -2016; Strategy& research

51

Strategy&

Low oil prices have destroyed market cap. across services and operators alike…

52

2,500,000

4,000,000

3,500,000

2,000,000

3,000,000

1,000,000

500,000

0

1,500,000

US$m

-38%

Feb-16Jun-14

Market Cap. of Bloomberg Oil Producers Index

500,000

400,000

200,000

300,000

100,000

0

US$m

Jun-14 Feb-16

-42%

Market Cap. of Bloomberg Oil Services Index

US$1.5trn

loss in MCUS$187bn

loss in MC

Note: Average monthly market cap. quoted for Bloomberg World O&G Producers and Services Indices


Strategy&

...while historically oil services index has outperformed O&G producers index

53

40

60

80

100

120

140

160

180

200

01/01/200801/01/2006 01/01/201601/01/201401/01/201201/01/2010 01/01/2018

Index

Bloomberg World Oil & Gas Index

Bloomberg World Oil Services Index

Bloomberg World O&G and Oil Services Indices Rebased January 2006 – March 2016


Strategy&

0

50,000

40,000

30,000

10,000

80,000

70,000

20,000

60,000

2007 20152012 2013 20142011201020092008

Deal Value

US$m

Global M&A in OFS 2007 – 2015

Note: All deals >US$10m. Completed and Pending only


Deal values in OFS peaked in 2014 and there have been some transformative developments in M&A

Halliburton – Baker Hughes

US$37.5bn

represented 50% of deal values.

However, likelihood of deal

completing uncertain as US DoJ

challenges transaction on anti trust

grounds

Target Acquirer Value

US$bn

Status

• Baker

Hughes

• Halliburton • 37.5 • Pending

• Cameron • Schlumberger • 15.2 • Pending

• Dresser

Rand

• Siemens • 7.6 • Completed

• Saipem • Private Equity • 0.5 • Pending

Recent Deals in OFS Selected Examples 2014 – 2016

54

Strategy&

With low oil prices we are witnessing a number of strategic plays by OFS players…

55

Activity Rationale & Comments Example

• Transformational

M&A

• Larger players focus on vertical integration

• Develop one shop capabilities

• Leverage production efficiency technology to

win more work

• Halliburton / Baker Hughes

• Schlumberger / Cameron

• Bolt on

acquisitions

• Tactical acquisitions to help entry into new

geographies, develop and diversify

technology offer or fill in product portfolio

gaps

• Proserv / Nautronix (access to technology -

subsea controls and communications market)

• Fluor / Stork (access to European customer

base)

• Alliances • Strategic alliances common method of

achieving mutual benefits

• More of these alliances anticipated in 2016

as companies broaden reach across the

supply chain

• FMC and Technip forming Forsys Subsea

(aimed at reducing cost of subsea oilfield

exploration)

• Petrofac and McDermott entering into strategic

marketing alliance to pursue opportunities in

subsea, umbilicals, risers and flowlines sector

• Cost reduction • Headcount reduction, capex reduction,

dividend cuts

• All players

Strategic Responses to Low Oil Price Selected Examples


Strategy&

…with ongoing speculation of more sector consolidation

56

Company Comments

• In December 2015 rumours of potential merger

between Technip and FMC

• Technip has formed offshore alliance with FMC

(Forsys Subsea)

• In October 2015 National Oilwell Varco announces

interest in possible acquisitions

• In January 2016 speculation that Wood Group to be

target for SNC

• In February 2016 Weatherford announced it was

abandoning plans to undertake M&A and instead

focus on internal re-organisation efforts

Rumoured M&A Deals Recent and Selected Examples


Strategy&






• M&A Trends





• Appendices

57

Strategy&

Given the high cost of production in offshore UK, low oil prices are undermining production economics

58

0

20

40

60

80

100

Ind

on

esia

Me

xic

o

UK

US

Bra

zil

Au

str

alia

Norw

ay

An

go

la

US$/bbl

Current

Brent

price

Average Offshore Breakeven Oil Price Selected Countries


At current oil price,

production economics

are challenging in UK

Strategy&

As a result we are witnessing decrease in exploration activity, with number of offshore rigs in decline…

59

0

10

20

30

40

50

Number

Ø 24

-46%

e2

01

6

20

15

20

14

20

13

20

12

20

11

20

10

20

09

20

08

20

07

20

06

20

05

Number of Exploration Wells Drilled UK North Sea

Source: DECC; Baker Hughes; Strategy& research

In past 10 years average of 24

exploration wells drilled

annually

6

9

12

15

18

21

09

/14

09

/15

01

/14

05

/14

07

/14

05

/15

01

/16

-60%

Number

11

/14

11

/15

01

/15

07

/15

03

/15

03

/14

Number of Offshore Rigs UK North Sea

Strategy&

…and increasing likelihood of decommissioning of smaller marginal fields

60

Decommissioning Expenditure 2015 - 2024

Source: Oil & Gas UK; Strategy& research

Comments

• Smaller fields with high production costs may be approaching end of their lives and are prime candidates to be shut. Halting output is first step towards abandonment

• In February 2016 Wood Mac said operators were likely to halt output at 140 (out of 330) offshore UK fields during the next five years, even if crude rebounded from US$35 -US$85/bbl

• Decommissioning industry still in early days as Shell prepares to dismantle first of four platforms in Brent field, while Fairfield is about to abandon Dunlin. As sector declines, service providers anticipate decommissioning may generate more revenue to compensate diminishing spend in exploration

• To abandon one of North Sea’s bigger platforms, and plug up to 30 wells, can cost more than £700m

Strategy&

This is against a backdrop of high capex spend in 2014, forecast to decline by 40% in 2016 and then recover modestly

61

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

£m

-40%

20

10

20

11

20

19

20

16

20

20

20

12

+11%

20

18

20

17

20

13

20

15

20

14

+25%

Comments

• According to Rystad data, UKCS capex declined from a high of £14.8bn in 2014 to £8.9bn in 2016 (40%) drop

• Capex is forecast to recover gradually rising to £13.4bn by 2020

• Average capex in UK N Sea in past 10 years has been £8bn

• Rystad estimates breakeven oil price for UK offshore US$67/bbl. With current oil price hovering at US$30/bbl, production economics in UKCS is challenging

• Given current prices further projects could be deferred while marginal fields might be shut in or decommissioned

• Statoil’s Mariner field deferred start up to 2018. FIDs for Rosebank (Chevron) and Jackdraw (BG) have been delayed

Capex Spend UKCS 2010 - 2020

Source: Rystad Energy; MTO 2016 IEA; Strategy& research

Strategy&

Record high capex in 2014 resulted in new project start ups and improved field reliability, raising oil production

62

0

200

400

600

800

1,000

1,200

1,400

000s bbls/d

+16%

20

10

20

11

20

19

20

16

20

20

20

12

+4%

20

18

20

17

20

13

20

15

20

14

-11%

Comments

• According to Rystad, oil production in UK rose to 976k bbls/d in 2015 (16% up on previous year). Growth stimulated by record capex investments in 2014

• New projects contributing to growth included Nexen’s Golden Eagle, BP’s Kinnoul projects, EnQuest’s Alma and Galia fields among others

• Total’s £3.5bn flagship project Laggan Tormore project in west of Shetlandsstarted gas production in February 2016

UK Oil Production 2010 - 2020

Note: Production includes crude oil, condensate and NGL

Source: Rystad Energy; MTO 2016 IEA; Strategy& research

Strategy&

Gas production also saw an uplift in 2015 with overall oil and gas production up in 2015 by 12% to reach 1.6m bbls/d

63

0

200

400

600

800

1,000

000s bbls/d

-2%

-9%

+7%

20

20

20

19

20

18

20

17

20

16

20

15

20

14

20

13

20

12

20

11

20

10

UK Gas Production 2010 - 2020

Note: Production includes Gas and Unsold Gas (flared)


UK Oil and Gas Production 2010 - 2020

0

500

1,000

1,500

2,000

2,500

+2%

000s bbls/d

20

14

20

13

20

12

20

11

20

10

-10%

+12%

20

20

20

19

20

18

20

17

20

16

20

15

Oil

Gas

Strategy&

With the industry currently in turmoil, government and operators are looking for solutions…

64

UK Government

• UK PM to set up oil support group for N Sea. Chaired by Energy Secretary

• £250m rescue package for Aberdeen. Includes new O&G Technology Centre to carry

out R&D on extraction from small oilfields

• Scotland secretary promoting partnership between Aberdeen and Mozambique town

of Pemba, to help latter become offshore oil hub

Oil & Gas UK

& Operators

• Oil and Gas UK pushing for lower taxes such as reducing corporation tax (currently

30%) and Petroleum Revenue Tax (currently at 35%). However, some operators say

this alone will not encourage further investment in North Sea

• Industry asking government to relax rules about who pays for decommissioning of

oil platforms

• Premier CEO advocating regulator obliges companies to invest in ageing

infrastructure to ensure asset integrity


Strategy&

…and there are some players who will be well placed to weather this uncertainty – such as Apache

65

Comments

• Apache entered North Sea in 2003 after acquiring ~97% working interest in Forties field

• Apache in 2014 was looking to divest or spin off North Sea assets as part of a broader split between its domestic and international operations. However, now committed to stay in North Sea

• Apache’s success in North Sea based on improved efficiency and low operating costs. In particular Apache touts advantaged infrastructure position it has built up over years

• Controlling its own infrastructure means that Apache enjoys greater amount of production uptime than many of its peers, giving it a production efficiency rate of more than 90%, compared to an industry average of 65% on UKCS

Apache Operations in the N Sea 2015 - 2024


Strategy&

Oil & Gas UK recently released their 2016 Activity Report highlighting some of long term challenges facing the sector

66

“The UK Continental Shelf (UKCS) is entering a phase of ‘super maturity’…”

Oil & Gas UK’s 2016 Activity Survey

“The report also illustrates that in this next phase, the basin must compete fiercely in the current price environment to attract the limited remaining global investment.”


“…the report demonstrates the vital need for a coherent approach by industry, the regulator, and the UK and Scottish Governments to boost competitiveness and confidence. Together, we need to transform the basin into a highly

competitive, low tax, high activity province, which is attractive to a variety of operators and sustains and supports the supply chain.”


Source: Oil & Gas UK; Strategy& research

Strategy&






• M&A Trends





• Appendices

67

Strategy&

There remain many key geo political risks worldwide in 2016 which may impact oil price…

68

Testing of hydrogen

bomb in North Korea

P5+1 and Iran reach

breakthrough deal to wind

back nuclear aspirations in

exchange for reversal of

economic sanctions. KSA

anxious about resurgent

Iran

Peace settlement in Syria

remains elusive. Opposition

fragmenting with radicals

gaining foothold. Russian

intervention escalating

tension. In March 2016

Russia partially withdrawing

troops

Growing influence of Al

Quaeda and its affiliates in

North Africa, Sub Sahara

and East Africa

Sanctions against Russia

continue with Putin pursuing

more aggressive foreign

policy (Syria)

Source: Deutsche Bank; Press Search; Eurasia Group; Strategy& research

Civil war in Libya

worsening. Libyan exports

at minimal levels. Struggle

for control expected to

continue throughout 2016.

IS militants growing

presence

Saudi lead coalition

campaign against Iranian

backed Houthis in Yemen.

‘Export of radical Islam’

with terrorist attacks on

Charlie Hebdo in

France and then on

Paris. Similar threats

across Europe

including Brussels

attack

Rising tension between KSA and Iran breaking

diplomatic ties

Saudis unsuccessfully pushing for production

freeze with major producers

In US crude export ban was

lifted in Dec. 2015

Strategy&

…rising tension between KSA and Iran (major OPEC producers) has increased geopolitical risk in the region

69

Comments

• Catalyst for recent escalation was Saudi Arabia’s execution of Shia cleric on January 2 2016

• This led Iranian regime to warn of “divine revenge” and protesters in Tehran to torch the Saudi embassy, causing KSA to remove its diplomats and break off relations

• Both countries already fighting proxy conflicts in Syria, Iraq, Yemen, Bahrain and Lebanon

• KSA concerned by US seeking détente with Iran which will encourage latter to play greater regional role

• From an oil perspective, Iran keen to increase production and exports to generate more revenue once sanctions lifted. This will align with KSA strategy to flood market

• However, reduces likelihood of Iran and KSA co operating to cut production to bolster oil price

Kuwait

Bahrain

Qatar

UAE

Oman

Yemen

Saudi Arabia

Iraq Iran

Syria

Lebanon

Jordan

Israel

Egypt

Areas of Conflict / Proxy War – Iran and KSA

Source: Bloomberg; Press; Eurasia Group; Strategy& research

Strategy&

Additionally G7 making historic announcement to phase out fossil fuel emissions to combat climate change…

70

Comments

• In June 2015 G7 leaders agreed “deep cuts in global greenhouse gas emissions are required with a decarbonisation of the global economy over the course of this century”.

• G7 supported cutting greenhouse gases by 40% to 70% by 2050 from 2010 levels

• Pledge to mobilise US$100bn a year from public and private sources by 2020 to help poorer nations tackle climate change

• Agreement to speed up renewable energy deployment in Africa

• However, challenges remain:

– Will Paris meeting produce agreement to ensure G7 goals met?

– Other emerging countries (such as China) will need to make significant contribution

• However, growing support in business for action (Norway’s Oil Fund, Axa)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000 0.5%1.9%

201420102005200019951990

Million tonnes

Global CO2 Emissions By Region

N America Asia Pacific

Europe & EurasiaMiddle East

S & C America

Africa

Source: BP Statistical Review of World Energy June 2015; Strategy& research

Strategy&

…followed by COP21, resulting in all countries committed to decarbonisation but current pledges fall short of <2C

71

2.7

3.6

4.5

0 1 2 3 4 5

Based on

Paris pledges

2C Threshold

Celsius

Following

current policies

If countries

do not act

Average Warming Projected by 2100

Note: 1) Some aspects will be legally binding, such as submitting emissions reduction target and regular review of that goal. However, targets set by nations

will not be binding under the deal struck in Paris.

Source: Climate Action Tracker; Strategy&

Comments

• COP21 in Paris resulted in deal to attempt to limit rise in global temperatures to “well below” 2C and pursue efforts to limit it to 1.5C

• Pact is first to commit all countries to cut carbon emissions and agreement is partly legally binding and partly voluntary1. Deal will come into being in 2020

• Countries to peak greenhouse gas emissions as soon as possible and achieve balance between sources and sinks of greenhouse gases in the second half of this century

• Progress to be reviewed every five years

• US$100bn a year in climate finance for developing countries by 2020, with a commitment to further finance in future

Strategy&






• M&A Trends





• Appendices

72

Strategy&

After a prolonged period of bearish sentiment about oil prices (lower for longer), market beginning to be bullish

73

H1 2015 H2 2015 H1 2016

Oil Price Quotes Selected 2015 - 2016

"I would not be surprised if the price falls to

as low as around $20...”

Nobuyuki Nakahara, former oil executive and

ex-member of the Bank of Japan's policy board

January 2015

"…maybe prices have reached a

bottom…How long will it last? I don’t

know . . . but I am sure the price will

rebound.”

Abdalla El-Badri, OPEC Secretary General

January 2015

“Oil in the $20s is possible…$20-$25 oil price

scenarios are possible.”

Adam Longson, Morgan Stanley, January 2016

"While we are increasingly convinced that

the market needs to see lower oil prices for

longer to achieve a production cut…we may

ultimately clear at a sharply lower price with

cash costs around $20 a barrel Brent

prices…”

Goldman Sachs, September 2015

"We have go to plan on this [price] being

down, and we don't know exactly what level,

but certainly a year, I think probably two and

maybe three years.“


January 2015

"It is a very, very volatile business in terms

of supply and demand. The oil price

responds to very small mismatches

between supply and demand…”

Ben Van Beurden, Shell CEO, September

2015

“We don’t anticipate a recovery in 2016…I

don’t know if the price will be at $40, $45,

$50, $60…”

Patrick Pouyanne, Total CEO, December

2015

“The oil price is growing…”

Igor Sechin, CEO Rosneft, April 2016

“I do think we’ve seen the bottom…”

Jeremy Weir, CEO Trafigura, April 2016

“Traders call end to slump as oil price hits

highest level this year”

Financial Times headline, April 2016

“If a US$100 was a benchmark before, I

believe a level like US$60 to US$70 will

secure oil for the foreseeable future.”

Torbjorn Tornqvust, CEO Gunvor, April 2016

LOWER FOR LONGER SENTIMENTBleak and Uncertain Light at end of tunnel?

Strategy&

As for the long term future oil price forecasts are varied

74

Sources: EIA-AEO-Early 2015,IEA World Energy Outlook 2015; Rystad Energy; Strategy& research

Brent Crude Price Historic and Outlook Various Sources

Long-Term OutlookHistorical Evolution

0

20

40

60

80

100

120

140

160

180

200

220

2014

2015

2004

2005

2007

2010

2008

2012

2011

2013

2006

2009

2016

2017

US$/bbl

2024

2038

2030

2029

2021

2018

2025

2028

2017

2020

2031

2035

2037

2039

2033

2032

2019

2023

2040

2027

2034

2026

2036

2022

EIA Low Oil Price

EIA ReferenceEIA High Oil Price

Rystad Energy

IEA Crude Import (real terms - new policies)

IEA Crude Import (real terms - current policies)

Strategy&






• M&A Trends





• Appendices

75

Strategy&

Cost Curve by Reserves

76

20

0

6,0004,0000 2,000

40

120

100

80

60

Production costUS$/bbl

5,0003,0001,000-1,000-2,000

160

140

Long Term Oil Supply Cost Curve 2013 IEA Update

Remaining technically recoverable oil resources (bn bbls)Note: Unless otherwise indicated, all material in figures and tables derives from IEA data and analysis. "Other conventional oil" includes deepwater. No carbon pricing included. Synfuel

resources are difficult to assess due to competition with other natural gas and coal uses. Biofuels are renewable and, in theory, not resource constrained

Source: IEA Resources to Reserves 2013

40

20

0

160

140

120

100

80

60

Already

produced

Kerogen

OilExtra Heavy

Oil and

Bitumen

MENA

Conv. Oil

OtherCon. Oil

Non-CO2-EOR

CO2-EOR

Arctic

Ultra-Deepwater

LTO

GTL CTL

Eth

anol -

conventional

Eth

anol -

cellu

losic

Bio

die

sel-

conventional

Bio

die

sel-

advanced

Synfuels Biofuels

On a sustained basis

current oil price will impact

production economics of

more expensive

unconventionals

Strategy&

100

70

40

30

80

0

10

50

60

90

0 15 2510 205 85

20

7065 75 90 958030 35 554540 6050

US$/bbl

2020

Production

million boe/d

Current Brent

spot price

Global Liquids Supply Cost Curve 2020

Onshore Middle East

Offshore

Shelf

Extr

a H

eav

y O

il

Deep

wate

r

On

sh

ore

Ru

ssia

Onshore

RoW

NAM

Shale

Oil S

an

ds

Source: Rystad Energy

Ult

ra D

eep

wate

r

Cost Curve by Production

77

Strategy&

0

100

200

300

400

500

600

700

800

900

1998 2000 2002 2004 2006 2008 2010 2012 2014

Index

Energy Commodity Price Trends Selected Commodities - Rebased

Japan Coking Coal Import cif

Japan LNG

German Av. Gas Import

Brent Crude

Heren NBP Gas

WTI Crude

Coal NWEurope

Henry Hub Gas

US Coal Spot

Brent and WTI have tailed off

with WTI discounted vs. Brent

Coal price broadly in decline


Regional dynamics of gas.

Japan LNG rising with Heren

and German import price in

decline

US gas price beginning to

recover

Commodity Pricing Trends

78

Strategy& 79

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