EMEA energy: 2016 outlookPhilipp Chladek, Salih Yilmaz

Bloomberg Intelligence analysts

EMEA oil & gas E&P 2016 outlook

Low oil prices separate industry wheat from chaff

OPEC’s unfolding strategy for tolerating cheaper crude has shifted pricing power away from Saudi Arabia and toward shale producers in the U.S. If it persists, higher-cost development projects such as those in the North Sea may be at risk. Operators with strong balance sheets and room to cut costs are more likely to prevail.

M&A activity may reappear on a large scale only when price volatility recedes. The remainder of 2015 may bring more clarity about the magnitude of Iran’s return to global energy markets.

Shale, emission laws mold a new oil world with many implications

Potential emission limits and the American shale boom are the most influential factors on global oil markets. Cogent emission laws may limit oil use and keep the most costly-to-extract resources underground. This may cap oil prices and trigger harsh cost competition among suppliers.

Shale may profit from cost flexibility and act as price stabilizer. The West’s improved energy independence could lead to a stronger dollar. OPEC has little to throw in the way of the permanent supply shift shale creates.

North Sea needs higher price or technological miracle to survive

The North Sea is one of the most expensive areas to produce oil and gas worldwide. Costs already deemed too high when the price of oil was more than $100 a barrel must be reduced, otherwise the region’s oil industry is at risk.

While some niche assets and conglomerate operations may be able to endure, many smaller mature assets are headed for decomissioning unless a significant cost-saving technology emerges. Regulatory efforts to foster cooperation and cut costs have had limited success so far.

If Iran plays along, billions in gas sales beckon

With Europe’s likely imminent lifting of sanctions against Iran, the country’s authorities must work to create an attractive, legal investment environment so that oil companies return. While considerable risks remain, Iran promises vast resources and has the potential to challenge Russia as a key gas supplier to Europe.

Oil companies will need to invest billions in infrastructure for pipelines or liquefaction terminals and spend years on construction before they can turn any plan into reality.

EMEA refining 2016 outlook

Will Volkswagen scandal be the demise of diesel?

After years of investment into configuring refineries to produce more diesel, the Volkswagen scandal has prompted the question of whether diesel cars are here to stay. Europe, where diesel has the largest market penetration, pioneered the switch to the technology.

European refiners have enjoyed strong refining margins in 2015 thanks to the slump in the oil price, though they are likely to continue to feel pressure from the new megarefineries in the Middle East, which are exporting to Europe.

Volkswagen scandal brings dieselization in Europe into focus

A reversal of the switch to diesel cars in Europe, known as dieselization, has come under the spotlight since the Volkswagen scandal drew attention to the particulate-matter and nitrogen-oxide emissions of diesel cars.

The improved efficiency of gasoline cars and the loss of diesel’s price edge at the pump is bad news for the fuel. Paris mayor Anne Hidalgo said the city will remove diesel cars by 2020. The Volkswagen story may be a catalyst in other major cities considering the same.

Refiners want low oil to stay, keeping margins, throughput high

Refiners may be able to maintain high refining margins and enjoy reduced feedstock costs if crude oil prices stay low in 2016. The industry will probably keep maximizing throughput to reap the benefits of higher margins.

Yet significant refining margins in 2016 may postpone a much-needed capacity cull in Europe short-term. Refiners have enjoyed a very strong year in 2015, with extraordinarily high margins, though Europe’s fundamental overcapacity problem persists.

Middle East refiners may boost exports, pressure Europe margins

European refiners will continue to feel squeezed by growing supply from the Middle East with the new megarefineries coming onstream, and more products being available for export. The Middle East is more competitive in oil-product exports with the surge in new-refinery construction.

More supply will likely pressure product prices, and, therefore, refining margins. In Africa, refineries will need to continue more regularly, and at higher capacity, to meet ever-increasing fuel demand due to the growing population.

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