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Oil PricesThe shale, the plunge and the outlook
DR. EROL MET INSEM ENERJ İ , SUSTAINABIL ITY , ENERGY & MANAGEMENT IAEE EURASIAN CONFERENCE – AUGUST 2016 BAKU- AZERBAI JAN
1/1/2005
7/1/2005
1/1/2006
7/1/2006
1/1/2007
7/1/2007
1/1/2008
7/1/2008
1/1/2009
7/1/2009
1/1/2010
7/1/2010
1/1/2011
7/1/2011
1/1/2012
7/1/2012
1/1/2013
7/1/2013
1/1/2014
7/1/2014
1/1/2015
7/1/2015
1/1/2016
7/1/20160
20
40
60
80
100
120
140
160Brent (USD/bbl; 2005-2016)
Peak 145 $/bbl
Financial recovery
Global ffinancial
crises
Ddemand growth 2007-2008
Lowest 28 $/bbl
Shale boom
Steady State
Deep at 35 $
Oil prices- the last 10 years
Sources : IEA, Platt's
0 1 -Jan -1
6
1 1 -Jan -1
6
2 1 -Jan -1
6
3 1 -J an -16
1 0 -Fe b -1
6
2 0 -Fe b -1
6
0 1 -Mar -1
6
1 1 -Mar -1
6
2 1 -Mar -1
6
3 1 -Mar -1
6
1 0 -Ap r -1
6
2 0 -Ap r -1
6
3 0 -Ap r -1
6
1 0 -May-1
6
2 0 -May-1
6
3 0 -May-1
6
0 9 -J u n -16
1 9 -J u n -16
2 9 -Ju n -1
6
0 9 -Ju l -1
6
1 9 -Ju l -1
6
2 9 -Ju l -1
6
0 8 -Au g-1
62025303540455055
Bre nt, U SD/bbl 2 0 1 6
49.9$/b
Oil Price Range has significant impacts on the economy of producing countries
60$ /b range is the level that covers the cost of 90% of all production techniques.
50$/b and below create high risks with many producing countries
40 $/b range above breakeven point of many OPEC countries but way too low for new investments
Shale plays lie at the higher end of the non-opec marginal cost curve, as infrastructure build-outs, decline rates, high levels of rig activity keep costs high
Sources : Cost Figure : Rystad Energy / Deloitte and Country Risk Figure: Oliver Wyman Analysis
Average Cost $/bbl
Production mb/d
60 70 80 90
80
90
10
10 20 30 40 50
70
60
50
40
30
20 $27
$41
$50 $51 $52
$65
$70
On Shore Middle East
Offshore Shelf Heav
y O
il
Onshore Russia Onshore RoW
Deepwater
Ultr
adee
pwat
er
N.AmericaShale
OilS
ands
Arcti
c
OPEC Avg.
Non-OPEC Avg.Global Avg.
Oil Production and Consumption- Regional Dynamics
World Oil Production growth in 15 years is 22.4% Sustained production growth, avg 5 years : 1.9% 2015 growth : 3.2%
Rate of increase in production is dominant in North America by 42.2%, whereas OPEC proved a stable growth by 8.8 %
Rate of increase in consumption has been dominant in Asia Pacific and Middle East (17%)
World Oil Consumption growth in 15 years is 23.4% Steady consumption growth, avg 5 years : 1.4% 2015 growth : 2.0 %
2010 20150
102030405060708090
100
35.1 38.2
34.3 33.8
13.8 19.7
Oil Production, mb/d
OPEC NON OPEC NORTH AMERICA
8.8%
42.2%
2010 20150
20
40
60
80
100
42.7 42.0
36.2 42.0
9.9 11.0
Oil Consumption mb/d
Total North America + Europe Total Asia Pacific + Mid EastROW
17%
Source Data : BP Statistical Review
18%
Global supply and demand approached a balanced state..
Demand growth in 2016 expected*; 1.4% mb/d Total demand expected*; 2016 : 96,1 mb/d; 2017 :
97,4 mb/d While OECD demand is not growing, demand growth in
Non OECD countries dominates the growth.
Source : Oil Market Report, IEA
Average 1.2 mb/d oversupply in market for a period of 9Q
Supply growth 600.000 b/d Total supply 2016 : 96 mb/d
2013 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16 2Q16 3Q16 4Q16 2016 42.0
43.0
44.0
45.0
46.0
47.0
48.0
49.0
50.0
51.0
46.145.8
46.5
45.3
46.746.3
46.246.6
45.9
46.7 46.546.4
45.947.2
47.1
48.8 49.0 49.248.5
48.6
49.7 50.150.4
49.7
Demand Growth, mb/d
Demand OECD Demand Non-OECD
Perfect Storm!Three important pillars of the low oil price period
1- Implied Oversupply of the Oil Markets 2- Strong USD 3- OPEC trying to keep market share
2013 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16 2Q16
-0.6
0.81.5
2.2
1.31.7 1.6
1.3
0.2
Supply Demand Balance mb/d
Avg 1.2 mb/d for a period of 9Q
Jan-14
Mar-14
May-14
Jul-14Sep
-14
Nov-14Jan
-15
Mar-15
May-15
Jul-15Sep
-15
Nov-15Jan
-16
Mar-16
May-16
Jul-16
2535455565758595
105115
75
80
85
90
95
100
Oil Prices & U.S $
Crude b/$ $ TWBC
Average 1.2 mb/d oversupply in market for a period of 9Q
Strong USD since the end of 2014, trade weighted basket
OPEC not imposing quota keeping the growth
Sources: Oil Market Report EIA, World Bank and OPEC
Contributors and consequencesMiddle East back in Playfield A period of slower demand growth
in Asia Pacific
Iraq’s oil production shows steady increase , 1.1 mbd increase in 2015 reaching to 4.0 mbd
Iran, after sanctions, now back to the stage with potential to add 1.0 mbd capacity in 2016
Low Oil prices has led to lower energy investments.
Total annual investment in Energy has dropped from 90b$ to around 40b$ in a period of 3 years.
Around 200 energy investment projects being pushed back on an annual basis
Economic growth in China, representing 40% of the growth of the world oil consumption has slowed down
The equivalent demand dropped by 1.0 mbd compared to 2014 levels.
Sources: BP Statistical Review and World Bank
Oil Prices and Supply Demand Characteristics* past 10 years
• Oil prices have rallied between 30$ - 140$ range over the last 10 years. The main drivers were; 2005-2008: Demand growth, slow response from production, OPEC
politics on higher prices, instabilities in oil producing countries. 2008 : Global financial crisis 2008-2014 : Economic recovery, OPEC politics toward high prices and
balanced s/d, price level allowed new investments 2014- 2016 : Sustained over supply, new technologies, production
increase in Mid East, OPEC’s market share 2017 - .. : Potential balanced s/d outlook ?
Graph a sensitivity chart.. % oversupply vs price variation
Change in drives
Pricing and investments strongly influenced by slow / conventional productions techniques
Producers and political stabilities determine the boundaries of the price band
New technologies allow very fast exploration to production stages , in large quantities
Less impact from producers cartels
More fluid, therefore more volatile markets
More rigid, less
volatile
Less rigid, more volati
le
Surge of Oil Production in US
US oil production increased around 1.0 mbd every year since 2012
Approximately 4.0 mbd production increase from 2012 to 2015 ; equivalent to Iraq’s production
From 2008 to 2014, total US oil production has risen dramatically by 73% from around 5.0 to 8.6mbd
Shale Oil production was very quick, reaching to 5.0mbd level in five years time
The shale sectors contribution to GDP was about 1.5%
Source: US Energy Information Administration
Shale Oil has been the name of the game
Future Outlook – Influencers of the S/D characteristics and price outlook
1. Can the Shale Oil Industry sustain production levels with low oil prices and for how long ?
2. How the Oil Producing Countries (mainly OPEC) would respond to the new Economics of Oil ?
3. What has been the impact of low oil prices in the Conventional World and to the investments in E&P world ?
4. How the policies around the climate change and environmental policies and would the technological developments in the Renewable Energy Industry make energy prices competitive to oil ?
IMPORTANT DISCUSSION POINTS
Can the Shale Oil Industry sustain production levels with low oil prices and for how long ?
Bakken Region Permian Region
Source: US Energy Information Administration
Eagle Ford Region
Can the Shale Oil Industry sustain production levels with low oil prices and for how long ?
Significant drop in the number of active rigs since 2015,
Increased productivity per well Reduced operating costs, at a level of 30$ The upward production trend would be
temporarily disrupted 50-70$/b level could trigger idled rigs back to
action quickly
Shale Oil revolution likely to continue until at least 2020 but with much slower rate!
Production mbd
Tight oil
Other fluids
15 mbd
HistoryHistory Projection
Tight Oil
Natural Gas Plant Fluids
Bio Fuels
Crude Oil
Other Fluids2015 2040
10 mbd
15 mbd
US Production of Petroleum and other liquids 2000 -2040
2000Source: Energy Information Administration
Active Rigs
How the Oil Producing Countries (mainly OPEC) would respond to the new Economics of Oil ?
• OPEC has chosen to stay competitive on pricing in November 2014
Represents 40% of the Oil Market Low cost production compared to
shale Longer term continuity per well Higher Spare capacity Large yet to find fields
OPEC likely continue to remain on the market prices with no quota impose to push prices up
1Q - 03
4Q - 03
3Q - 04
2Q - 05
1Q - 06
4Q - 06
3Q - 07
2Q - 08
1Q - 09
4Q - 09
3Q - 10
2Q - 11
1Q - 12
4Q - 12
3Q - 13
2Q - 14
1Q - 15
4Q - 15
3Q - 06
2Q - 17
0.00.51.01.52.02.53.03.54.04.55.0
0.00.51.01.52.02.53.03.54.04.55.0
OPEC Spare Capacity, mb/day
1213.4; 81%
279.2; 19%
Proven Oil Reserves, bn b
OPEC Non-OPEC
Sources: BP Energy Outlook and OPEC
What has been the impact of low oil prices in the Conventional World and to the investments in E&P world ?
• Spending on Exploration and new investments has fallen down by almost 50% since 2014
• Reduced investments likely to remain low next 5 years
• Total World Rig count dropped significantly since the beginning of the low oil price period
• North America
Investment spending by the global oil industry has fallen by $1 trillion since prices collapsed in 2014.
Add notes McKenzie .. New projects on exp.
Source: Wood McKenzie Source: Energy Information Agency, US
How the climate change and environmental policies would effect the demand side ?
Source: World Bank
Source: Oil and Gas Journal
The impact of the climate change, in terms of water and food resources will be more prominent in Mid East, North Africa and Asia Pacific leading to more pressure on GDP growth in these regions
Significant cost reductions achieved in renewables, mainly in Solar Systems have a potential for fast growth and therefore oil industry will be more dependent on transport industry.
High Oil Reserve regions likely to see more pressure due to effects of the climate changes
Outlook for the Oil Prices? Main driver of the oversupply, shale oil production
increase in the U.S. has slown down Since low Oil Prices, significant reduction in
investments and exploration activities Demand would likely to continue at a pace of 1.2-
1.4mbd rate , leading to a more balanced S/D characteristics.
Shale Oil, by nature, quick to response market conditions
Existing stocks might suppress the S/D driven price hike towards in 4Q of 2016
• Oil price likely to increase in 2017• Forecast expectations dominate around 55 $
range for 2017 and moving up to 65-70$ range in 2018
Survey by WSJ on Sept 2015:2016 average 58.7$/b
Source: Wall Street Journal (above) and collected data from EIA, EIU, World bank, Morgan Stanley, Barclays
Conclusions
Perfect storm, a combination of over supply, strong $ and weakened demand was the main driver of the oil price plunge.
Conditions of perfect storm no longer exist leading to more balanced supply demand characteristics and therefore markets are expected to see a price increase in 2017.
Although forecasting on future outlook of oil prices has proven “big surprises” for many experts, there exists sufficient technical base for price range of 50-60 $ /b in 2017.
Shale Oil, although the production hike has ended and reached to a stable level in the US, the potential for duplication in other countries and versatility of the new technologies to expand quickly in the existing fields, still warrants a quick pick up of the production
Lack of investments, mainly in offshore projects and new exploration projects would impact the production growth in the conventional side, whereas OPEC would have the potential to fill the gap.