Going through Another Cycle

Transcription

1 Global Rig Count Down 5 Since Nov ; Recent Uptick Driven by North America Capital spending cut significantly IEA: $583 billion upstream (25% less than ) IEA: Further 24% drop expected in 216 Going through Another Cycle Global layoffs >3, ~5 6K in greater Houston Gürcan Gülen, Ph.D. Bureau of Economic Geology s Center for Energy Economics Jackson School of Geosciences The University of Texas at Austin September 16, 216 Petroleum Engineer s Club of Dallas 1 TX: Rig Count Seems to be Rebounding 2 Permian is Coming Back; EF Stable; Barnett? Drilling is very responsive to the oil price (obviously) NGL prices traditionally linked to oil price; but today ethane is priced as methane (mostly) Oil and natural gas prices decoupled since the late 2s Calculations based on Baker Hughes and EIA DPR data. Calculations based on Baker Hughes rig data and EIA price data.

2 What to Expect Going Forward? Increasing defaults, B or lower, many distressed borrowers Midstream downgrades: the MLP model under pressure More bankruptcies and consolidation / rationalization Largest M&As so far: Shell BG; ET Williams (?); HAL BH, SLB Cameron Headline was from slow in E&E M&A on mainly September due to 15, oil 216: price Gulf uncertainty megadeal leading suggests to irreconcilable merger season bid ask could spreads finally arrive Reserve replacement needs will drive large companies to look for value add assets or shrink, change focus, something else? Numerous bankruptcies; some smaller companies targets for acquisition (distress sales); great desire to cherry pick to sustain portfolio high grading Demand should start increasing & supply should start falling short 5 Fundamentals Typical Cycles Excess Decreases Drilling Activity Decreases Higher prices discourage Lower prices encourage Shortfall Time Based on Tom Bates, Lime Rock Increases Drilling Activity Increases Excess Excess supply might continue: Iran, Iraq, Libya, ongoing projects, Saudi policy Demand growth might remain lackluster: slower economic growth in China+, energy efficiency & conservation, alternative fuels, environmental factors NA natural gas: similar story mostly 6, $/BBL $16 $14 $12 $1 $8 $6 $4 $2 $ Cushing, OK WTI Spot FOB ($/Bbl) Europe Brent Spot FOB ($/Bbl) WTI Brent Spread Saudi Market Share Strategy I, to 1999 Desert Storm, 199 USD Neutral Asia Financial Collapse, China "Coming Out" Party, /11 Iraq War, 23 6 U.S. Europe Financial Collapse, 28 9 "Arab Spring" $1 Saudi China The Party's Market Over, Share $5 Strategy II,... USD Neutral $ $5 $1 $15 $2 $25 US LTO Surplus $3 Spread: WTI minus Brent, $/BBL Crude oil is a global commodity Sort of $16 Henry Hub Monthly Average Spot ($/MMBtu) $14 $12 $1 $8 $6 $4 $2 $ Avg Feb 89 Feb 92 ($1.61) Avg Mar 92 Dec 98 ($2.11) Avg Jan 99 Dec 1 ($3.51) Avg Jan 2 Sep 9 ($6.32) Avg Oct 9 Present ($3.64) GOM Hurricane Events References: Feb 27, "Henry Hub at $3 or $5" published (Foss, OIES NG 18) Dec, "Henry Hub at $3 or $1" published (Foss, OIES NG 58) 1995 Energy Policy Act El Paso pipeline explosion, Carlsbad, NM August 19, 2 California market failure, 2 21 Enron bankruptcy December 4, 21 U.S. shale gas drilling boom Peak LNG imports with new regas capacity March August 27 Lehman Brothers bankruptcy September 15, 28 U.S. shale oil drilling boom U.S. natural gas is not global but more of a commodity Will U.S. LNG exports integrate U.S. and world gas markets?

3 Despite Sinking Rig Counts, Production Proved Resilient, Especially for Natural Gas for a while Upstream Costs Decline Less and Slower The rig count does not mean the same as before: Cluster drilling: more wells per rig Infill drilling: less less cost (?) in areas with proven high productivity Improved completions Focusing on best acreage 9 High prices Input costs increase Low prices Sticky input costs Smaller revenue Margin squeeze What percentage of these reductions are temporary? 1 To rebuild cash positions companies will need returns substantially better than 1 Mainly Gas Producers Cost Stack with 1 Return ($/BOE) Cost Stack with Return Equal to Capex ($/BOE) $ $1 $2 $3 $4 $5 $6 3 Year MA FD Costs ($/BOE) Cash Costs ($/BOE) 1 Return ($/BOE) Mainly Oil Producers $ $2 $4 $6 $8 $1 3 Year MA FD Costs ($/BOE) Cash Costs ($/BOE) FD Return ($/BOE) Cost Stack with 1 Return ($/MCFE) $ $2 $4 $6 $8 3 Year MA FD Costs ($/MCFE) Cash Costs ($/MCFE) 1 Return ($/MCFE) Cost Stack with Return Equal to Capex ($/MCFE) $ $5 $1 $15 3 Year MA FD Costs ($/MCFE) Cash Costs ($/MCFE) FD Return ($/MCFE)

4 Improvements are Mainly Portfolio Effects All Companies: Consequences for Gas Yield Oilier ,36 1,164 1,255 1,34 1,351 1, Gassier , ,462 1,536 1,674 1,871 2,12 2,135 2,232 4, 2,5 1,5 1, 5 Natural Gas Share of Annual Production 64% 64% 62% 59% 55% 51% 49% US Total Production () Natural Gas Production:Total U.S. Production Today, NGLs do not Provide as Much Value Cheap NGLs Aided an Industrial Renaissance Without ethane uplift, upstream economics? Provide uplift to upstream economics Some Demand Constrained Can US ethylene compete if ethane P and/or naphtha P? collapse & C2 rejection uplift reduced Global ethylene capacity Demand? Export Markets? Export of C3 C4 & Ethylene Plants Global ethylene capacity has been increasing, stagnating & uncertain; some old units will probably retire but capacity expanding in ME and China (cheap feedstock, subsidized) 15 CEE using data from Oil & Gas Journal

5 Industrial Gas Demand in the U.S. Reference Case: 83 Projects worth $65 billion 2.3 BCFD add High Case: 112 Projects worth $98 billion 3.5 BCFD add Some of the projects might be delayed / cancelled in the current price environment. CEE Dispatch Modeling: NG Burn Increases Significantly Under Most Scenarios 6 TCF range fro 23 natural gas use for power generation: o Low estimate (11 TCF): more renewables, higher NG price, and lower load growth. o High estimate (17 TCF): less renewables, lower NG price, higher load growth, and premature nuclear retirements Gas_for_Power_Gen_Outlooks Aug16.pdf Is U.S. LNG Competitive? Lower than expected gas Economic slow down Japan re opening nuclear plants Increased & more effective use of renewables Coal, nuclear in China, India Alternative supplies: Increased pipeline flows (Russia) World LNG market is in excess supply until the early 22s Domestic (shale) gas production picking up globally (long term) A Strong Demand Stack Scenario Power 23 = 17.3 (AEO 216 Ref: 11 same as CEE min) AEO Highest Gas Use estimate for 23 is 33.5 TCF under the High Oil and Gas Resource scenario. Exports almost double in that scenario. No significant change in industrial consumption CEE analysis; EIA AEO, AEO 216 2