New Global Pricing Realities Aspen Institute Energy Policy Forum

Transcription

1 420 West 118 th St, New York, NY New Global Pricing Realities Aspen Institute Energy Policy Forum Jason Bordoff Columbia University July 16, 2015 Aspen, Colorado

2 Topics Oil Market Outlook Gas Market Outlook 2

3 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 The Oil Price Drop Shift to a Lower Range Major Oil Price Collapses in Recent Oil Market History Peak to trough % decline Brent Prices $ per barrel -100% -80% -60% -40% -20% 0% The magnitude of the oil price drop is comparable to the biggest oil price collapses in recent history Short of a major supply shock, oil prices may have shifted to a lower price range for an extended period Source: EIA, Bloomberg 3

4 Future Price Expectations Shifted Lower As Well Brent Futures Curves $ per barrel, months into the future Future expectations shifted markedly lower, as reflected in futures curves and revised price decks Supply adjustment is choppy, a lot more oil is available in the $60-65 per barrel range than previously thought The global oil market remains persistently oversupplied, the IEA estimates excess global oil supply at 3.3 million b/d in Q2 2015, a level not seen since the 1997 crash Source: Credit Suisse 4

5 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Drivers of the 2014 Oil Price Crash Crude Oil Production in the US, Libya and OPEC Million barrels per day US Libya OPEC Oil market turned from relative tightness to a growing oversupply from Q Many specific factors contributed to the 2014 oil price collapse: Libyan crude production rebounded from 0.24 mbpd in Jun 14 to nearly 1.0 mbpd in Oct 14 (only temporarily) US production boom continued strongly in 2014 OPEC started ramping up production from mid-2014 Saudi policy shift reflects rational economic decision to boost long-term revenue and market share an historic shift in oil policy governance Source: EIA 5

6 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Factors Behind the Latest Correction Crude Oil Prices $ per barrel WTI Brent Oil price recovery in H largely driven by strong demand response Recent oil price weakness (Brent dropped from $65 on 6/23/2015 to $56 on 7/6/2015) reflects global macro headwinds Chinese macro and stock market wobbles Grexit fears in the Eurozone and an abundance of supply Saudi drilling and production boom Iran nuclear deal imminent Iraqi exports at record levels US oil rig count bottoming out in July Historically high crude and product stocks Source: EIA 6

7 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 New Saudi Oil Policy Reflects Historic Shift Saudi Crude Oil Production Million barrels per day Saudi Rig Count Number of rotary rigs drilling Gas Rigs Oil Rigs Saudi crude production increased by over 0.7 mbpd betw Nov 14 and Apr 15 Crude output averaged ~10.3 mbpd through Q2 2015, up to mpbd last month Saudi oil policy reflects historic shift: Maximize revenue & market share Avoid repeat of 1980s mistakes Position Aramco as leading NOC Ramp up drilling activity Capture full value chain Reduce role of oil ministry Additional pressure to undercut Iran s ability re-enter market & stymie shale Implication: Increased volatility? Source: JODI, Baker Hughes 7

8 The Oil Price Drop Winners and Losers Winners Oil consumers worldwide $50 price drop is equivalent to $1.5 tn reduction in spending on oil annually The global economy Global GDP growth boosted by up to 0.7 percentage points in 2015 and by up to 0.9 percentage points in 2016 (IMF) Subsidy reform Subsidy reforms in India, Indonesia, Malaysia, Kuwait, Egypt, collectively representing nearly 25% of global fossil fuel subsidies in 2013 Losers Major producers OPEC (ex. Iran): oil export revenue down $100B in 2014, set to drop another $350B in 2015 Nigeria: post-election violence largely averted, GDP outlook pulled down by 2.5 p.p. to 4.8% in 2015 by oil price drop Venezuela: GDP projected to drop 7% and inflation reach 96% in 2015 Russia: GDP is set to drop by 3.8% in 2015 (IMF) as a combined result of sanctions and the oil price drop Saudi Arabia: drew ca. $58B from reserves between Aug 14 and Apr 15 The oilfield services and majors Upstream CAPEX cut by 20% in 2015 vs Impact on gas and renewables? Coming soon from CGEP Source: IMF, Citi, Reuters 8

9 Implications for Global Supply High Cost Projects Challenged More than $100B of high cost projects have been delayed/deferred, but lower service costs, fiscal reforms, productivity improvements, access to capital have all blunted the impact of lower prices. US shale: steep capex cuts and rig count drop, but productivity improvements and cost compression continues to bring down the cost curve, resulting in highly resilient supply Deepwater: high risk of delays, but cost deflation and efficiency provides some relief Arctic: today s oil price irrelevant, long-term bet on healthy oil prices and demand post-2030 Russia: production has proved resilient in the short-term as fiscal regime and weak ruble offset negative oil price impact for producers, investments will suffer in the medium-term North Sea: high-capex projects will likely be delayed, but tax breaks (e.g. in UK) and service cost deflation can partially offset the negative impact of the oil price drop Brazil: most pre-salt projects break even below $60, but Petrobras troubles limit investment Canada: 2030 production outlook cut by 1.1 mbpd (from 6.4 mbpd to 5.3 mbpd), announced capex cuts and delays will primarily affect production post-2016 Unless US and Iraq surprise to upside, high capex megaprojects will be needed in the future are we setting the stage for an underinvestment cycle? 9

10 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Is the US the World s New Swing Supplier? US Crude Oil Production and Oil-Directed Rig Count US Crude Oil Production - LHS US Oil Rig Count - RHS Source: EIA, Baker Hughes 2,000 1,800 1,600 1,400 1,200 1, Oil rig count down by 60% since Oct 14, but crude production is yet to decelerate much Repeating experience of natural gas supply Key uncertainties: Shape of the supply curve Access to capital Productivity gains and high-grading Service cost compression Partially drilled but uncompleted wells Has market balancer role shifted to US?: Shale can ramp up & down much faster than conventional but not as fast as Saudi Resilient in face of lower prices US ain t swinging yet High Saudi output leaves little spare buffer 10

11 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Demand Outlook is Key Variable for Price Outlook Liquid Fuels Demand in Selected Oil Importers Y-o-y change, million barrels per day US Europe India China Total Strong demand response in Q surprised to the upside, weather and strong ref. margins also helped Demand boom concentrated in major net oil importers, e.g. OECD Europe, US, India, China Liquid Fuels Demand in Selected Oil Exporters Y-o-y change, million barrels per day Russia Middle East Mexico Canada Brazil Total Demand in future may be limited by global macro headwinds (e.g. in Eurozone and China), strong dollar, reduced energy intensity of GDP growth, and other factors Source: EIA 11

12 Topics Oil Market Outlook Gas Market Outlook 12

13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul US Gas Supply and Pricing US Dry Gas Production and Rig Count Bcf per day, number of rotary rigs drilling Henry Hub Futures Curves $ per MMBtu Dry gas production - LHS Gas-directed rig count - RHS Source: EIA, Baker Hughes, Bank of America, Reuters 13 Impact of oil price drop on natural gas (& renewables) cuts in both directions: Domestically, drop in associated gas & NGL prices vs falling service costs & productivity gains Globally, drop in oil-indexed gas prices vs lower LNG investment In US, gas supply is winning, defying 39% drop in rig count since Nov 14 Production slowdown may be taking shape, but storage is bigger constraint Bottom line: plenty of US gas is available in the $3 to $4 price range LNG export represent a large call on US gas production if volumes disappoint then prices may weaken further

14 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Implications of Lower Gas Prices Cheap Gas Squeezing Coal % 50% 40% 30% 20% 10% 0% Henry Hub Gas Prices $ per MMBtu Analysts price view: $3.5 per MMBtu (real) through 2020 The Share of Coal and Gas in US Power Generation % of total generation, all sectors Coal Gas The share of gas in US power generation exceeded that of coal in Apr 15 for the first time in US history (32% vs. 30%, EIA STEO) The share of gas has continued to expand in power generation due to low gas prices and coal plant retirements (unlikely to change even with Supreme Court EPA MATS decision) Coal plant retirements are expected to be in 2015 at 12.9 GW following a 3.3 GW capacity drop in 2014 More than 5 GW of coal capacity retired in Jun 15 alone Coal stocks have been hammered Source: EIA, Citi Research 14

15 Global LNG Spot Prices Have Shifted Lower As Well JKM (Asia), NBP (Europe) and HH (US) Spot Gas Prices $ per MMBtu Global spot LNG prices have converged since early-2015 Source: Citi Research Current price levels for Aug delivery: JKM (Asia) $7.45 NBP(Europe) $6.7 per MMBtu Significant volumes of US LNG can actually land in Europe Demand for US LNG still likely to be strong, especially given tolling fee nature of contracts Competitiveness of frontier LNG sources (East Africa, Eastern Med, greenfield Australia, Canada) are challenged in new price environment (supportive of renewables) Cheaper oil means cheaper oil-linked gas in Europe & Asia, which lowers electricity prices and undermines renewables and nuclear 15

16 Implications for Global LNG US Export Story Is Not Over Approved and Potential US LNG Export Capacity Billion cubic feet per day Terminal Project Location Non-FTA Capacity (Bcf/d) DOE FTA Application Status Source: Bank of America, DOE, FERC 16 Sabine Pass starts in 2015; Cameron, Freeport, Cove Point and Corpus Christi trains 1-2 are reported under construction (58 mtpa vs. Qatar s 77 mtpa); more FIDs expected in 2015 Approved projects add up to more than 9 bcf/d of new export capacity by 2020 Advanced pre-fid projects represent another ca. 4 bcf/d of export potential DOE Non-FTA Application Status FERC Application Status Status Targeted Export Start Date Sabine Pass Trains 1-4 LA 2.2 Approved Approved Approved Under constr. Q Freeport LNG TX 1.8 Approved Approved Approved Under constr Cameron LNG LA 1.7 Approved Approved Approved Under constr Dominion Cove Point LNG MD 0.8 Approved Approved Approved Under constr Corpus Christi Trains 1-3 TX 1.7 Approved Approved Approved Under constr Lake Charles LNG LA 2.0 Approved Approved Filed Pre-FID Jordan Cove LNG OR 0.8 Approved Approved Filed Pre-FID Oregon LNG OR 1.25 Approved Approved Filed Pre-FID Sabine Pass Trains 5-6 LA 1.2 Approved Approved Approved Pre-FID 2018

17 Policy Uncertainties Domestic EPA s MATS rules: will it survive after Supreme Court defeat? EPA s Clean Power Plan: will it survive legal challenges and Republican Congress? PTC / ITC renewal: will Congress extend the main federal renewable tax incentive schemes? LNG Exports: might LNG volumes significantly exceed or fail to meet expectations? International Paris climate talks: will a meaningful global carbon price emerge? Japanese nuclear policy: what will be the pace and timing of the Japan s nuclear restarts? Iran sanctions relief: can Iran emerge as a major gas producer and exporter? Chinese gas import demand: how fast with Chinese gas demand grow? Will it develop its shale gas resources and/or sign further pipeline deals with Russia? Subsidy reform: will major gas consuming countries incentivize more efficient gas use? 17

18 Thank you For more information contact Jason Bordoff Professor of Professional Practice in International and Public Affairs Founding Director, Center on Global Energy Policy Columbia University (212)

19 Factors Behind the Latest Correction Grexit Fears Greece s slow-motion train wreck continues Grexit now appears the default option, while the task of keeping Greece in the Eurozone is increasingly daunting Firewalls are in place and the ECB can probably avert widespread contagion markets are currently not pricing in a Lehman moment in Europe BUT Confidence crisis, euro weakness and cost of Greek default can easily reverse Europe s recent oil demand recovery OECD Europe accounted for 13.6 mbpd (or 15%) of global oil demand in Q Oil demand in OECD Europe was up by 4.4% y/y growth in Q

20 Factors Behind the Latest Correction China Macro Shanghai Composite Stock Index Index Chinese Implied Oil Demand Growth, y/y Million barrels per day Structural shift to less oil-intensive growth model has been underway Product demand responded strongly to lower oil prices in Q Easing of financial conditions inflated an equity bubble in H now the correction, but equities are still up 75% y/y Current equity selloff may undermine confidence in continuing healthy oil demand growth Spillover risk to real economy remains low households and banks have limited exposure to equity markets Source: Bank of America, Barclays 20

21 Factors Behind the Latest Correction Iran Nuclear Deal Iranian Crude Oil Production Million barrels per day Source: Bank of America Comprehensive nuclear deal and sanctions relief remains within reach Iran has plans to immediately sell 40 mn barrels in floating storage (mainly NGLs), likely at discounted prices Production ramp-up estimates vary, analysts expect kbpd of additional production in 6-12 months after the lifting of sanctions Price impact depends on timing of production ramp-up, reaction of other suppliers and global demand response 700 kbpd of additional production would reduce 2016 crude prices by $5 to $15 (EIA STEO Apr 15) 21

22 Factors Behind the Latest Correction Iraqi Production Source: Barclays Iraqi crude oil production hit an all-time high of 4.1 mbpd in Jun 15 (IEA) Iraqi exports also hit record levels at 3.7 mbpd in Jun 15 New facilities and splitting of Basra crude into light and heavy grades helped boost exports in June (some of it may be re-exported Iranian crude) Production is expected to slow down in H as the Iraqi NOC is planning capex cuts Kurdish deal remains in place, although payment disputes continue Continuing IS threat clouds future production outlook 22

23 Deepwater Cost Curve Shifting Lower, But Delays Are Likely Deepwater Is Among the Worst-Hit Project Type Split of major pre-sanction development projects with $60+ breakeven by development type The industry has poor track record of delivering deepwater megaprojects at cost and on budget, even at high oil prices Price pressure focuses minds on efficiency e.g. via standardization and better planning Cost compression (partly due to pre-2014 overbuild cycle) also provides some relief Brazil: most pre-salt projects break even below $60, but Petrobras troubles may limit investment outlook West Africa: most pre-sanction deepwater projects in Angola and Nigeria are high breakeven ($60+), high risk of delays and cancellations without fiscal relief US GoM: development of large discoveries in Lower Tertiary remain economic thanks to better than expected flow rates (15+ kbpd) and cost deflation Source: Goldman Sachs 23

24 North Sea Lower Oil Prices are Just Another Challenge North Sea oil has long been challenged by high development and production costs, ageing infrastructure and looming decommissioning liabilities Short-term production impact not yet apparent Medium-term outlook shifted from marginally positive to marginally negative (ca. 100 kbpd decline forecasted by Citi in each of the next two years) Smaller projects and field redevelopments offset some of the mature field declines High-capex projects will likely be delayed, but tax breaks (e.g. in UK) and service cost deflation can partially offset the negative impact of the oil price drop 24

25 Canadian Oil Sands Long-Term Outlook Sharply Downgraded Canadian Project Delays and Cancellations Canadian Oil Sands Projects on the Cost Curve Most Canadian oil sands developments (esp. mining) are not economic at today s oil prices Long-term (2030) production outlook cut by 1.1 mbpd (from 6.4 mbpd to 5.3 mbpd) Canadian production will increase through 2020, albeit at a slower pace than expected (+140 kbpd vs kbpd annually, according to the IEA) As of mid-may, nine major Canadian oil sands projects had been deferred due to the price drop Capex cuts and delays will primarily affect production post-2016, already sanctioned projects will not likely to be stopped by lower prices Alberta s new social democratic government presents further uncertainties to the investment outlook Source: Rystad Energy, Morgan Stanley 25

26 Russia Short-Term Resilience, Medium-Term Struggle? Russian Oil Production Up in the Short-Term Million b/d Russian production has proved resilient in the short-term (up by 100 kbpd y/y in Q1 15) Ruble cost deflation and efficiency gains have helped offset impact of lower oil prices in the short-term Medium-term outlook is more negative as lower oil prices and Western sanctions weigh on investments Russian Oil Production Growth in the Medium-Term Million b/d IEA expects Russian production to drop by 560 kbpd in 14-20, Bank of America forecasts 300 kbpd drop in Greenfield developments in East Siberia, tight oil development in the Bazhenov basin (previously expected to produce at 500 kbpd by 2018) and field redevelopment projects in mature areas will be hardest hit Source: Citi, Bank of America 26

27 Arctic A Long-Term Bet On Healthy Oil Prices and Demand Arctic developments are not viable at today s oil prices but Arctic exploration is a long-term play with at least 10 to 15-year development cycle current price outlook is irrelevant, if operators expect high prices and continuing oil demand growth in the time horizon Shell continues drilling campaign in Alaska, Chevron pulled out of Beaufort Sea drilling program in Canada, Exxon s Kara Sea exploration suspended due to sanctions against Russia, some Norwegian projects have been pushed to the right Environmental opposition may prove as big of a challenge as engineering and economics 27

28 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Factors Behind the Latest Correction US Supply Resilience US Crude Oil Production and Oil-Directed Rig Count US Crude Oil Production - LHS US Oil Rig Count - RHS Source: EIA, Baker Hughes 2,000 1,800 1,600 1,400 1,200 1, US supply response to a massive drop in oil-directed rig count has been frustratingly slow for non-us producers Oil rig count appears to have bottomed out in Jul 2015, indicating that some producers can start adding back rigs at less than $60 per barrel WTI prices Capital markets remain largely open for US independents, but credit conditions may tighten from H with borrowing base redetermination and regulatory restrictions on risky lending by Fed s OCC Given the slow US supply response and continuing global oversupply, the IEA warns that it may take another price drop for the full supply response to unfold 28

29 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Factors Behind the Latest Correction Inventories 3,000 2,900 2,800 2,700 2,600 2,500 2,400 OECD Total Commercial Stocks Crude Oil + Products, million barrels 5y range 5y average YTD Oil stocks remain persistently high by historical standards OECD commercial stocks keep building, despite summer demand peak and strong refinery runs Global implied stock builds reached an astonishing 3.3 mb/d in Q2 2015, according to IEA OMR Record-high inventories remain a strong bearish factor, and global oversupply increasingly moves from crude into product stocks Source: EIA, Bloomberg 29

30 Call on US Shale Not Quite Swinging Yet EIA Revision of US Crude Production (Jun vs. May 15) Million b/d So far, mainly stock builds and demand response have balanced the oversupplied oil market Increased or decreased price volatility? US shale can respond faster than conventional, but not as fast as Saudis High Saudi production leaves little spare capacity buffer, although OPEC s role as effective cartel has long been overstated Light sweet buffer more effective than heavy sour one in dampening Brent & WTI spikes Atlantic Basin overhang plus weight of global inventories provides some cushion too Source: Citi, EIA, EBW Analytics 30