Outlook for the Upstream Sector of the Oil and Gas Industry

Transcription

1 Outlook for the Upstream Sector of the Oil and Gas Industry VMA Market Outlook Workshop Chicago, IL Spears & Associates Tulsa, OK August 2015

2 Million bbls/day 3.5 World Oil Demand Growth/US Oil Supply Growth Global Oil Demand Growth US Oil Supply Growth Global oil demand growth rates declined post-2012 in the face of continued $90+ oil prices. Due to production from tight oil reservoirs, US oil supplies grew faster than world oil demand in 2013 and 2014.

3 $/bbl Spot WTI Prices $120 $100 $80 $60 $40 $20 $0 J F M A M J J A S O N D J F M A M J J A S O N D Rather than cut production to maintain prices, OPEC decided in Q to let the law of supply and demand balance the market.

4 Million bbls/day 3.5 World Oil Demand Growth/US Oil Supply Growth Global Oil Demand Growth US Oil Supply Growth World oil demand growth has accelerated (+1.5 mmbpd) in response to lower oil prices. At the same time US oil production growth is slowing, but OPEC (Saudi, Iraq) has increased output 1.3 million bpd in the past 4 months.

5 $/bbl Spot WTI Prices $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 In terms of pricing, demand fears - driven by China uncertainty - are currently more important than supply side worries about OPEC output not slowing down, more Iranian production coming, and no evidence (yet) that US/non- OPEC supply is falling.

6 Million bbls/day 50 World Oil Demand Developed Economies Emerging Markets Emerging markets account for >50% of global oil use and will continue to drive global demand growth as oil use in developed economies trends lower due to energy efficiency and sluggish economic growth

7 Million bbls/day 2 World Oil Demand Other Africa India China Mid East North America China (37%), the Mid East (22%) and India (12%) have combined to account for over 70% of the net increase in global oil demand since 2010.

8 Million bbls/day NGL US Oil Production Offshore Alaska Lower 48 US oil production is estimated to have peaked around 13.0 million bpd in Q (US crude oil output was 9.7 million bpd in April and 9.5 million bpd in May.)

9 Million bbls/day OPEC Surplus Crude Oil Production Capacity 0.0 Surplus production capacity is near an all-time low (<2% of demand) and will be little changed going forward as reduction in planned production gains (Brazil, Colombia, etc.) offset increased output from Iran.

10 Million bbls/day The Global Production Challenge 0.0 Declines From Existing Fields Incremental Demand Incremental demand growth accounts for only ~15% of need to develop new supply sources

11 Million bbls/day 0.7 US Crude Oil Exports US crude oil exports have risen sharply but are limited by law to deals allowed by administrative waivers issued by the DOC. Repeal of the law is not expected in the current Congress.

12 Billion cubic feet/day (bcfd) 85 US Gas Demand / Production Spurred by low gas prices, US gas demand has grown at a 3.4% CAGR since US gas production has grown at a 4.2% CAGR since 2009 due to new supply from gas shales.

13 Billion cubic feet/day (bcfd) US Gas Imports / Exports Imports Exports The US is on track to become a net gas exporter by 2017

14 $/mmbtu US Spot Gas Prices $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Post-2008, spot gas prices have traded in the $3-$4/mmbtu range. Going forward, the gas market is expected to tighten as exports increase.

15 Index 120 Unit Well Costs (2008 = 100) Oil prices have fallen ~40% this year and well costs are down ~20% YTD. The average US breakeven price is estimated to have fallen from ~$60/bbl to ~$40/bbl over the past year due to price reductions, high-grading, and redesigned drilling/completion programs.

16 Active Rigs 2,000 1,800 1,600 1,400 1,200 1, US Rig Count Vertical Directional Horizontal Average annual US rig count is forecast to fall 45% in 2015 and 10% in Monthly activity has stopped falling but will only slowly recover as prices improve. Investors want to see capital discipline and balance sheet strength, not growth. Oil companies will limit spending into 2016 to survive lower for longer.

17 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 US New Wells Drilled Dry Gas Oil Private E&P companies typically drill ~30% of all horizontal wells and comprise ~40% of total activity. These firms have limited access to public markets and are largely funded through bank debt, which is diminishing as proved reserves decline, price hedges roll over and futures prices stay low.

18 Wells in Sample Distribution of Horizontal Lateral Lengths 10,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Lateral Length (ft.) Well lengths are increasing ~8% per year this is uniform across most basins. The longest laterals are in the Bakken (10,000 average) but every major horizontal play now has 10,000 laterals.

19 % Proppant Volume Growth % Increase in Proppant Volume 60% 50% 50% 40% 30% 20% 32% 26% 10% 0% 0% 0% 0% 0% -10% -3% -20% -14% Every year, oil companies pump more proppant per well due to longer laterals and greater proppant concentration per stage saw major increases in the Eagle Ford, Permian & Bakken.

20 Active Rigs Canadian Rig Count Vertical Directional Horizontal 0 Canadian activity is forecast to fall 50% in 2015 and another 5% in PetroChina has joined a growing list of US firms (ConocoPhillips, Devon, Apache, and EOG Resources) that have divested or are looking to sell their Canadian assets.

21 12,000 10,000 8,000 Canada New Wells Drilled Dry Gas Oil 6,000 4,000 2,000 0 Oilsands investment has fallen sharply this year. The slowdown in the growth of oilsands production lessens the need for one of four planned export pipelines from Alberta that are currently in limbo.

22 Active Rigs 1,400 International Rig Count 1,200 1, Offshore Land International drilling activity is forecast to fall 10% in 2015 but hold steady in Regionally, International activity is expected to be mixed in 2015: Mid East (unchanged), Africa (-10%), the Far East (-10%), Europe (-14%), and Central and South America (-17%).

23 16,000 International New Wells Drilled 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Offshore Land There are typically ~300 field development projects in the International market that are in the pipeline proposed, planned, approved or under construction. The only type of project that has not been impacted by low oil prices has been field development work that was already underway before prices began to fall.

24 Millions $25,000 $20,000 Surface and Subsea Equipment Market Surface Subsea $15,000 $10,000 $5,000 $ These market segments include the wellheads and Christmas trees used onshore and offshore. Demand is linked to new well completion activity. The Subsea category also includes spending on flowlines and manifolds.

25 Millions $7,000 Unit Manufacturing Market $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ This market segment is comprised of the manufacture of equipment - frac trucks, wireline vans, coiled tubing units, etc. used by oilfield service firms at the wellsite. Orders for new equipment have largely ceased as activity and utilization have fallen.

26 Observations A challenging oil and gas price environment through year-end 2015; but gradual improvement is expected over the course of next year as supply growth slows and markets tighten. US oil production will not exceed Q production peak until after Oil-related midstream construction is slowing sharply this year and next. US gas production growth rate will slow, leading to a slowdown in gasrelated midstream construction through Uncertainty about future prices will diminish upstream investment. Improvement in North American drilling activity will be weighted to the second half of 2016.