Oil Price Volatility Challenges and Opportunities. December 5, 2016

Transcription

1 Oil Price Volatility Challenges and Opportunities December 5, 2016

2 Oil price per barrel (Brent, US$) CPI deflated Copyright 2016 by The Boston Consulting Group, Inc. All rights reserved. Oil prices have historically been quite volatile with several sharp declines over the last five decades Monopoly pricing I Competitive pricing I Monopoly pricing II Comp. Pricing II : Start OPEC Mid 1980s: Oil Glut 2005: Excess world demand 2014: End of OPEC monopoly (US shale) Global credit crisis 0 OPEC cartel asserts market power Oil price jumps to $ trading band OPEC loses monopoly pricing power as 1980s oil glut unfolds (e.g. North Sea oil) Oil drops to 25-50$ trading band OPEC market share grows as it meets excess world demand $-band Excess supply & falling demand reassert compt. pricing Source: Thomson Reuters Datastream, BCG Center for Macroeconomics analysis Prez - Petrotech_2016_Oil_Price_Volatility.pptx 1

3 Copyright 2016 by The Boston Consulting Group, Inc. All rights reserved. The current decline is the longest by far compared to many previous cycles Major WTI oil price cycles since Cycle Start Decline (Days) Recovery (Days) Aug 2006 Jan % 100% Oct 1997 Aug Oct 1997 Jul Jan 1986 Jun Jul Jun Days 1. Updated 12th October; 572 days decline to date represents the lowest point so far of the ongoing June 2014 cycle, till 20th Jan 2016 (26.01 USD/bbl) 2. In the July 2008 cycle, prices did not recover to their pre-decline peak of $ Note: Price data plotted every 7 days meaning that some daily troughs may not be fully graphically visible Source: EIA, BCG Analysis Prez - Petrotech_2016_Oil_Price_Volatility.pptx 2

4 Copyright 2016 by The Boston Consulting Group, Inc. All rights reserved. The current crisis is the result of a series of global events that created an imbalance between supply and demand World liquid fuel production and consumption balance Significant global events Mbpd Q1 Supply closely tracks demand up to mid Q Q1 Implied stock change and balance (left axis) World liquids production Updated: 4th October 2016 Source: EIA (STEO), BCG analysis 1 A 2 3 Oil price ($bbl) 4 B Q1 Brent World liquid fuels consumption Mbpd Supply events 1 Global production increased driven by US tight oil, Iraq, Libyan short-term recovery in mid OPEC, Nov'14 meeting: Saudi Arabia refuses to cut production, wish to leave to allow the market to self-correct* 3 Supply further increased in 2015, driven by US tight oil, Iraq, and the broader OPEC; Russia has also kept pace with production 4 Sanctions against Iran lifted and Iran oil output increases; other global supplies weaken Demand events A Demand growth slowed down by weaker Chinese and European economies B Demand is picking up due to increased demand growth in India, China, US, and Russia *Saudi Arabia ended its "pump at will" policy end of Sept 16, Other plans to cut production finalized in end Nov 1.2 MMb/d cut from OPEC members beginning January 1 Another 0.6 MMb/d from non-opec members 6-month compliance period with built in plan for a 6-month rollover Prez - Petrotech_2016_Oil_Price_Volatility.pptx 3

5 Copyright 2016 by The Boston Consulting Group, Inc. All rights reserved. Going forward oil prices could converge towards one of three possible scenarios "Fast-paced rebound" Rapid recovery to $70-90 "Cyclical Recovery" Slow, sustained recovery to $60-70 "Sustained Pain" Around or below $50 for the midterm Signals that would contribute to the scenario Market correction and quick return to tighter supply / demand balance OPEC makes a meaningful quota cut end 2016 which is uniformly adopted US rig count keeps at low levels, with sharp declines of production Chinese demand growth recovers and gets closer to historic levels Indian demand growth also rises steadily and shows stability International demand growth is boosted artificially by low prices Global exploration activity continues at record low levels with a corresponding reduction in RRR Global production decline due to delays of under developed assets/ project cancelations Market recovers over 1-2 years, but to lower levels than recent years OPEC makes a quota cut in end 2016, however, implementation is not uniform US keeps plateau production in the next 6-12 months Iran proves to add notable production volumes to an oversupplied market Delays and cancelation of projects are done at slow-pace Chinese, Indian demand picks up growth International demand is healthy but not exceptional Project cancellations and cost reductions take the cost of the marginal barrel to $70 Current prices are established as a mid-term "new normal" OPEC continues pump at will strategy or relaxes it at a slow pace OPEC expansion plans continue uninterrupted (UAE, Iraq, Mexico) Iran increases production US unconventionals remain resilient through better efficiency and cost, growing slightly Cost reductions continue to achieve fundamentally improved economics across E&P Resource holders start adapting fiscal regimes to new reality, reducing the fiscal burden Long-term efficiency and growth differ from previous forecasts Source: BCG Analysis Prez - Petrotech_2016_Oil_Price_Volatility.pptx 4

6 Challenges & Opportunities The current oil crisis has generated a set of challenges for key entities in the Upstream sector Copyright 2016 by The Boston Consulting Group, Inc. All rights reserved. Producers Financials of E & P companies have taken a hit Efficiency improvement and cost cuts are high priority Governments Net exporters adversely impacted, importers benefiting Scaling back investments, reworking tax regime Energy Service Providers (ESPs) ESP stock prices in significant decline ESP players exploring alternate business models Source: BCG Analysis Prez - Petrotech_2016_Oil_Price_Volatility.pptx 5

7 Challenges & Opportunities Given the length of the crisis, players have started adapting to the new world and have discovered hidden opportunities Copyright 2016 by The Boston Consulting Group, Inc. All rights reserved. We highlight opportunities that satisfy three conditions Hidden opportunities fall into three broad themes 1 2 Emerged during the oil crisis Opportunities should be a direct consequence of the crisis as opposed to a development already underway Win-win for producers, govt., ESPs Opportunities should be synergistic and/or value additive across producers, governments and/or ESPs Savings reinvested e.g., reinvesting subsidy / savings back into the O&G sector Hidden Opportunities Riding the wave of collaboration e.g., players from different parts of the value chain collaborating on projects 3 Significant value addition for players The quantum of the value generated from the opportunity identified should be significant New markets e.g., capturing consumers that were earlier priced out of the market Prez - Petrotech_2016_Oil_Price_Volatility.pptx 6

8 Copyright 2016 by The Boston Consulting Group, Inc. All rights reserved. Summary Oil prices have historically been quite volatile with several sharp declines over the last five decades. However, the current decline is the longest by far compared to many previous cycles and is the result of a series of global events that created an imbalance between supply and demand US shale has played an important role in maintaining low prices during this crisis and could persist as a threat to OPEC going forward; OPEC core members remain concerned any cut in supply will be countermanded by an increase in shale. Internally within OPEC the dynamics have also become more complex, especially with sanctions being lifted against Iran Going forward prices could converge towards one of 3 possible scenarios: Around or below $50 for the mid-term; Slow, sustained recovery to $60-70; Rapid recovery to $ Several signals need to be tracked to provide an indication as to which scenario would materialize The current oil crisis has generated a set of challenges for producers, governments as well as oil field service providers. However, opportunities have also opened up that could forge new win-win relationships across players and alternate operating models across the value chain Prez - Petrotech_2016_Oil_Price_Volatility.pptx 7

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