Special Presentation Impact of a low oil price environment on supply, demand, stability & growth 6 th IEA IEF OPEC Symposium on Energy Outlooks, Riyadh Alexander Pögl 16 February 2016
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The Current Picture 140 Brent Brent Spot Spot Price Price FOB (FOB) [$/bbl] 120 Brent Spot Price (FOB) -69.9% in 5 months 100 80-23.6% in 9 months 60 40-37.5% in 15 months -49.6% in 8 months -57.4% in 28 months -42.5% in 14 months 20 Source: EIA -66.0% in 18 months 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 The current down cycle is unusually deep and long although this is not unprecedented: Key questions are what to make out of the last decade of high prices (one-off anomaly vs. new norm?) as well as the industry losing out on ca $7billion on a daily basis compared to the period 2011-14 Tuesday, 16 February 2016 www.jbcenergy.com Slide 4
Cost to produce one barrel of oil Supply 140.00 130.00 120.00 110.00 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 2 12 22 32 42 52 62 72 82 92 102 Source: JBC Energy Marginal Cost of Oil Production [million b/d; $/bbl] Supply 2016 Demand 2016 Supply 2014 Demand 2014 This is a snapshot of volumes supplied / demanded on an annualised basis. Short term outages as well as future developments are not reflected. Production costs (full cycle costs in this case) are only indicative as there are huge variations within each category. Middle East Onshore FSU onshore Additional cheap crude WAF Offshore North Sea Quantity of Oil Supplied / Demanded Oil sands heavy Biodiesel Ethanol Oil sands upgraded US Shale Oil The question is how many of the marginal resources will be required going forward. Lower break-even costs are only one factor in the equation the other is higher supplies from low-cost producers (OPEC & Russia). Equilibrium is also very sensitive to demand movements. Tuesday, 16 February 2016 www.jbcenergy.com Slide 5 Arctic Cost reduction
Supply 200 180 Big Six* IOCs Upstream CAPEX Cuts vs Cost Index [billion $; Index] * BP, Chevron, ConocoPhillips, ExxonMobil, Shell, Total 160 140 12 24 120 100 80 60 Upstream CAPEX Average 2010-2014 Development of UCCI (2010 = 100) 40 Source: Company information, IHS UCCI, JBC Energy 2010 2011 2012 2013 2014 2015 2016 For the long-term supply outlook it will be crucial to what extent lower spending will be counterbalanced by lower costs. (*ExxonMobil, BP, Shell, Total, Conco, Chevron) Tuesday, 16 February 2016 www.jbcenergy.com Slide 6
Supply 2.0 North America Crude Supply Scenario [million b/d] 2.5 1.5 Base case: - 550,000 b/d Scenario: - 1.1 million b/d 2.0 1.0 1.5 0.5 1.0 0.0 0.5-0.5-1.0-1.5 Mexico y-o-y Canada y-o-y US y-o-y Total North America y-o-y scenario 0.0-0.5-1.0 Implied stock change annual average Implied stock change annual average scenario Implied stock change Implied stock change scenario -2.0 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16-1.5 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 The lower prices go and the longer they stay lower, the more pronounced will be the North American production slump. We could also imagine y-o-y declines to reach a level of 1.5 million b/d in H2, with a significant impact on the balance. Generally speaking America hosts a lot of high-cost output. Tuesday, 16 February 2016 www.jbcenergy.com Slide 7
Supply 1,200 USShale Growth Dynamics ['000 b/d] 3000 1,000 2500 800 600 400 706 382 265 208 163 149 134 116 2000 1500 1000 200 500 0 755 0-200 -400-600 -426 y-o-y change relative output change compared to 12 months before Source: JBC Energy cumulative output change - right scale 0 12 24 36 48 60 72 84 96 108 120-500 -1000-1500 Efficiency gains and cost cutting measures could lower break even prices even further, which could spark a quick shale recovery. Also, higher prices (50-60 $/bbl range) could lead to a ramp up. However in longer term growth will become slower and will not compensate future shortfalls of conventional production. Tuesday, 16 February 2016 www.jbcenergy.com Slide 8
Demand 120.0% 100.0% Diesel Price Changes since January 1st, 2014 [%] Gasoline 80.0% 60.0% Price changes were calculated using local currencies. 40.0% 92% 20.0% 46% 0.0% -20.0% -32% -28% -17% -16% -41% -38% -18% -19% -40.0% -60.0% -70% -62% -70% *Middle East data is an average of retail price changes in Saudi Arabia, Kuwait, Bahrain, Oman, and the UAE. -80.0% Sources: ICE, Various Brent RBOB ICE gas oil China India US EU Middle East* Oil consumer prices have fallen only by a fraction of the oil price fall, limiting price and income effects. The Middle East has even seen rising retail prices as governments curtail subsidies to counterbalance lower oil income. Tuesday, 16 February 2016 www.jbcenergy.com Slide 9
Demand 2,000 1,800 1,600 1,400 1,200 Oil Demand Growth - 2016/01 Oil demand Growth - 2014/01 Total Product Demand Comparison Revisions of Oil Demand Growth 2016 vs 2014 Title ['000[unit] b/d] 1,000 800 600 400 LPG Naphtha Gasoline Kero/Jet Gas Oil Fuel Oil Other Product by Product Revisions from 2014 to 2016 1,000 200 800 600 400 200 0-200 -400 0 2011 2012 2013 2014 2015 2016 2017 2018-600 2011 2012 2013 2014 2015 2016 2017 2018 Overall, we do not see oil demand much higher than before the price fall, but gasoline demand is now cumulatively 1.4 million b/d higher, while gas oil/diesel demand is 0.3 million b/d lower than assessed in early 2014. Peak demand is an issue and limiting the upside for oil prices. Tuesday, 16 February 2016 www.jbcenergy.com Slide 10
Refining Actual Spare Capacity in the Global Refining System in 2015 ['000 b'd] Theoretical Spare Capacity Absent due to Maintenance Seasonality Europe FSU Non-Swing/Non-Operable Asia Middle East Africa Available Spare Capacity North America C&S America 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 We assess global spare refining capacity to have tightened further in 2015 in line with strong demand, among other factors. We do not expect a reversal of this trend in 2016. CDU shutdowns of 6.8 million b/d in 2009-2015 have provided key support. Tuesday, 16 February 2016 www.jbcenergy.com Slide 11
2, 000 1, 500 1, 000 500 0-500 Refining 2,000 1,500 Annual CDU Capacity Increase Chart vs TitleDemand Growth ['000 b/d] Forecast from Q3-2014 Europe FSU Asia Middle East Africa North America C&S America Total Demand Growth 1,000 500 0-500 2014 2015 2016 2017 2018 2019 2020 Current Projection 2014 2015 2016 2017 2018 2019 2020 CDU capacity additions are struggling to meet demand growth over the current years. Delays and cancellation of projects have tightened the refining market. Low oil prices lead to further investment cuts, while China and India are in a low-investment cycle. Tuesday, 16 February 2016 www.jbcenergy.com Slide 12
Balance 100 99 98 97 96 95 94 93 92 91 90 89 88 87 Implied stockchange - right scale World oil demand Total liquids supply World Oil Balance [million b/d] 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 86 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16 Q1 17 After an unprecedented 10 quarterly stock builds, the market will start to tighten in H2 2016. But we now see a lengthening of the balance again in H1 2017, before things begin to improve on a more constant basis. Tuesday, 16 February 2016 www.jbcenergy.com Slide 13-2.0
Talking Points Peaking Supply Growth? CAPEX by big six IOCs has peaked in 2013, while production levels fall since 2010 Question of how much costs fall compared to spending cuts Shale oil will not save us from a potential shortfall in traditional supplies in case of persistent underinvestment Peaking Demand Growth? Low oil prices will fail to provide much demand stimulus in the medium to long term Other energy prices are also low Green revolution, substitution & efficiency improvements move ahead besides strong upward revisions for 2015, going forward we don t see oil demand much higher than before exception: gasoline (cumulatively +1.4 mbpd), while gas oil/diesel -0.3 mbpd compared to 2014 Peaking Refining Spare Capacity? Investment cuts do not only affect oil & gas upstream. (National) Oil Companies in cash strains do also cut back investments in refining, petchem, LNG & other mid- and downstream segments Refining sector will maintain reasonably healthy margins Oil market balance is de facto unpredictable for the coming years? Clearly current information favours surplus to continue well into 2017 But geopolitical risk, potential OPEC policy changes and turning supply-side dynamics in high-cost areas can easily change the balance upside down amid historically low spare capacity levels Tuesday, 16 February 2016 www.jbcenergy.com Slide 14
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