Summary - The Challenge to European Refining Posed by the Rise of US Unconventionals Scottish Oil Club November 2014
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Crude oil outlook and US Unconventionals
The US has a massive opportunity set of unconventional plays, with many sitting in established, mature basins The Main US Lower 48 Plays Step-change in the materiality of the Eagle Ford 7 Wood Mackenzie
Tight oil footprint continues to expand through 2020 Bakken Production grows from 1 million b/d in 2014 to 1.7 million b/d in 2020 PADD 4: Rocky Mountain PADD 5: West Coast Niobrara PADD 2: Midwest Northeast Monterey Mid Continent PADD 1: East Coast 8 Permian Production grows from 0.3 million b/d in 2014 to 0.9 million b/d in 2020 Note: scale of bubble reflects relative contribution to US tight oil volumes PADD 3: Gulf Coast Other Gulf Coast Eagle Ford Production grows from 1.3 million b/d in 2014 to 1.9 million b/d in 2020 2014 production 2020 production
..and so is a key part of non-opec supply growth Year-on-year non-opec total liquids production growth Gains in US tight oil average almost 390,000 b/d per year between now and 2020. US tight oil contributes 50% of non-opec growth in 2015 and more than 25% in subsequent years. Source: Wood Mackenzie 9
Change in OPEC crude oil capacity by country and for NGLs shows the reliance on Iraq Change in total from 2013 to 2020 in million b/d Source: Wood Mackenzie 10
Growth trajectories in transport set the trend for OECD vs non-oecd. Levels are currently even, but non-oecd is 7 Mb/d higher by 2020 OECD oil demand by sector Non-OECD oil demand by sector 60 Transport Petchem Res/Comm Industry Other 60 Transport Petchem Res/Comm Industry Other Oil Demand, million b/d 50 40 30 20 Oil Demand, million b/d 50 40 30 20 10 10 0 2000 2005 2010 2015 2020 0 2000 2005 2010 2015 2020 Source: IEA; Forecast Wood Mackenzie 11
Growth in US tight oil has offset the additional losses helping retain Brent oil price stability through to end 2014 US tight oil growth keeping pace with rise in losses Year-on-year change in US tight oil and outages '000 b/d 7,000 6,000 5,000 4,000 3,000 Emerging/New Plays Other Established Bone Springs/Wolfcamp Niobrara Eagle Ford Bakken/Three Forks Glbal unplanned (visible) outages Y-o-y change ('000 b/d) 1,600 1,200 800 400 0 Unplanned outages US tight oil -400 2009 2010 2011 2012 2013 2014 Source: Wood Mackenzie YTD Cumulative growth/decline since 2008 2,000 1,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cumulative ('000 b/d) 3,000 2,500 2,000 1,500 1,000 500 0 Unplanned outages US tight oil -500 2009 2010 2011 2012 2013 2014 Source: Wood Mackenzie 2008 Base Year YTD Source: Wood Mackenzie 12
OPEC spare capacity cushion keeps a cap on price gains this decade provided that our political risk assumptions work out Call on OPEC crude compared with our forecast of OPEC crude oil productive capacity Source: Wood Mackenzie 13
Conclusions Without US oil production growth and Canadian success with oil sands, non-opec would see little increase from now to 2020 US tight oil boom has helped keep a lid on global prices in view of nearly continuous supply outages of varying impact outside the US since 2011 Economic growth, a rising middle class and the quest for personal mobility support non- OECD oil demand growth Weak oil demand growth and/or a supply surge, such as gains in Libya s production, put downward pressure on Brent prices US tight oil creates a relatively quick reacting price floor. Brent priced at $80 per barrel real would affect around 1 million bpd of new US tight oil production over the coming years 14
Implications for European refining
Overcapacity continues to pressure refining utilisation rates Europe is most impacted Annual Global Supply/Demand Outlook Average Refinery Utilisation by Region 2.5 2.0 Mb/d 95% 90% Asia Pacific Greater Europe North America 1.5 1.0 0.5 Average refinery utilisation 85% 80% 75% 70% 65% 0.0 2014 2015 2016 2017 2018 2019 2020 New Refineries Capacity Expansions Non Ref Sup growth Demand growth 60% 55% 2005 2007 2009 2011 2013 2015 2017 2019 Source: Wood Mackenzie 16
USGC refiners have a strong competitive advantage from cheap natural gas and crude LLS-Brent Differential Regional Spot Gas Prices 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2018 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Crude Price Differential $/bbl Real (2014). US$/mmBtu, Real (2014) 2019 2020 LLS-Brent (Real) Henry Hub NBP Source:history Argus, forecast Wood Mackenzie Source: Argus, Datastream, NYMEX, Wood Mackenzie 17
Investments in new distillation capacity are emerging in the US. Product exports continue to rise Cumulative US Refining Capacity Investments in kb/d (2014-20) US Product Balances 18.7 Previous Year Capacity Expansion New Creep 3.0 LPG Naphtha Gasoline Jet/Kerosene Diesel/Gasoil Fuel Oil Surplus 2.5 Capacity (Mb/d) 18.5 18.3 18.1 Balances (million b/d) 2.0 1.5 1.0 0.5 0.0 17.9-0.5 17.7 17.5 2014 2015 2016 2017 2018 2019 2020-1.0-1.5-2.0 Deficit 2005 2010 2015 2020 Source: Wood Mackenzie 18
The European gasoline surplus experiences increasing competition with no obvious new home Cumulative Change in Gasoline Balances European Gasoline Surplus 600 Gasoline Export Markets* US PADDs II, III, IV & VI 1,000 Surplus - constant supply Surplus - forecast 500 900 800 kb/d 400 300 200 100 - kb/d 700 600 500 400 300 200 100-100 2014 2015 2016 2017 2018 2019 2020 0 2014 2015 2016 2017 2018 2019 2020 * Latin America, Mexico, East Canada, US PADD I, West Africa, non-euro Med, Middle East Source: Wood Mackenzie 19
Excess refining capacity in Europe will take the form of closures and run cuts 20 Crude runs reacted to the fall in demand, with capacity rationalisation following after 2 years Competitive pressures from other regions, combined with structural product imbalances reduces crude runs further 90% 19 85% 18 17 80% Mb/d 16 75% 15 14 13 12 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Demand Crude Runs Capacity Average Utilisation 1.7 Mb/d 70% 65% 60% Source: Wood Mackenzie 20
Summary The Atlantic Basin gasoline market is set to decline in the medium term It will become increasingly competitive, with additional supply available from USGC refiners enjoying access to cheap energy and discounted crude Average European coastal refineries are at a major competitive disadvantage and will be forced to reduce runs That reduction in European crude runs leaves a very large and growing diesel deficit in Europe, over which refiners in the US, Russia, Middle East and Asia will compete Export refiners in all regions will be closely watching developments in European middle distillate demand 21
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