operating models in the new oil and gas reality -...

Operating models in the new Oil

and Gas reality

Porto Vecchio, July 8th, 2016 International Business Congress

International Business CongressStrategy& | PwC

Oil market

Gas and LNG market

1


The Oil industry is facing a new reality, originated by long terms trends…

2

Conversion - more transport fuel per barrel

– Continued investments in cracking & coking

– Fuel oil down from 25% in 1980 to 9% in 2013

– High incentive to process heavy crudes

Demand – reaching peak

– Engine efficiencies / environmental policies and targets

– Substitution

– Changing travel patterns

Reserves - grown significantly

– Extraction technology advances

– Reaching new frontiers (deeper – further)

– Unconventional sources

How can Oil Companies adapt?Source: Strategy& analysis


… and by growing volatility and uncertainty

3

Sources: EIA-AEO-Early 2015,IEA World Energy Outlook 2015; Rystad Energy; Strategy& research

Brent Crude Price Historic and Outlook Various Sources

Actual data Outlook

Brent daily price volatility 2004-2013


Relative competitiveness of energy commodities is very volatile too

4

0

2

4

6

8

10

12

14

16

18

20

22

24

26

1/20161/20151/20141/2010 1/20131/2011 1/2012 1/2017

USD MMBTU

Gas, Coal and Crude Wholesale PricesUSD/MMBTU

0

20

40

60

80

100

120

140

160

180

200

220

240

260

1/20131/2012 1/20161/2014 1/20151/20111/2010 1/2017

Jan 2010 = 100

Gas, Coal and Crude Wholesale Prices

Rebased Jan 2010 = 100

Source: Bloomberg; Strategy& analysis

Henry hub spot

Brent crude

TTF spot

ARA coal ARA coal

Brent crude

Henry hub spot

TTF spot


Oil Companies are adapting their operating models and are improving their financial resilience

Cost Reduction• Strategic review of cost base

• Supply chain optimisation

• Improved use of technology

• Capital projects optimisation

Strategic reset• Re-assess long term strategy

• Reduction in capex and

deferment/ abandonment of

investments

• Joint Venture / contract reviews

• Stakeholder management

Secure cash• Improve cash flow

• Enhance working capital

• Reduce / restructure debt

• Ensure supplier stability

Integrated Margin Management

• Market reassessment

• Divest non core assets

• Early monetization of

resources

• Acquire complementary

assets ‘on cheap’

• Develop trading capabilities

Portfolio Optimization

5

“Fit for Fifty”

Source: Strategy& analysis


For example, Integrated Margin Management (IMM) targets margin optimization across the value chain …

6

Oil Value Chain

IMM means

… taking an integrated

view of the oil value chain

understanding the drivers of

margin at each level

… identifying ways to

optimize the components to

unlock one-off benefits

… building a sustainable

capability to monitor and

continuously optimize the

margin as conditions

evolve. This requires:

– Organization structure and governance

– Performance management and incentives aligned to IMM

– Processes and KPIs

– Tracking and optimizing tools

– Management Information Systems

Refinery

E&P

Source of

Crude oil

Service

station

Delivered Price

Raw Materials

Transfer Price at

Refinery Gate

(spot market less

transportation)

Refinery Dock Deposit

Rack

Price

Wholesale

Price

Retail

Price

Refining Margin Logistic Margin Wholesale Margin

Retail Margin

Downstream Margin

Reseller

Transport and Supply

Sales MarginE&P

Margin

Realized

Crude Price

Commercial

Customer



… integrating all relevant functions within regional markets (supply envelops)

7

• Supply and exchange

obligations & options

• Supply & price negotiations

• Sales channel obligations

& options

• Price sensitivities

• Information on the market

outlook

• Demand sensitivity and

customer segments

• Primary distribution obligations

& options

• Information on competitors’

supply

• Refinery schedules and plans

• Information on availability &

demand (incl. Refining)

• Impact offtake priorities

• Actively consolidate information

for meaning

• Determine exposures and

approach to its management

• Assess options and

evaluate profit

opportunities

• Keep score and control

activities

• Information on availability

& competitiveness

• Seek and prepare for

supply flexibility

Supply

Finance

Marketing

Wholesale

Scheduling

Transport

Logistics

Inventory



Oil market

Gas and LNG market

8


The European gas market experienced fundamental changes over the last decade

9

Seller’s Market

(1970s to end 2000s)

Buyer’s Market

(2010s)

Growing economyGrowing power sector

Crisis and very slow recovery (zero growth)Overcapacity and no growth in the power sector

Constantly growing gas demand(tight market)

Drop in demand, over-contracting,increasing liquidity (long market)

Market dominated by vertically integratedincumbents (quasi-monopolistic national markets)

Unbundling, new entrants and increased competition

Transportation capacity constrained and not accessible to new players

Increasingly interconnected markets and easy access to transportation capacity for all players

Interfuel competition and oil linked long term contracts

Gas-to-gas competition

No liquid trading hubs in continental EuropeGrowing number of liquid hubs, offering physical

and financial products

European transition from a Seller’s market to a Buyer’s market



European demand for gas stalled and then experienced a prolonged downturn …

10

0

50

100

150

200

250

300

350

400

450

500

Bcm

2000

+1,193% 0%

20101970 19901980

-20%

1965 1975 2005 201519951985

Source: BP Statistical review of world energy 2016

Natural Gas Consumption in EU 28 – [Bcm, 1965 – 2015]


… and only a moderate growth is expected

11

ENTSOG Forecasted Gas Demand EU28 [Bcm, 2015-2030]

465453435427

20252020 20302015E

Notes: Data from ENTSOG has been converted using MWh = 94.2 Scm

1) Dutch gas production has been adjusted based on the decisions of the Dutch Government on the Groningen field

Source: ENTSOG 2015 (10 years development plan), Dutch Government, Strategy& analysis

3930 24 20

36

35

27

15

11

9

8

6

76

6

7

8

1

3

1

1

1

2

6

583

6

2030

3

2025

2

79

2020

102

24

5

24

5

2015E

116

25

NL1

UK

RO

DE

PLOther

AT DK

IT

73%% of import

dependence77% 83% 88%

Total Forecasted Gas Production EU28 [Bcm, 2015-2030]


At the same time, gas trading hubs emerged across Europe

12

0

200

400

600

800

1,000

1,200

1,400

49

188

20072005

61

2008

120

2006

89

2004 2009

428

2012

Bcm

20132011

1,340

2010

872

1,221

1,038

GaspoolNCG

TTFCEGH

ZeebruggePSV

PEG

Source: IEA Gas Medium Term Market Report 2012 for data from 2004 to 2011; IEA Gas Medium Term Market Report 2014 for 2012 and 2013 data; Gasunie for TTF data

from 2011 to 2013, ICIS article “TTF Gas Exchange Trading grows faster than OTC” for TTF data for 2009 and 2010

0

200

400

600

800

1,000

1,200

1,400

1,016

2008

961

1,096

201020072005

903

500

2006

615

2009

Bcm

2004 2013

552

1,094

20122011

1,137

1,271

Total Traded volumes at NBP –

[Bcm, 2004-2013]

Total Traded Volumes at Main Hubs in Continental

Europe – [Bcm, 2004-2013]

International Business CongressStrategy& | PwC 13

The market structure became more complex with the growing importance of hubs and traders …

Producer/

Exporter

Importers/

International

transportation

Local Distribution

Companies

Large Consumers

(Power Generation,

Industrial)

Residential

Commercial

Small Industrial

Gas Hub

Traders,

Financial players,

Wholesalers

European gas market structure



… and hub prices became a relevant price signal, decoupled from oil indexed benchmarks

14

0

5

10

15

20

25

30

35

40

Jan/14Jan/06 Jan/13

€/MWh

Jan/12Jan/11Jan/10Jan/08 Jan/15Jan/09Jan/07Jan/05

Oil Indexed Formula TTF MA

SEASONAL FLUCTUATIONS STRUCTURAL DECOUPLING

Dec’05

Nov’06

Nov’07

Oct-Nov’08

Winter peaks

Source: Bloomberg, The Oxford Institute for energy Studies (for the Oil Indexed Formula)

TTF prices vs Oil Indexed gas price – [€/MWh, 2004-2015]


Going forward, some suppliers seem to be better positioned to address the market challenges

15

MAJOR SUPPLIERS ONLY

PIP

EL

INE

LN

G

Source: BP Statistical Review 2015, Strategy& analysis

Well positioned Facing difficulties

Algeria’s gas export are

forecasted to remain stable

or to slightly decline, mainly

because of rising domestic

consumption

Azerbaijan could displace

some gas in South Eastern

Europe starting from 2020,

depending on price

competitiveness

Russia is expected to maintain

its current positioning, with

potential upside given its cost

advantage on equity gas and

potential to ramp-up production

Norway should still be

able to maintain its market

share, even if in the longer

run this can be challenged

by cheaper gasLibya’s gas export is

expected to have a marginal

impact on Europe, even in

the unlikely scenario of

political issues resolution

Qatar will likely maintain its

current positioning although

LNG growth elsewhere (i.e.

USA) may challenge

remaining spot volumes

Nigeria’s role in supplying

Europe via LNG may increase

thanks to new investments,

although political risks can

reduce attractiveness

Mediterranean: Egypt, Cyprus and

Israel could potentially enter into

European market, thanks to the new

discoveries, most likely after 2018

USA’s LNG export capacity

will potentially reshape global

gas market, with volumes

also routed to EuropeThe role of LNG will depend on price

competitiveness vs. pipe and on

arbitrage opportunities

GAS SUPPLIERS


By 2025, US / ME LNG and Russian export could replace the declining European production

16

Simplified Natural Gas Flows – [Bcm, 2025]

Source: BP Statistical Review 2015, Strategy& analysis

• Excluding temperature driven

fluctuations, gas demand in EU28 is

projected to reach 453 Bcm in 2025

• Indigenous production is expected to

decrease and to account for ~17% of

consumption

• Imports via pipeline from Russia are

expected to increase, given Russian

cost position and potential to increase

production

• LNG imports (mainly from Qatar and

US) are expected to continue to

increase

• Flows via pipeline from North Africa

are expected to have a marginal

impact, mainly in Italy and Spain

• In case LNG prices are below pipe

gas prices, “West to East” flows might

gain importance

Expected additional pipe gas

import availability to EU28

ME LNG:

+10-15 Bcm?

AFRICA LNG:

+3-6 Bcm?

MAIN FLOWS ONLY

RUSSIA:

+40-60 Bcm?

NORWAY:

lower export?

AFRICA Pipe:

+0-2 Bcm?

Expected additional LNG gas

import availability to EU28

US LNG:

+15-20 Bcm?

AZERI Pipe:

impact mainly

in SEE


The global LNG market is currently a buyer’s market with further value levers for European buyers

17

• Global gas prices are converging

• Oversupply and downward pressure on gas prices have turned the LNG market in buyer’s

favour

• The buyer’s market raises a challenge for LNG sellers – prices are below average global

breakeven price

Downward

pressure on gas

prices

Europe as LNG

sink market

• LNG imports will supply a growing share of Europe‘s gas demand by 2020

• Global LNG oversupply will turn Europe into sink market - flexible LNG will compete with

flexible pipe

• Current US LNG exports finding it difficult to competitively sell contracted volumes in North

West Europe

• LNG exports could be priced at US LNG marginal cost; liquefaction tolling fee is a sunk cost

• Global LNG liquefaction capacity is set to increase to 590 bcm/year, and regasification

capacity to 1075 bcm/year

• Annual growth in global LNG demand is also expected to rise (2.0% during 2010-2014 to

3.8% for 2015-2025)

• But there is a potential global LNG oversupply of c. 120 mtpa by 2025 - the market could

react by limiting/delaying new supply and increasing demand as prices weaken

Global LNG

oversupply

1

2

3



Based on ongoing and planned projects, a potential LNG oversupply of up to 120 mtpa could emerge by 2025

18

Note: Existing supply up to historic demand and not liquefaction nameplate capacity

Source: PwC research and Strategy& analysis

• Global LNG supply is driven byliquefaction capacity additions whichis expected to increase to c. 430 mtpa(existing and projects underconstruction) by 2020

• This is mainly driven by Australianand United States capacity additionswith around half of the additionsexpected to enter the market in 2016and 2017

• Global LNG demand is driven byEurope, China and non-OECD thatare expected to double their share ofLNG imports by 2020

• LNG demand of major Asian LNGimporters (Japan, South Korea andTaiwan) will drop their share of globalimports by more than 15% until 2020

• Several regions will show substantialchanges in their net trade position:US will turn into a gas exporter andSE-Asia into a net gas importer

0

100

200

300

400

500

600

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

Mtp

a

Pacific Basin Existing Atlantic Basin Existing Middle East Existing

Total Under Construction Pacific Basin Planned (Likely) US Planned (Likely)

Middle East Planned (Likely) Atlantic Basin Planned (Likely) Total Global Demand

Global LNG supply-demand (2006-2025)

c. 120 mtpa


Regional price differences are shrinking, limiting the opportunities for arbitrages

19

Source: Bloomberg; Strategy& analysis

-

5

10

15

20

25

ge

n -

09

mag

- 0

9

se

t -

09

ge

n -

10

mag

- 1

0

se

t -

10

ge

n -

11

mag

- 1

1

se

t -

11

ge

n -

12

mag

- 1

2

se

t -

12

ge

n -

13

mag

- 1

3

se

t -

13

ge

n -

14

mag

- 1

4

se

t -

14

ge

n -

15

mag

- 1

5

se

t -

15

ge

n -

16

mag

- 1

6

$ /

Mm

btu

US - Henry Hub Netherlands - Title Transfer Facility (TTF) U.K. National Balancing Point (NBP) Asia spot - Japan Korea Marker

Gas day ahead prices (2009 – June 2016)

The nuclear reactor incident at Fukushima in

March 2011 caused a surge in Japanese

demand for natural gas

NBP and TTF prices spiked in February 2012 due to

an exceptionally cold winter in Europe.

Temperatures dropped to as low as -18ºC in the UK.

European gas prices reached a new record in March 2013,

after one of Britain’s main import pipelines was temporarily

shut down by a technical fault– not helped by persistently low

temperatures putting upward pressure on demand.

The decline in Asian gas prices reflects

the collapse in crude oil prices - on which

they are based - during 2014-2015.

Asian spot prices similar to

the North West Europe gas

hub prices for Q2 2016.


Going forward, gas suppliers should adapt their operating model to the new market reality

20

Supplier’s reaction to the new reality

• Confronted with price and volume pressure from traditional buyers, suppliers need to create

alternatives/optionality for gas monetization:

– Greater emphasis on trading and portfolio management

– Possible downstream integration -- access to infrastructure and markets

– Greater differentiation of products (duration, pricing, flexibility, volume guarantee) -- for example

suppliers would benefit from increasing their flexibility on volume commitments and supply

destination

– Ability to exploit opportunities offered by trading hubs (buy/sell)

– Ability to serve second tier buyers (possibly with less-than-stellar credit rating)

• At the same time, in a lower margin and more competitive market, gas suppliers should focus on

investment optimization, cost reduction and cash management

– Align capital investments to price signals from the market

– Improve management control systems

– Streamline the organization and standardize functions, systems and procedures

– Renegotiate contracts with key suppliers

– Improve cash management (e.g. investment timing and working capital optimization)


Buyers (importers) are not better off, and are still in a “stop-loss” mode

21

Changing role of Importers

• Role as intermediaries has lost relevance, as they found themselves squeezed between end-users/wholesalers and suppliers, while competing with traders

• So far, their reaction has been mainly defensive (in Europe, price renegotiations vs. suppliers to avoid losses; in Asia aggregation of buyers and promotion of liquidity through the support for a regional hub; introduction of hub indexation)

• It is unclear how importers would be able to create sustainable value in the mid/long term (gas portfolios are being spun-off into “low growth” companies along with distressed generation assets)

• In general importers are struggling in promoting gas as a “transition fuel” towards a low carbon economy

• Importers need to add value with a more proactive business model

– Trading and optimization (e.g. reselling/diverting excess of committed supply)

– Demand aggregation (e.g. JVs with other buyers to increase bargaining power and optimization levers)

– New products, including value added products (small scale LNG and CNG for transportation)

operating models in the new oil and gas reality -...

Documents