the great energy shakeout

© 2016 IHS© 2016 IHS Markit. All Rights Reserved.

The Great Energy Shakeout: Strategies in an Uncertain World

Atul AryaSenior Vice President, EnergyIHS [email protected]

Buenos Aires, July 26, 2016

IHS Argentina Energy Symposium

mailto:[email protected]

© 2016 IHS Markit. All Rights Reserved.

WELCOME

© 2016 IHS© 2016 IHS Markit. All Rights Reserved.

Outline

§ Context and Key Questions

§ Oil Markets

§ Global Gas Markets

§ Company Challenges and Strategies

§ Future Outlook

3

© 2016 IHS

Context and Key Questions

4

© 2016 IHS

Three “Transitions” Underway 1. "BRIC Era" (2004-2014) to "Shale Era” – Demand to Supply

§ From strong growth in emerging markets leading to strong oil market and high prices….

§ ...to over-supplied oil market and weak prices§ Breakthroughs on shale gas and shale oil§ "New Mediocre“ in world economy - today

2. China's transition § “Industrial/exporter“ to "services/consumer society"§ Structural problems§ "Policy mistakes"-- and dilemmas

3. Paris Climate Conference§ Transition to "lower carbon future“§ 185+ nations with carbon reduction plans

5

© 2016 IHS

Future expectations are shaped by beliefs …which have proven to be incorrect …

Source: IHS Energy. Numbered for ease of reference, not in order of importance or other reasons.

1. In early 1980s common belief prices would be $100 by 1990-2000.

2. High ($40s) oil would lead to recession (1980s- mid 2000s: oil price was in $20s)

3. Economic crisis come from emerging markets, not developed markets

4. US oil production would never stop declining

5. OPEC always supports price through supply management

6. Oil supply is scarce (“peak oil”) and will increasingly rely on Middle East

7. Oil demand will be strong for many years because more Chinese will be driving cars —and China’s economy will be strong for many years to come

©2016 IHS 6

© 2016 IHS

Tight oil

1. What is the timing of the crude oil price recovery?

2. At what price level will growth in US crude oil production return?

3. OPEC does not exist as we knew it. What does this mean for oil supply and the oil market?

4. Is a peak in global oil demand approaching?

5. Are we approaching a “Global Gas Reset”? What is the future for LNG?

6. What will be the impact on energy mix of efforts to address climate change and local pollution?

Note: Issues numbered for ease of reference and not necessarily order of importance.

Questions for the energy markets in 2016 and beyond

7

© 2016 IHS

Energy demand continues to grow globally, with renewables and gas rising the fastest

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 20400

1,000

2,000

3,000

4,000

5,000

6,000

IHS Base Case: Primary energy demand - by fuel, 1990-2040

Notes: Oil includes international marine/aviation bunkersCoal includes steam and coking coalRenewables include solar, wind, geothermal, and tide/wave/ocean energyOther includes biofuels, solid waste, biomass, and net trade of electricity and heat

Source: IHS © 2016 IHS

Million tons

oil eq

uivalent Share in 2015

Share in 2040

32%

21%

2%

10%

5%

28%

1%

6%

10%

25%

28%

23%

5%

3%

OilGasCoal

Other

NuclearRenewablesHydro

Draft June 2016

8

© 2016 IHS

Oil Markets

9

© 2016 IHS

We are in a supply crisis not a demand crisis – where are we in re-balancing markets?

• The oil industry has undergone numerous cycles over the past decades but this one is the worst since the 1980s.

• The current price crash downturn is caused by supply growing faster than demand,

• Prior periods of new supply (Alaska, Mexico, North Sea, West Africa) were marked by long lead projects, which once on line did not respond to lower prices.

• The US supply system is short-lead and price responsive. How it responds is a major element driving the re-balance.

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016E

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

Nominal oil prices, $/barrel

BrentWTI

© 2016 IHSSource: IHS

10

© 2016 IHS

How do you upend the order of the global oil market?See the stunning growth in USA production from 2008-15

©2016 IHS

2008 2009 2010 2011 2012 2013 2014 2015

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Cumulative growth in oil production relative to 2008

Notes: Production growth is for crude oil, condensate, and natural gas liquids.Source: International Energy Agency, EIA, IHS. . © 2016 IHS

Million barrels per day

USA

Rest of the world (net)

Saudi ArabiaRussia

CanadaIraq

11

© 2016 IHS

New world of oil: On supply side, economics rule with no OPEC management

Old OPEC order New world of oil0

20

40

60

80

100

120

New world oil of oil: Economics rule with no OPEC management

Source: IHS CERA © 2013 IHS

Illustrative oil production (MMb/d)

Low cost production

OPEC production

Non-OPEC production

OPEC spare capacity High reactivity barrels

High cost production

Global Demand

12

© 2016 IHS

The $2 trillion global upstream spending cutGlobal upstream oil and gas capital expenditures (capex) forecast for 2015-19 is down $2 trillion since the oil price collapse. About half of the cut is due to service cost reductions. The other half due to activity reduction.

$4.41

$2.46

August 2014 estimates February 2016 estimates

- 44%

Total Global Upstream Oil and Gas Capex 2015 – 2019(USD Trillion)

Data Source: IHS Global Upstream Spending Report

13

© 2016 IHS

US crude oil production started to decline at the end of 2015 and is expected to bottom out end 2016

Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-176

6.5

7

7.5

8

8.5

9

9.5

10Monthly US crude oil production

Source: IHS, EIA © 2016 IHS

Million ba

rrels pe

r day

• US production bottoms out at just below 8.5 MMb/d.

• Rig activity reaches a low point soon and increases in late 2016 and 2017.

• Steady, though not aggressive, drilled but uncompleted (DUC) liquidation throughout 2016 and 2017.

• Further gains in well productivity in key plays (e.g. Wolfcamp, Bone Spring, SCOOP) and in efficiencies.

• No near-term signs of sweet spot exhaustion.

9.7

8.5

9.2

14

© 2016 IHS

Non-OPEC crude oil supply growth turns negative as lack of investment takes hold

United States

Brazil

Canada

Indonesia

Colom

bia

India

Argentina

Kazakhstan

Norway

United

Kingdom

Oman

Russia

Azerbaijan

China

Mexico

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2015 2016 2017

Non-OPEC crude oil production annual change, 2015–17

Notes: Data are for 15 largest non-OPEC crude producing countries in 2013.Source: IHS

Million ba

rrels pe

r day

© 2016 IHS

15

© 2016 IHS

Gulf-5 responsible for most of OPEC crude production growth in 2016-17

Algeria

Angola

Ecuador

Gabon

Indonesia

Iran

Iraq

Kuwait

Libya

Nigeria

Qatar

Saudi Arabia

UAE

Venezuela

Total OPEC

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2015 2016 2017

Annual change in crude oil production for OPEC countries, 2015–17

Notes: Estimates for Saudi Arabia and Kuwait include 50% of Neutral Zone production.Source: IHS

Million ba

rrels pe

r day

© 2016 IHS

16

© 2016 IHS

World oil demand outlook trimmed, largely on “Brexit” vote impact—but demand still to grow 1+ MMb/d in 2016 and 2017

Changes in oil (liquids) demand by region (volume change from previous year in million barrels per day)

© 2016 IHS

Notes: Mexico is included in Latin America. Data in table may not add up due to rounding.Source: IHS

Global oil demand growth (MMb/d)

2015 2016 2017OECD 0.5 0.1 0.0Non-OECD 1.2 1.1 1.1Total world 1.7 1.2 1.1

North America

2015 2016 2017(0.50)

(0.30)

(0.10)

0.10

0.30

0.50

Europe

2015 2016 2017(0.50)

(0.30)

(0.10)

0.10

0.30

0.50

China

2015 2016 2017(0.50)(0.40)(0.30)(0.20)(0.10)0.000.100.200.300.400.50

Latin America

2015 2016 2017(0.50)

(0.30)

(0.10)

0.10

0.30

0.50

Africa

2015 2016 2017(0.50)(0.40)(0.30)(0.20)(0.10)0.000.100.200.300.400.50

Middle East

2015 2016 2017(0.50)(0.40)(0.30)(0.20)(0.10)0.000.100.200.300.400.50

Eurasia

2015 2016 2017(0.50)(0.40)(0.30)(0.20)(0.10)0.000.100.200.300.400.50

India

2015 2016 2017(0.50)(0.40)(0.30)(0.20)(0.10)0.000.100.200.300.400.50

Non-OECD Asia ex. China & India

2015 2016 2017(0.50)(0.40)(0.30)(0.20)(0.10)0.000.100.200.300.400.50

OECD Asia Pacific

2015 2016 2017(0.50)

(0.30)

(0.10)

0.10

0.30

0.50

17

© 2016 IHS

Global oil demand to slightly exceed production in 2H 2016, for the first time in more than two years

1Q 2013

2Q 2013

3Q 2013

4Q 2013

1Q 2014

2Q 2014

3Q 2014

4Q 2014

1Q 2015

2Q 2015

3Q 2015

4Q 2015

1Q 2016

2Q 2016

3Q 2016

4Q 2016

1Q 2017

2Q 2017

3Q 2017

4Q 2017

90

91

92

93

94

95

96

97

98

99

Demand Supply

World oil (liquids) demand and supply by quarter


Million ba

rrels pe

r day

Surplus

Note: For more details on our global balance, please see the data file, “IHS Energy Global Crude Oil Markets Outlook for Oil Market Fundamentals,” posted with this report.

18

© 2016 IHS

Charting the Path to Market Rebalancing The road from consolidation to mid-cycle prices goes through Riyadh

April to July 2015: $55/bbl - The spring rally

August to November 2015: $45/bbl - Testing US resilience

December 2015 to mid-April 2016:$35/bbl - Cash Suffocation

April 2016 to June 2016: $45/bbl - Consolidation

3Q16 to 2Q17: $50/bbl - Recovery

2H17: $57-$63/bbl - Mid-cycle price?

19

© 2016 IHS

Oil price quarterly low was in Q1 2016, but volatility will continue

• Price annual averages• 2014: Brent $99/WTI $93• 2015: Brent $52/WTI $49• 2016: Brent $45/WTI $44• 2017: Brent $57/WTI $56

• Assumptions • US production declines to 8.5 MMb/d by end 2016

• Iran adds 600,000 b/d in 2016

• Upside risks• Global crude outages, higher production declines in some countries

• Downside risks• Politics allow oil to come back into the market (Libya, Neutral Zone)

2012:1Q

2012:2Q

2012:3Q

2012:4Q

2013:1Q

2013:2Q

2013:3Q

2013:4Q

2014:1Q

2014:2Q

2014:3Q

2014:4Q

2015:1Q

2015:2Q

2015:3Q

2015:4Q

2016:1Q

2016:2Q

2016:3Q

2016:4Q

2017:1Q

2017:2Q

2017:3Q

2017:4Q

$0$10$20$30$40$50$60$70$80$90$100$110$120

Quarterly average Brent and WTI crude price outlook (nominal $/barrel)

Source: IHS, Argus Media Limited; 6 July 2016 © 2016 IHS

Brent

WTI

20

© 2016 IHS

Snapshot of global oil fundamentals and price outlook

© 2016 IHS

Notes: Gulf-5 includes: Saudi Arabia, Kuwait, United Arab Emirates, Iraq, and Iran. Liquids supply includes crude oil, condensate, and natural gas liquids (NGLs). Liquids demand includes all refined products, blended biofuels, synthetic fuels, as well as liquefied petroleum gases (LPGs) and ethane. A positive number for implied change in global liquids inventories indicates an implied stock build. A negative number indicates an implied stock draw. Figures are rounded. MMb/d = Million barrels per day.*World economic growth projections are preliminary.Source: IHS, Argus Media Limited

2013 2014 2015 2016 2017FUNDAMENTALS World economic growth* 2.5% 2.8% 2.6% 2.4% 2.7% (from previous year) World oil (liquids) demand growth 1.4 0.7 1.7 1.2 1.1 (from previous year in MMb/d) World oil (liquids) supply growth 0.9 2.2 2.8 (0.2) 1.2 (from previous year in MMb/d) US crude oil production growth 1.0 1.3 0.7 (0.6) (0.2) (annual average in MMb/d)

Gulf-5 crude oil production growth 0.0 0.4 1.2 1.0 0.6

(annual average in MMb/d)Implied change in global liquids inventories (1.1) 0.5 1.5 0.1 0.2

(annual average in MMb/d)PRICES Dated Brent $ 109 $ 99 $ 52 $ 44 $ 57 (annual average per barrel) WTI - Cushing $ 98 $ 93 $ 49 $ 44 $ 56 (annual average per barrel)

21

© 2016 IHS

Global Gas Markets

22

© 2016 IHS. ALL RIGHTS RESERVED.

Global gas snapshot: July 2016

23

Key regional trends shaping the LNG market

© 2016 IHS

China slowdown; strong coal competition

‘Residual market’ for LNG

Ongoing cost reductions

LNG imports for power

Growing LNG dependence Supply surge;

CBM uncertainty

Nuclear policy uncertainty; solar uptick

East Africa remains on

starting blocks

Growing gas surplus capacity

Alaskan and Canadian LNG

remain on starting blocks

Gas Long

Gas Short


US natural gas resource estimates have risen sharply

US natural gas resources vs break-even $/Mcf

Source: IHS

© 2016 IHS

• IHS raised US natural gas resource estimates from 900 Tcf in 2010 to 1400 Tcf in 2016 at a breakeven price of $4.00/Mcf

• 800 Tcf has a breakeven price of $3.00/Mcf

• Well data from the Marcellus and Utica is showing much larger and more prolific production than anticipated

24


The abundant low-cost resource base will keep Henry Hub prices below $4 through 2025

25


A Bear Market for LNG

• Supply capacity increasing by 50% in the next 5 years.

• Demand is much weaker than anticipated in core importing markets.

• Prices could fall very low for an extended period of time. Variable cost of LNG will influence how low prices can go and how much US production might be shut-in.

• Europe will serve as the key LNG market balancer.

• Key implications in the near term:

• Weak outlook for new Final Investment Decisions (FIDs)

• Aggregators key to market balancing

• Heightened optimization of LNG trade

• Liquefaction project FIDs in the longer term will be impacted by these changing market dynamics.

26


Global LNG supply is growing faster than demand

280 285

311

340 361

391

413

2014 2015 2016 2017 2018 2019 20200

50

100

150

200

250

300

350

400

450

US AustraliaOther Paciifc Other Atlantic Middle EastSoutheast Asia

Global LNG supply (capacity)

Note: MMtpa = Million metrics tons per annumSource: IHS © 2016 IHS

MMtpa

US

Australia

Middle East

Southeast Asia

Africa

243 249 269

301

324

339 350

2014 2015 2016 2017 2018 2019 20200

50

100

150

200

250

300

350

400

450

JKT Europe North America

Other Asia Latin America MENA

Global LNG demand

MMtpa

© 2016 IHSNote: JKT = Japan, Korea, Taiwan; MENA = Middle East and North AfricaSource: IHS

Japan, Korea, Taiwan

Other Asia

Europe

27


How will the global LNG market balance?

• Most non-US producers will not shut-in production since variable costs are low.

• Europe will play a key role in managing excess LNG as the oversupply intensifies since other major importers are facing structural and economic demand constraints.

• US LNG will help balance the oversupply particularly towards the end of the decade. European gas prices will limit how much US LNG will be needed on the market.

• After multiple years of low prices, new demand markets are expected to materialize.

• With LNG and gas prices lower for a long period, we expect a hiatus in new, large-scale liquefaction FIDs. Some smaller-scale projects might be able to find a way to FID, but these are likely one-off instances.

• After the market returns to a more balanced state post-2022, liquefaction project developers will face a new norm in buyer behavior.

• Despite their supply-long position in the coming years, LNG aggregators will still play a critical role in underpinning new supply for when market shifts back into balance.

28


Company Challenges and Strategies

29


The E&P spend decline should bottom out in 2016, with a small rise expected in 2017

• Global E&P capital spend is falling from $719 billion in 2014 to ~$385 billion in 2016

• Costs fell 20-25% with exploration activity falling by more than half.

• Spending in 2017 is relatively flat as companies focus on balance sheet repair

• These actions are creating a major portfolio “hole”2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

$0

$100

$200

$300

$400

$500

$600

$700

$800

Onshore ConventionalOnshore UnconventionalOffshore (including pipelines)

Global E&P onshore and offshore capexNominal $ billions

Source: IHS Energy © 2016 IHS

USD

Billion

$719

$385

30

© 2016 IHS

The volume of unsanctioned deepwater projects at risk is material to companies and countries

2010 2015 2020 20250

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

>$70 $60 - $70 $50 - $60

$40 - $50 <=$40 Producing

Deepwater crude production outlook by breakeven range


Thou

sand

barrels per day

<=$40

$40 - $50

$50 - $60

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

>$70 $60 - $70 $50 - $60 $40 - $50 <=$40

Unsanctioned deepwater crude production outlook by breakeven range


Thou

sand

barrels per day

<=$40

$40 - $50

$50 - $60

Producing

31

© 2016 IHS

Moving Beyond 2016

• Historically high debt leverage for IOCs, NOCs, and Independents will impact• E&P spending and portfolio decisions• Access to capital markets• Mergers & Acquisitions• Share price performance

• Balance sheet repair will feature strongly in 2017 for many companies

• Some regions continue strong, but many are flat

• Beyond 2017 activity will be rising

32

© 2016 IHS

IOC and NOC debt is skyrocketing and cash flow is negative for the Majors

1995

1996

1997

1998

1999

2000

2001

2002

2003

2005

2004

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015e

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

IOC and NOC debt has been rising sharply

Source: IHS Herold © 2016

IHS

Net deb

t, US$

billion

2003200420052006200720082009201020112012201320142015

2016 est.

2017 est.

-$60-$50

-$40-$30-$20-$10

$0$10$20$30

$40$50

US$

billion

Majors will significantly outspend operating free cash flow through 2017


Cash flow from operations less capital expenditures and dividends; does not account for asset sales, share buybacks or principal payments on debt.

BP, Chevron, ExxonMobil,Shell, Total

Majors

Euro IOCs

Latin NOCs

33

© 2016 IHS

2005200

6200

7200

8200

9201

0201

1201

2201

3201

4201

5201

6E$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

Exploration spend of the 21 largest IOC exploration companies plus Petrobras

© 2016 IHS

$ billion

s

Source: IHS, company guidance

$55

$46

$33

$15-$18

Global exploration spend is slashed again in 2016 and Majors foresee flat overall upstream spend

IOCs

Petrobras

$73$81

$106$94

$155$139$141

$162$152

$126

$95$92

2006200

7200

8200

9201

0201

1201

2201

3201

4201

5E201

6E201

7E$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$ billion

s

Global IOC upstream capital spending & production decline; proven reserve additions plummet

Source: IHS, company guidance © 2016 IHS

Preliminary 2015 Global IOC reserve replacement metrics: 1-yearMajors’ upstream capital spending outlook

34

© 2016 IHS

Unsanctioned projects are critical to raise Non-OPEC conventional supply

• Projects already sanctioned will add new non-OPEC supply through 2019 – and provide service sector work to EPC firms

• Delays in new project investment decisions will hit some sectors as late as 2018/19.

• E&P and service sector companies are seeking to provide new ways to make unsanctioned projects cost competitive

2016201

7201

8201

9202

0202

1202

2202

3202

4202

5-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

Non-OPEC conventional oil supply outlook

Source: IHS

Thou

sand

barrels/day

© 2016 IHS

Base decline

SanctionedUnsanctioned

Net

35

© 2016 IHS

Upstream M&A market: a buyers’ market with no buyers

§ 2015 deal count fell by almost 50%, lowest since 2001§ Total global deal value ex-Shell/BG, plunges 70%§ Corporate deal count 20-year low. Rejected unsolicited bids >$60 billion§ Asset deal value falls to lowest level since 2004§ US still accounts for 50% of total transaction value, ex-Shell/BG

36

© 2016 IHS

No shortage of opportunities: More than $260 billion of energy assets on the market, though best yet to come

© 2016 IHSSource: IHS

37

© 2016 IHS

Who wins and loses in energy’s future?

©2016 IHS

1. Many companies struggling to survive

2. Short-cycle oil—is it here to stay?

3. Long-lead time projects—such as large offshore projects—face severe challenges.

4. Onshore projects with short drilling to production times have the upper hand—at least for now

5. Global gas market has strong growth prospects, but not necessarily high upstream margins.

6. Consumers win—greater choice and competition among energy suppliers for market share

Points are numbered for ease of reference and not necessarily in order of importance.

39

© 2016 IHS

Will the future be different from the past?

§ Fossil fuels have held a remarkably steady share of around 80% of the global energy mix for decades

§ The high share of fossil fuels is due to their abundance, energy density, infrastructure, and competitive costs

§ Oil’s future will be shaped by transport and the future of gas by power generation

§ There will be more choices because of energy from wind, solar, and batteries – technology, price and policy will shape choices

40


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ENERGY

the great energy shakeout

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