the origins of the global oil price collapse and potential ...€¦ · the origins of the global...

LabyrinthConsul4ngServices,Inc. artberman.com

The Origins of the Global Oil Price Collapse and Potential Investment Opportunities

Arthur E. Berman, Petroleum Geologist

Labyrinth Consulting Services, Inc.

Houston, Texas

February 25, 2016


TheOriginsoftheGlobalOilPriceCollapseandPoten4alInvestmentOpportuni4es•  Thecurrentoilpricecollapserepresentsdevalua4onfromover-investmentin

unconven4onaloil—andmostcommodi4es—becauseofcheapcapital,aclassic“bubble.”

•  Itispartofalargerstructuraladjustmentoftheglobaleconomytounprecedenteddebtlevelsandprolongedlowinterestrates.

•  OPEC’sdecisiontoincreaseproduc4onispartofastratagemtostopcapitalprovidersfromfundingnon-commercial4ghtoilprojectsandtoincreaseitsmarketshare.

•  Highenergycostshaveresultedinloweconomicgrowth.•  Con4nuedoilpricesof$30perbarrelorlessaretheonlyreasonablepathto

highergrowthandabalancedoilmarket.•  OilpriceswillrecovermorequicklythanmostforecastsaslongasOPECholds

thelinelongenoughtoforceabehaviorchange.


EnergyIsTheEconomy:ACri4calPrologue•  Peoplethinkthattheeconomyrunsonmoneybutitruns

onenergy–NateHagens.•  Oilprices&theeconomymustbeviewedthroughthedebt

lens.•  Theendofcheapoilinthe21stcenturyledtofinancial

disloca4onsandul4mately,theFinancialCollapseof2008.•  Monetarypolicyfocusedonforcingconsump4onand

investment:zerointerest&furtherexpansionofcredit.•  Thisresulteduninten4onallyinthelongestperiodofhigh

oilpricesinhistoryandaboominunconven4onaloilproduc4on.

•  Thebubbledeflatedin2014.•  Over-produc4oncon4nuesbecausecashflowiscri4calto

servicedebtdespitelossesoneverybarrelproduced.•  Thereisnoquicksolu4on.Produc4onmustfallmuchlower

thanpresentlevelsandthiswillonlyhappenbyprolongedeconomicpressure.

•  Under-investmentwillcauseasharpoil-pricereboundinafewyears.

•  AnOPECproduc4oncutismorelikelyonceU.S.produc4onshowsmeaningfuldecline.


TheEndofNormalforOilMarketsin2014:OilOver-Supply&PriceCollapse

•  Energymarketshavebeencharacterizedbylowoilpricesandover-supplysincemid-2014.

•  SupplydeficitbeforeJan2014,supplysurplusa`er.•  Pricesfellfrom2011-2013averageof$111perbarreltoaverageof$52in2015.•  WithoutanOPECcut,2016priceswillprobablybeinthe$30perbarrelrange.

-0.30-0.10

-1.10

-0.30

1.27

0.80

-0.51

-0.95

-0.22-0.07

-0.81

-1.13

0.30

1.07 1.03

1.38

1.61

2.44

1.62

2.24

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1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 BrentCrudeOilPrice

(DollarsPerBarrel)

MarketB

alance--LiquidsProductionSurplusorDeficit(M

illionsofBarrelsPerD

ay)

WorldLiquidsMarketBalance(SupplyminusDemand)

Source:IEAOMRJanuary 2015,EIA& LabyrinthConsulting Services,Inc.

BrentPrice(RHS)

SupplySurplus(LHS)

SupplyDeficit(LHS)

AvgBrentPrice2011-2013:$111

AvgBrentPrice2015:$52

2014-2015


OriginsofOver-Supply&PriceCollapseinIncreasingScarcityofConven4onal

•  Theoriginsofthissitua4onarefound,ironically,inincreasedscarcityofpetroleumresources.

•  Increasingpropor4onofunconven4onaloilsince2000:deep-water,oilsands,4ghtoil.•  4-yearproduc4onplateau2005-2009.•  Conven4onalproduc4onpeakin2011.•  Worldproduc4onpeakinAugust2015?

70

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80

85

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100

Jan-2003

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Sep-2005

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Sep-2011

Jan-2012

May-2012

Sep-2012

Jan-2013

May-2013

Sep-2013

Jan-2014

May-2014

Sep-2014

Jan-2015

May-2015

Sep-2015

MillionsofBarrelsofLiquidsPerDay

WorldConventional&UnconventionalLiquidsProductionConventional Liquids Unconventional Liquids

UnconventionalOil

ConventionalOil

Source:EIA,Drilling Info, Statistics Canada &Labyrinth Consulting Services,Inc.

World PeakAug201596.9mmbpd

ConventionalPeakJan201186.2mmbpd

4-yearproductionplateau 2005-2009

IncreasingProportionofUnconventionalOil


HighestOilPricesinHistory,2010-2014

•  A`ertheFinancialCollapseof2008,oilpricesfellbrieflybelow$40perbarrelbutrecoveredquicklybecauseof3.2mmbpdOPECproduc4oncut.

•  Pricesweremorethan$90perbarrelfor45monthsbetweenNovember2010andSeptember2014.Longestperiodofhighpricesinhistory.

•  Bycomparison,highpricesinearly1980sdidnotlastaslongbuttriggeredalmost2decadesoflowoilprices.

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Jul-15

CPI-AdjustedWITCrudeO

ilPrice(DollarsPerBarrel)

OilPricesin2015Dollars

Sept1979-Sept1981:26months>$90

Sept2007-Sept2008:13months>$90

Nov2010-Sept2014:45months

>$90

1974ArabOilEmbargo

1979Iran-IraqWar

2008FinancialCrisis

OPECProduction Cut

Feb1986-Oct200317yearsof$34averageoilprice

Source:EIA,U.S.FederalReserveSystem&LabyrinthConsulting Services,Inc.


HighOilPricesFueledU.S.TightOilProduc4on

•  Highoilpricespartlybecauseofsupplyinterrup4onsfromLibya(-1.4mmbpd)andIran(-1.0mmbpd).TheselosseswerelargelyoffsetbyincreasesfromIraq(+2.35mmpbd)andSaudiArabia(+0.6mmbpd).

•  HighpricesalsocausedbyextraordinarymonetarypoliciesenactedinresponsetotheFinancialCollapse.

•  8yearsofzero-interestratepoliciesdiscouragedconven4onalinvestmentsinCDs,moneymarketsandTreasurybonds.

•  HighyieldcorporatebondsfromU.S.E&Pcompaniesofferedbeoermarginswithonlymoderateperceivedrisk.

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Jul-0

8

Oct-08

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Jul-0

9

Oct-09

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1

Oct-11

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3

Oct-13

Jan-14

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Jan-15

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5

Oct-15

Jan-16

MillionsofB

arrelsofCrude

OilProd

ucBo

nPe

rDayCom

paredTo

Janu

ary20

08

OPECCrudeOilProducBonComparedToJanuary2008

Algeria Angola Ecuador Iraq Kuwait Libya Iran Qatar SaudiArabia UnitedArabEmirates Nigeria Venezuela

SaudiArabia Iran

Iraq

Source:EIASTEO&LabyrinthConsulBngServices,Inc.

FinancialCrisisProducBonCut

ProducBondecreasesinLibyaduetocivilwar,inIranduetosancBons

Libya

SaudiArabia

Libya

IraqiproducBonhasincreased2.3mmbpdsinceJanuary2008

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c002

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#

WTI$Oil$Price$Janu

ary$2015$US$Do

llars$

Interest$Rate$

Federal$Funds$Interest$Rates$January$2000>January$2015$


ExpansionofCreditandofU.S.TightOilProduc4on

-1

-0.5

0

0.5

1

1.5

2

2.5

Jan-14

Feb-14

Mar-14

Apr-14

May-14

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Jul-1

4

Aug-14

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Oct-14

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Jan-15

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Jun-15

Jul-1

5

Aug-15

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MillionsofB

arrelsofLiquidsPerDayCom

paredtoJa

nuary20

14

LeadingNon-OPECLiquidsProducConComparedtoJanuary2014UnitedStates Brazil China Mexico Canada Russia

Source:EIA&LabyrinthConsulOngServices,Inc.

U.S.

Brazil

China

Russia

Source:EIA&LabyrinthConsulOngServices,Inc.

Canada

Mexico

TheU.S.isresponsibleformorethan70%ofNon-OPECover-producCon.Brazil&Canadaare

responsibleformostoftherest

•  DebtcausedtheFinancialCollapseandmoredebtwascreatedtoremedytheproblem.•  $57trillioninnewdebtsince2007.•  Globaldebtisnow$199trillion—286%ofGDP.•  U.S.debtis269%ofGDP.Chinaisevenhigher.•  U.S.isresponsibleformorethan70%ofnon-OPECover-produc4onsinceJan2014(+2.2

mmbpd).Brazil(+1.6mmbpd),Canada,ChinaandRussiaareresponsibleformostoftherest.

•  Thisover-produc4onisthemaincauseoftheglobaloilsupplyimbalance.


U.S.Produc4onHasNotDeclinedAsMuchorAsEarlyAsMostPredicted

•  U.S.crudeoilproduc4onhasdeclinedabout570,000bopdsincethepeakinApril2014,about60,000bopdpermonth.

•  EIAforecastisforatotaldeclineof1.4mmbpdbySeptember2016(~100,000bopdpermonth)beforeincreasingagainbasedon$43perbarrelWTIbyyear-end2016and$58byyear-end2017.

•  PricedeckhasWTIat$43perbarrelbyDecember2016&$58byDecember2017.•  Forecastsuggeststhattheoilmarketissufficientlyinbalancenowforpricestoincreasebut

thatproduc4onwillnotrespondtopricesignalsun4llaterin2016—veryop4mis4c.

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9.69

9.13

8.31

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6.5

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10.0

Jan-14

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MillionsofB

arrelsofCrudeOilPerDay

U.S.CrudeOilProduction&Forecast

-570kbpdsinceApril(~60 kbpd/month)

Forecastfor-1.38mmbpdbySept.2016(-117kbpd/monthJan-

Sept)-820kbpdlessthanJan2016

Source: EIASTEOFebruary2016&Labyrinth Consulting Services,Inc.

+1.25mmbpd(2mmbpdliquids)sinceJan2014(OPEC +1.1mmbpd)

Nov1970willremain U.S.peakby350kbpd

Octoberest.-490,000bopdNovemberest.-420,000bopdDecemberest.-450,000bopdJanuaryest.-570,000bopd

$31.68

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WTIPrice(DollarsPerBarrel)

STEOU.S.ProductionForecastPriceDeck


U.S.CrudeOilStocks

•  Liolechancethatoilpriceswillincreasebeyondthehead-fakesandsen4ment-drivenpricecyclesof2015andearly2016un4lU.S.crudeoilstoragebeginstodecrease.

•  Oilstocksarecurrently152millionbarrelsabovethe5-yearaverageand128millionbarrelsabovethe5-yearmaximum.

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MillionsofBarrelsofCrudeOil

U.S.CrudeOilStocks5-YearRange 2015Inventory 2016Inventory

5-YearRange

2015

Source:EIA&LabyrinthConsultingServices,Inc.

2016

152millionbarrelsabove the5-yearaverage


Cushing&GulfCoastWorkingStorageU4liza4on

•  CushingandGulfCoaststoragemakeupalmost70%ofU.S.workingstorage.•  Theseareasarecurrentlyat84%ofcapacity.Cushingat89%.•  Aslongasstoragevolumesremainabove80%ofcapacity,oilpriceswillbecrushed.•  Un4lU.S.oilproduc4ondeclinessubstan4ally,storagewillremainnearcapacity.

84%

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PercentUtilizationofW

orkingStorageCapacity

StorageInventoryandW

orkingCapacity(T

housandsofB

arrelsofOil)

Cushing andGulfCoastCrudeOilStorage

GulfCoast Cushing Capacity Utilization

GulfCoastInventory(83%Capacity)

Source:EIA &LabyrinthConsulting Services,Inc.

CushingInventory(89%Capacity)

WorkingStorageCapacity

Percent Utilization(RHS)


TheFutureLooksBeoer…Maybe

•  Largereduc4oninE&Pinvestmentin2015andprobablyevengreaterin2016.•  Deferredinvestmentsin2015equivalentto20billionbarrelsofreserves.•  Asubstan4alsupplydeficitwillresultinthenot-too-distantfuture.•  Apricespikeseemsunavoidable.

4

OUTLOOK | 2016: A Year of Transition. Global Oil and Gas Industry Outlook

E&P: Retrenching to the core

The rapid collapse in commodity prices in 2014 triggered a near immediate response from industry participants, which continues to reverberate in early 2016. Starting in late 2014 and continuing throughout 2015, upstream companies reduced dividends, cut or eliminated share buybacks, implemented supplier rate reductions, reduced capital spending by 20 to 40% (figure 2), and imposed staff reductions—or at least hiring and salary freezes. Drilling activity in the United States declined by more than 50% in the past 12 months.

Note: Does not include national or state-owned oil companies.Sources: Bloomberg, AlixPartners

Global capex spending trends and estimates, public companies (USD billions)

66

539

43

45 2324

29 29 28

28

29

8162

631

51648865

710

918964

745

128

10163

741

167

10363

541

172

10665

379

2010 2011

+12% –19%

2012 2013 2014 2015 2016E

Exploration and production DownstreamOil field services and equipment ChemicalsMidstream

FIGURE 2: Capex cut by 20% in 2015, with more in store for 2016

Early actions by companies across the value chain enabled those companies to lower break-even costs across active basins in the United States by 30% or more, which should make 2016 an easier year for them. Those companies aggressively reset their cost structures with suppliers; took organizational actions

to realign their general and administrative expenses (G&A), with new, lower levels of activity; and immediately began high-grading their drilling portfolios. Those actions enabled many companies to continue to operate selectively within the core areas of their acreage, where the development economics are still attractive. Those measures should serve as a roadmap for other players that face continuing challenges (figure 3).

In total, we estimate that overall capital spending by public companies worldwide declined by nearly 20% in 2015 from record 2014 levels, with the E&P sector declining by more than 30%. Capital spending reductions by upstream producers are expected to continue this year, which will help rebalance supply and demand and eventually help boost commodity prices. In the short term, however, spending reductions will have a pronounced, negative impact on the oil field services and equipment sector and require even more aggressive cost reductions.

Meanwhile, oil and gas M&A activity in the first half of 2015 dropped to a multiyear low (figure 4) as buyers and sellers struggled with asset valuations in a volatile pricing environment. However, US E&P operators with high debt and large impairments will likely have to resort to asset sales as access to capital recedes.

Looking to 2016, we expect the start of a slow and steady recovery in prices, driven by global supply-and-demand dynamics. Transportation fuel demand—particularly caused by growth in developing economies—is largely responsible for sustaining global oil demand and for generating only minimal growth in some markets.

Sources: Morgan Stanley, Rystad Energy, US Energy Information Administration, International Energy Agency, AlixPartners analysis

Unconventional oil plays Likely 2016 break-even estimates

Basin/Play Break-even Range (USD/bbl)

Low High

Niobrara $ 32.50 $ 48.45

Anadarko $ 32.91 $ 69.19

Marcellus $ 33.18 $ 41.80

Eagle Ford $ 37.12 $ 70.24

Bakken $ 37.12 $ 65.55

Permian $ 37.82 $ 75.97

Granite Wash $ 38.52 $ 81.70

Mississippian $ 47.23 $ 61.75

Utica $ 50.56 $ 68.22

Barnett $ 52.11 $ 62.66

Uinta $ 56.88 $ 68.40

Tuscaloosa Marine $ 65.57 $ 78.85

$50.00 to $64.99/bbl $65.00+ /bbl

Sources: Morgan Stanley, Rystad Energy, US Energy Information Administration, International Energy Agency, AlixPartners analysis

$30.00 to $49.99/bbl

FIGURE 3: Drilling down: North American break-even costs

11/9/2015 The New Oil Order: in charts - FT.com

http://www.ft.com/intl/cms/s/2/ccd5c56a-36ce-11e5-b05b-b01debd57852.html#axzz3qzrjTpCi 3/9

The world’s big energy groups have shelved $200bn of spending on new projects. WoodMackenzie, the energy consultancy, says that companies have deferred 46 big oil and gasprojects with 20bn barrels of oil equivalent in reserves, which is more than Mexico’s entireproven holdings. Wood Mac says that the number of major upstream projects expected to befully approved during 2015 could probably be counted “on one hand”.

Saudi Arabia


AnOilPriceWeCanLiveWith

•  IMFprojec4onsindicatethatSaudiArabiaanditsGulfStateblockneed~$75perbarreltobalancetheirfiscalbudgets.

•  OPECaverageis$94perbarrel.•  KeyoperatorsinthethreemainU.S.4ghtoilplaysneed~$70perbarreltobreak

even.•  $70-80perbarrelaccommodatesthelower-costproducers.

$49

$69 $70

$86$89

$94 $95 $97

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$137

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Kuwait Iraq UAE SaudiArabia Qatar Average Oman Libya Bahrain Algeria Iran Yemen

FiscalBreak-EvenPrice

(DollarsPerBarrel)

IMFProjected2016FiscalBreak-EvenOilPrices

Source: IMF


TheOriginsoftheGlobalOilPriceCollapseandPoten4alInvestmentOpportuni4es

•  Widespreaddefaultsandbankruptciesarepossibleinthefirsthalfof2016.

•  AnOPECcutinmid-2016islikely.Withoutthis,thepricerecoverywillbeveryslow.

•  Itisunlikelythatpriceswillreturnto$90-100levelsexceptforbriefspikes.

•  Theglobaleconomywillremainweakun4lde-leveragingoccursandwillbeunabletosustainhighoilprices.

•  Therewillbeinvestmentopportuni4esbybewnglong(1-3years)onoilpricesattheearliestsignsofmovementstowardmarketbalance.

•  Therewillbeopportuni4esplayingoil-pricevola4litycycles.•  Thesebetsinvolveconsiderableriskandwillrequire

diligentandexpertmonitoringofevents.•  Investorsshouldbewillingtolosetheiren4reinvestment

becauseofextrememarketuncertain4es.•  Energyinvestmentcannotbesuccessfulwithoutawareness

oftheco-rela4onshipofenergyandthetotaleconomy.

the origins of the global oil price collapse and potential ...€¦ · the origins of the global...

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