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2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
2014 CGEP Westwood oil and economic growth
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2014 CGEP Westwood oil and economic growth

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An interesting presentation by Energy consultancy upon the impact of shale oil on the oil peak.

An interesting presentation by Energy consultancy upon the impact of shale oil on the oil peak.

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  • 1. 1 Steven Kopits Managing Director Douglas-Westwood / New York Oil and Economic Growth A Supply-Constrained View Center on Global Energy Policy School of International and Public Affairs Columbia University 11th February 2014
  • 2. 2 www.dw-1.com LNG offshore onshore downstream power LNG renewables History and Office Locations • Established 1990 • Aberdeen, Canterbury, London, New York, Houston & Singapore Activities & Service Lines • Business strategy & advisory • Commercial due-diligence • Market research & analysis • Published market studies Large, Diversified Client Base • 1,000 projects, 70 countries • Leading global corporates • Energy majors and their suppliers • Investment banks & PE firms • Government agencies Spanning the Energy Sectors • 10 years in offshore renewable energy © Douglas-Westwood Limited 2013 Our Business
  • 3. 3 Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 4. 4 Demand versus Supply Driven Forecasting GDP Growth Oil Demand Growth Oil Supply Growth • exogenous • 𝑓(𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ) • 𝑓(𝑑𝑒𝑚𝑎𝑛𝑑 𝑔𝑟𝑜𝑤𝑡ℎ) Demand-driven Forecasting Oil Supply Oil Demand Growth GDP • exogenous • 𝑓(𝑂𝑖𝑙 𝑠𝑢𝑝𝑝𝑙𝑦 𝑔𝑟𝑜𝑤𝑡ℎ) • 𝑓(𝑂𝑖𝑙 𝑠𝑢𝑝𝑝𝑙𝑦 + 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 𝑔𝑎𝑖𝑛𝑠) Supply-driven Forecasting
  • 5. 5 Demand versus Supply Driven Forecasting GDP Growth Demand Growth Supply Growth • exogenous • 𝑓(𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ) • 𝑓(𝑑𝑒𝑚𝑎𝑛𝑑 𝑔𝑟𝑜𝑤𝑡ℎ) • Traditional forecasting model • Many forecasters will never see anything but this during their entire career • Virtually all forecasters—investment banks, oil companies, and industry analysts, the US and foreign governments—use demand-constrained models. Demand-driven Forecasting
  • 6. 6 Demand versus Supply-Driven Forecasting GDP Growth Demand Growth Supply Growth • Supply growth is a function of non-OPEC supply and OPEC supply • OPEC provides the residual: “Call on OPEC” • OPEC is to stabilize prices with increased production or production cuts Traditional Oil Markets Forecasting Call on OPEC𝑇ℎ𝑒 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙
  • 7. 7 BP / IEA Forecasting • A demand-driven interpretation. “Global liquids consumption is projected to reach 104 Mb/d by 2030 but growth slows to 0.8% p.a. (from 1.4% p.a. in 1990-2010 and 1.9% p.a. in 1970-90).” “Demand growth comes exclusively from rapidly growing non-OECD economies. China, India and the Middle East together account for nearly all of the net global increase. OECD demand has peaked and consumption is expected to decline by 5.6 Mb/d.” BP Energy Outlook, Jan. 2013 (pp. 33, 39) From BP’s Energy Outlook, 2013
  • 8. 8 BP / IEA Forecasting BP Energy Outlook, Jan. 2013 (p. 41)
  • 9. 9 BP’s View of the Residual Call on OPEC GDP Growth Demand Growth Supply Growth Call on OPEC • BP solves oil supply growth > demand growth with rising spare capacity in OPEC. • This means purely Saudi Arabia, barring unexpected outages in other countries—on which more later. BP Energy Outlook, Jan. 2014 (p. 32)
  • 10. 10 Assumptions of Demand Constrained Forecasting • Oil demand is weak - GDP growth is endogenously weak, or - Social tastes or demographics have changed • OPEC is central - OPEC has enormous leverage - OPEC discipline is key to industry economics • Oil prices are balanced on a knife’s edge - Any excess supply or lack of OPEC discipline will tank oil prices—and with it, the IOCs
  • 11. 11 Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 12. 12 Demand versus Supply Driven Forecasting Oil Supply Growth (OPEC + non-OPEC) Oil Demand Growth GDP Growth • Exogenous, OPEC and non- OPEC considered together • Assumes limited accommodation from OPEC Supply-Constrained Forecasting • A “binding constraint” view of economic growth • Oil supply growth is insufficient, reducing GDP growth 𝛈 • Inherent Demand Growth – from unconstrained supply • Observed demand growth – Growth actually observed in the data, less than inherent demand growth • Efficiency Gain – Economy decreases energy intensity over time • Residual If efficiency gains + oil supply growth not sufficient, GDP growth will be limited
  • 13. 13 Supply-Constrained Pre-Conditions Need to demonstrate…. Constrained Supply • Demand is likely higher than demonstrated • Oil supply growth is constrained • Oil is a key enabling commodity (can affect GDP) • Constrained oil supply is materially affecting economic activity • Efficiency gains are likely not enough • GDP growth is off trend Traditional Forecast (Demand-driven) • “Peak demand” largely unsupported • Oil prices sustaining in the face of supply growth in excess of forecast demand
  • 14. 14 Full Cycle Gas Economics Source: Barclays Capital • Natural gas prices will continue to rise • Median required breakeven price is around $8 / mmbtu E&P Capex per Barrel 80 90 100 110 120 130 140 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Electric Power - Gas Electric Power Sector - Coal Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 15. 15 80 85 90 95 100 105 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 mbpd Actual (EIA) - Last Three Months of Period Expected Based on GDP Growth @ 2.5% Eff. Gain Expected Based on GDP Growth @ 1.2% Eff. Gain • Oil demand historically increases by 0.75 * GDP growth (inherent demand growth) • Implies 23%+ oil consumption growth from 2004-2013 • Actual oil supply growth was only 7.5% • By 2008, the world economy was missing a quantity equal to the output of Saudi Arabia • Today, compared to 2004 Q4, we’re missing a Saudi Arabia and an Iraq • That’s why oil is expensive Source: EIA. IMF, Douglas-Westwood analysis Observed Oil Supply; and Oil Demand anticipated based on GDP growth 39% Global GDP Growth 7.5% Oil Supply Growth • Demand growth = GDP growth – 1.2% annual efficiency gain without oil price pressure • Demand growth = GDP growth – 2.5% annual efficiency gain with oil price pressure at recent levels Inherent Demand
  • 16. 16 Liquids Supply Since 2005 • Total production up 5.8 mpbd since 2005, of which 1.7 mbpd is OPEC NGL’s (non-crude) • OPEC liquids production (crude + NGL) is unchanged since 2005 • US unconventional liquids (shale oil and NGL) up 5.1 mbpd—literally all net crude oil production growth—since 2005. • Canadian oil sands up 1.2 mbpd from 2005 • Legacy, conventional system still peaked in 2005. • Oil supply growth entirely leveraged to unconventionals Source: EIA STEO World Liquids Production Growth, 2005-2013, Oct- Dec averages, excludes OPEC NGLs 5.1 1.2 (1.8) 1.3 3.0 0.9 (0.7) (1.0) -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 US (incl. Shale Oil, NGL) Canada (incl. Oil Sands) Opec (incl. Iraq) All others mbpd Change Dec 2013 vs. Dec 2005 Change Dec 2013 vs. Dec 2010
  • 17. 17 OPEC Liquids Supply since 2005 • OPEC crude essentially unchanged in last three years, 1.8 mbpd less than 2005 • Most growth is NGLs, up 1.7 mbpd since 2005 • Iran, Libya, and Nigeria together down 2.4 mbpd since 2010 • Saudi up nearly 700 kbpd from 2010, close to 1979 levels • Iraq up only 1.2 mbpd since 2005—US adds more in a year now • US shale oil and NGLs would be easily the second largest producer in OPEC Source: EIA STEO, three month averages ending December of each year OPEC Liquids Production Growth 2005-2013 1.2 (3.0) 0.1 (0.0) 1.7 0.5 (2.4) 0.7 0.6 0.3 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 Iraq Iran, Libya, Nigeria Saudi Arabia Other OPEC Crude OPEC NGLs mbpd Change Dec 2013 vs. Dec 2005 Change Dec 2013 vs. Dec 2010
  • 18. 18 5.1 1.2 (1.8) 1.3 3.0 0.9 (0.7) (1.0) -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 US (incl. Shale Oil, NGL) Canada (incl. Oil Sands) Opec (incl. Iraq) All others mbpd Change Dec 2013 vs. Dec 2005 Change Dec 2013 vs. Dec 2010 Liquids Supply Since 2005 • Total spend since 2005 on upstream exploration and production: $4 trillion • Of which, $350 bn on US and Canadian unconventional oil and gas… • …and another $150 bn on LNG and GTL • $3.5 trillion was spent maintaining the 2005 legacy oil and gas system • About $2.5 trillion* was spent on legacy crude oil production—94% of the petroleum liquids supply today. • Result: legacy oil production has fallen by 1 mbpd • Peak oil for legacy system: still 2005 • For comparison: ‘98-’05, $1.5 trillion spend added +8.6 mbpd crude production • Compared to ‘98-’05 period, vaporized GDP of Germany Source: EIA STEO, Barclays, DW Analysis $350 bn 7% of supply $2,500 bn 93% of supply * GDP of Germany is $3.5 trn, Italy $2.0 trn World Liquids Production Growth, 2005-2013, Oct- Dec averages, excludes OPEC NGLs
  • 19. 19 Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 20. 20 Motorization and Oil in Historical Context Source: EIA • Motorization in West: 1.2 bn people, +30 mbpd supply, 12 years • Motorization in the East: 1.3 bn people, +4 mbpd crude, 8 years • Based on historical precedent, anticipated growth would be 2.7% per year, not 0.8% 20 30 40 50 60 70 80 mbpd World Crude Oil Production (C+LC): 1960-2011 World Crude Oil Production, million barrels per day
  • 21. 21 China Key Driver of Oil Demand Growth • How far? Japan, Korea, Taiwan: 0.5-0.6x US oil consumption per capita • When? S curve is 20-30 years—about one generation • Potential is enormous—50 mbpd in 2030 versus 10.5 now (if the oil supply were available; US is at 18.5 mbpd now) • Total non-OECD demand growth to 2030 could be 60 mbpd—2/3 as much as total production today. • How does this translate in 0.8% growth? 5 10 15 20 25 30 35 40 45 50 55 millionbarrelsperday China as Japan (1960-1973) China as Korea (1976-1996) China - EIA IEO 2010 Source: EIA, Douglas-Westwood Analysis China Unconstrained Demand China is here.
  • 22. 22 Petroleum Liquids – 2030 Forecast • Exxon, BP, EIA: 103-107 mbpd • Total, IEA: 95-96 mbpd • Kjell Aleklett (ASPO Europe): 75 mbpd (ex-shales) • These are all peak oil forecasts—not much changed in last few years Source: EIA Oil (Petroleum Liquids)Supply Forecasts to 2030 70 75 80 85 90 95 100 105 110 2030 MillionsbarrelsperDay Exxon 2040 (2012) EIA AEO 2012 BP 2030 (2012) IEA 2011 Total SA 2012 Uppsala 2010
  • 23. 23 • Assuming 100 mbpd supply by 2030, US consumption would be expected at 14 mbpd—down 1/3 from 21 mbpd in mid 2007 • Rate of long term decrease: 1.5% per annum, 2.3% on a per capita basis − Per capita, still puts US in 2030 on par with Japan, Korea today. Source: Douglas-Westwood projections based on EIA data Global Oil Consumption 2005 - 2030 Determining Demand Trends
  • 24. 24 OECD and Non-OECD Oil Consumption • OECD consumers providing 50% of new non-OECD oil consumption since Dec. 2007 • OECD consumers providing 28% of new non-OECD oil consumption in last year OECD countries in systemic crisis: USA, UK, Ireland, Iceland, Greece, Spain, Portugal, Hungary, Italy, France, Cyprus, Estonia, Latvia, Lithuania, Netherlands, Japan Non-OECD countries in systemic crisis: ? -100% 0% 100% 200% 300% 400% 500% 600% 700% 800% (6.0) (4.0) (2.0) - 2.0 4.0 6.0 8.0 10.0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Percentofnon-OECDOilDemandGrowthfrom OECDConsumers ChngeinOilConsumptionsinceDec.2007, mbpd Change in non-OECD Demand from Dec. 2007 (lhs) Change in OECD Demand from Dec. 2007 (lhs) Share of non-OECD Demand from OECD Consumers (rhs) Share from OECD Consumers, year on year (rhs) Source: EIA Change in OECD and non-OECD Oil Consumption since Start of the Great Recession
  • 25. 25 Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 26. 26 Oil price forecasts generally fall into one of three schools: • Futures Curve: The NYMEX futures curve sees oil prices falling below $90 / barrel by 2020. Underlying this is the implicit assumption that oil will somehow become cheaper or easier to find and produce, in contrast to the experience of the last decade. • “Operators’ Forecast”: Absent a convincing oil price model, a number of oil companies are using a “best guess” approach, which assumes that oil prices will remain around or above $100 / barrel on a Brent basis. This is not scientific, but many, if not most, oil company executives think this seems plausible and sufficiently conservative for investment decisions. • DW Forecast: Douglas-Westwood uses a unique supply-constrained model which has proved itself successful in both explaining and predicting oil prices and country level demand. This models assumes the global economy is constrained by a struggling oil supply, with the oil price rising to the global carrying capacity (similar to the monopoly price). Global carrying capacity should continue to increase by up to 7% theoretically, and about 4.5%, empirically. Oil Price Outlook $50 $70 $90 $110 $130 $150 $170 $/barrelcrude,Brentbasis "Operator's Forecast" Brent Oil Price Brent NYMEX Futures DW Brent Forecast Source: EIA, NYMEX, DW Forecast Brent Oil Prices – Historical and Forecast
  • 27. 27 Source: EIA, BP, Douglas-Westwood analysis Oil Supply and Demand under Supply- and Demand-Constrained Approaches Why no price collapse in 2013? $60 $70 $80 $90 $100 $110 $120 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 2013 2014 BrentOilPrice$/bbl ChangeonPreviousYear Oil Supply (EIA) Oil Demand (BP / IEA) Inherent Demand (DW) Brent Price (EIA) Max Brent Price (DW) • Demand-Constrained : Supply-growth substantially in excess of demand growth should have crashed oil prices. But that didn’t happen. • Supply-Constrained: With a global economy starved for oil, economic activity expanded to absorb excess supply, prices returned to carrying capacity.
  • 28. 28 Source: EIA US and China Annual Oil Consumption Growth (3 mma) But a supply constrained models depends on China • A demand-constrained model is driven primarily by demand in China • China sets the price, and causes the oil supply to be rationed • China has been all but absent from oil markets in recent times • This has allowed supply growth to increasingly flow to the advanced economies— US consumption has jumped since Q4 2013 • Without pressure from China, the OECD countries growth may not be constrained -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 USA China
  • 29. 29 19.2 22.3 20.1 0 0 0 0 0 1 1 1 1 1 1 18 19 20 21 22 23 24 Jan-2000 Jul-2000 Jan-2001 Jul-2001 Jan-2002 Jul-2002 Jan-2003 Jul-2003 Jan-2004 Jul-2004 Jan-2005 Jul-2005 Jan-2006 Jul-2006 Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010 Jul-2010 Jan-2011 Jul-2011 Jan-2012 Jul-2012 Jan-2013 Jul-2013 mbpd US Oil Cons. (12 mma) US Cons. at LT Trend US Cons. Pro Forma Recovery US Predicted "Peak Oil" Cons. US Demand Outlook • Normal US oil consumption growth trend: 1.8% per annum • Break trend 2005, US off trend twice now in last nine years • Consumption should be 22.3 mbpd, actual 19.2 mbpd (-14%) • The US is still a major exporter, but also the fastest growing oil producer. How does this affect US consumption and GDP growth? • Does increased US oil production allow the US to consume more oil? Source: EIA US Oil Demand – 2000 to 2013 Current Cons. Normal growth trend: +1.8% p.a. Cons. on long term trend Trend from Arab Spring Constrained trend: -1.5% per annum
  • 30. 30 Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 31. 31 Oil Consumption, VMT and Prosperity are Related • VMT, oil consumption and GDP growth have historically been almost directly correlated. Source: US Department of Transportation, EIA, Douglas-Westwood analysis Index of US Vehicle Miles Driven and Oil Consumption (1970 = 100)
  • 32. 32 Stay at Home: US Miles Driven • Peak driving was 2005—not 2007! • The US has lost mobility as it has lost oil consumption • New hires in the US cannot use any more oil—and this affects mobility • 1 in 6 cars missing from the road Source: DS Short, US Department of Transportation US Vehicle Miles Driven
  • 33. 33 Vehicle Ownership • Also, “peak car ownership”, in 2006 • Predates the recession Source: Michael Sivak, UMTRI, “The Reasons for the Recent Decline of Young Driver Licensing in the U.S.” Car Ownership in the United States
  • 34. 34 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 18-24 25-34 35-44 45-54 55-64 65-74 75+ 2007 2011 Not because seniors don’t want to drive • Relative probability for buying a car for 25-44 year olds has fallen. • Relative probability of buying a car for age 45+ has risen--substantially Source: Michael Sivak, UMTRI, “MARKETING IMPLICATIONS OF THE CHANGING AGE COMPOSITION OF VEHICLE BUYERS IN THE U.S.” Relative Probability of Buying a Car in the US by Age
  • 35. 35 Driving and Employment • No car, no job: Only 19% of persons aged 18-39 without a driver’s license hold a full time job. • Unemployment represents 80% of the reason young people are driving less Source: Michael Sivak, UMTRI, “The Reasons for the Recent Decline of Young Driver Licensing in the U.S.” Employment Status of Person’s without a Current Driver’s License Source: HDLI, “Drop in teen driving tracks with teen unemployment”, http://www.iihs.org/iihs/news/desktopnews/drop-in-teen-driving-tracks-with- teen-unemployment-hldi-study-finds Ratio of teen drivers to prime-age drivers and unemployment spread between teens and prime-age workers
  • 36. 36 Evidence of Oil Price Pressures on Behavior Source: : Michael Sivak, UMTRI, “A Comparison of CAFE Standards and Actual CAFE Performance of New Light Duty Vehicles” • Achieved new vehicle fuel economy has exceeded required standards—suggests price pressures influencing consumer choice • However, if oil (gasoline) prices ease, the pressure on the consumer to conserve rapidly dissipates Achieved and “Projected Achieved” CAFE Standards -8% -6% -4% -2% 0% 2% 4% 6% 8% Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Annual Rate of Improvement in New Vehicle Mileage Six month moving average Annual Rate of Improvement in New Vehicle Mileage Annual Rate of Improvement in Gasoline Consumption
  • 37. 37 50 60 70 80 90 100 110 120 1996 1996 1997 1998 1998 1999 2000 2000 2001 2002 2002 2003 2004 2004 2005 2006 2006 2007 2008 2008 2009 2010 2010 2011 2012 2012 2013 IndexofActivityAug.2005=100 (Peak) 12 mma Monthly LT Trend And it’s not just cars: US Airline Departures • US commercial airline departures are 16% below their 2005 peak… • …and departures are 30% below trend (even allowing for recession) • For every two aircraft taking off from US airports, one is missing • And the trend continues to decline. Source: US Department of Transportation, Douglas-Westwood analysis US Commercial Airlines (System) Departures: Peak = 100 (Aug. 2005) -16% -30%
  • 38. 38 • Ethane/Ethylene production growth linked to low natural gas prices and abundant supplies of natural gas liquids • Jet fuel down 14% • Heating fuel down 35% • But on-road diesel up by 1% and gasoline down by only 4% • Refutes proposition of reducing driving attributable to changed tastes or demographics—people are struggling to hang on to mobility And it’s worse in other sectors Source: EIA Product Supplied in the US: Change from 2005 to 2013 -70% -64% -46% -35% -27% -14% -4% 1% 72% -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Residual Fuel Oil Distillate to Power Asphalt Heating Oil Pet Coke Jet Fuel Gasoline Diesel Fuel Ethane/Ethylene
  • 39. 39 Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 40. 40 Listed Oil Majors: Capex and Crude Oil Production • Oil production has faltered, even as capex has soared • Capex productivity has fallen by a factor of five since 2000 • Observed decline trend now approaching 5% per year Crude Oil Production and Capex $50 $73 $109 $199 $192 $262 13.8 15.3 16.1 15.4 15.9 14.4 14.0 12.0 12.5 13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5 0 50 100 150 200 250 300 Crudeoilproduction(mbpd) US$billion CAPEX ($Billions) LHS OIL PRODUCTION RHS Combined data for BG, BP, COP, CVX, ENI, OXY, PBR, RDS, STO, TOT, XOM Source: Bloomberg via Phibro Trading LLC
  • 41. 41 Upstream Spend Continues Strong Source: Barclays Capital • Upstream spend (capex) has risen strongly in the last decade, with industry expectations, only six months ago, for continued strong gains Upstream Spend – Actual and Forecast (includes both NOCs and IOCs)
  • 42. 42 Parts of the Industry Look Great Source: Douglas-Westwood • Current revenues and backlog are at record levels throughout much of the industry • Q1 2013 subsea hardware orders were the best ever—by far • But profitability has lagged. Subsea Hardware Orders 0 1,000 2,000 3,000 4,000 5,000 6,000 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 SubseaOrderValue(US$million) GE Oil & Gas FMC Dril-Quip Cameron Aker Solutions 12-Month Moving Avg
  • 43. 43 Costs are Rising Fast Source: Barclays Capital • Profits have lagged because costs are rising faster than revenues. E&P capex per barrel has been rising nearly 11% per year. • Brent oil prices have been largely flat. • A number of projects have consequently been deferred, cancelled or return for re-evaluation. E&P Capex per Barrel
  • 44. 44 Turbulence in the Oil Sector * Goldman Sachs calculated economic breakeven oil price; Mad Dog breakeven price for Phase I and II together
  • 45. 45 • Costs have outpaced revenues by 2-3% per year. Profitability is down 10-20%. • The vast majority of public oil & gas companies require oil prices of over $100/bbl to achieve positive free cash flow under current capex and dividend programs • Nearly half of the industry needs more than $120/bb. The 4th quartile, where most US E&Ps cluster, needs $130/bbl or more. Source: Goldman Sachs Oil Price Required by Oil Companies to be Free Cash Flow Neutral After Capex and Dividends The Industry Needs $100+ Oil Prices
  • 46. 46 -80,000 -60,000 -40,000 -20,000 0 20,000 40,000 60,000 80,000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 IntegratedOilsFreeCashFlow($mn) Oil price increase greater than E&P Cost Oil price increase less than E&P Cost Recession & recovery Integrated Oils Free Cash Flow Post Working Capital, Dividends and Capex Source: Goldman Sachs Shell: “Sharper focus on fewer projects.” “Shell said it was dropping its oil and gas production growth targets, in a sign of how difficult it is becoming for supermajors to increase output.” The Majors Respond • Shell: Discontinue production guidance and focus on increased cash flow generation. • Shell: No Alaska 2014 • Major divestment programs
  • 47. 47 The Oil Cost Curve Approval threshold Based on anticipated oil price levels Cost inflation Projects at Risk of being canceled or delayed with Cost Inflation Projects at Risk of being canceled or delayed without Cost Inflation Iraq, most other Middle East Most GoM Fields, Pre-Salt Brazil GoM Lower Tertiary, Cheaper Shales Marginal Shales, Heavy Oil, Russian Greenfield Increased CapEx to OFS providers Increased CapEx + Bespoke Technology Innovation Innovate or eliminate as a class Govt take becomes central issue • Some high cost projects will be abandoned. More will be “pushed to the right” as operators use their current capex budgets to pay for earlier years’ cost overruns. • Operators will begin to take a closer look at their budgets, particularly related to deepwater exploratory drilling. Cost- effective solutions will be in demand, opening a new chapter on technology development. • Reducing government take (tax and royalties) will be a key focus of operator efforts. Governments will respond in an attempt to keep the operators in play, as they have been or are doing in US, Russian and Norwegian Arctic.
  • 48. 48 Conventional Oil Production • The conventional oil system—including Iraq, excluding Canada, US unconventionals and NGLs—peaked in 2005 • Oil systems normally follow symmetrical advance and decline around a peak. • Crude production has been maintained primarily by a massive increase in upstream spend, bringing production to the left from inherently lower “natural” levels • How does oil production regain trend? Fast? Slow? Or at all? Source: BP Statistical Review 2013, EIA STEOs 2008, 2013; smoothed data Change in Legacy Crude Oil Production from 2005 to 2012 66 68 70 72 74 76 78 80 82 84 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mbpd Crude Production Forward Iraq Crude Oil Normal Decline
  • 49. 49 E&Ps Cutting Capex One after Another Capex Set to decline Statoil to Postpone 2020 Production Target • Statoil Chief Executive Helge Lund -- cut costs $1.3 billion a year starting in 2016 in a bid to counter escalating oil sector costs. • Chevron -- 5% decrease in 2014 Capex from $42 billion in 2013. • Hess capex down 30% over two years • Shell capex down 20% for 2014. • BG expects 2015-2016 capital expenditure to fall to $8-10 bn from $12 bn(BG est.) in 2013.
  • 50. 50 Listing Oil Majors: Capex • Capital discipline now a key theme at oil majors • Cash flow growth over production growth • Implies unraveling • Substantial deterioration in outlook since October 2013 • Oil majors face a very challenging climate Historical and Forecast Crude Oil Production and Capex (Provisional, subject to Revision) Combined data for BG, BP, COP, CVX, ENI, OXY, PBR, RDS, STO, TOT, XOM Source: Bloomberg via Phibro Trading LLC 273 193 $0 $50 $100 $150 $200 $250 $300 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 UpstreamSpend,USDollars,billions Historical Capex Current Forecast Capex Forecast Capex based on Hess DW Oct. Provisional Forecast Industry "Consensus"
  • 51. 51 Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 52. 52 Supply-Constrained Oil and Economic Growth • In order to argue for a supply-constrained model, there must be a residual prepared to adjust up or down for increased or decreased oil supply. • This must be GDP growth, assuming the efficiency gains are bounded. • What do we need to demonstrate if this is true?
  • 53. 53 Supply-Constrained Oil and Economic Growth • Need a plausible model showing the mechanism of constraint. • Need to see some empirical evidence.
  • 54. 54 Oil Efficiency and GDP • In normal times, oil efficiency in GDP increases by 1.2% / year • In “stressed” times, 2.0% is possible • For six recent quarters, US efficiency up 3.8% -- 2.3% GDP growth • OECD GDP growth probably capped at 1.0-2.0% • A constrained oil supply is reducing OECD GDP growth by 1-2% 1.2% 2.0% 2.5% 3.8% 4.5% 8.0% -0.3% 0.5% 1.0% 2.3% 3.0% -1.0%-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% "Normal" unstressed "Stressed" Max Sustainable New Vehicle MPG Improvement Required efficiecy gain for 3% GDP growth Max efficiency gains in recession Efficiency Gains Implied Max GDP Growth
  • 55. 55 GDP Growth Forecasting Errors • Fed and CBO forecasts: Consistently over-estimated the pace of GDP growth • We seem to have some sort of unexplained factor holding back growth US Federal Reserve GDP Growth Forecasts Source: Wonkblog , http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/19/ this-graph-shows-how-bad-the-fed-is-at-predicting-the-future/ CBO GDP Growth Forecasts Source: Wonkblog , http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/19/ this-graph-shows-how-bad-the-fed-is-at-predicting-the-future/
  • 56. 56 Unexplained Weak Recovery
  • 57. 57 Dire Long-term Growth Forecasts Source: IMF WEO 2013, Statoil Energy Perspectives 2013 • Statoil sees a much darker future than the past • Long-term growth rates down 1% compared to pre-recession period • Why such pessimism? • Failed states? Advanced Country / OECD GDP Growth Rates Source: IMF WEO 2013, Statoil Energy Perspectives 2013 EU / Europe GDP Growth Rates 2.4% 0.9% 1.4% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Avg.AnnualFiveYearGDPGrowthRate EU (IMF) Europe (Statoil) EU Avg '90-'07 (IMF) EU Avg '10-'13 (IMF) EU Avg '11-'40 (Statoil) 2.7% 1.8% 1.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% AverageFiveYrGDPGrowthRate IMF Advanced Country OECD (Statoil) OECD Avg '90-'07 (IMF) OECD Avg '10-'13 (IMF) OECD Avg '11-'40 (Statoil)
  • 58. 58 Demand-Constrained Models Supply-Constrained Models Supply Growth Demand Growth Oil Prices Oil and Mobility The Oil Majors Oil and Economic Growth Conclusions
  • 59. 59 • Demand-constrained models dominate thinking about oil demand, supply, prices and their effect on the economy • The data have not supported these models in recent years; the data do fit a supply-constrained model • A supply-constrained approach will not be applicable if China falters, US short term latent demand is sated, and oil supply growth is robust. • For a supply-constrained model to be valid, oil must be holding back GDP growth as an implicit element of model construct. • If the supply-constrained approach is right, then GDP growth depends intrinsically on increasing oil production. • Without such increases, OECD GDP growth will continue to lag indefinitely, with a long-term GDP growth rate in the 1-2% range entirely plausible, and indeed, likely. • In turn, if this is true, then current national budget deficit levels and debt levels will prove unsustainable, and a second round of material and lasting adjustment will be necessary. Conclusions
  • 60. 60 Thank you Steven Kopits Managing Director New York, NY steven.kopits@douglaswestwood.com

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