North America Energy LandscapePresentation Transcript
North America Energy Landscape THE 2012 ONTARIO ADVOCIS SCHOOL The Financial Advisors Association of Canada Presented by EconMatters August 14, 2012 http://www.econmatters.com/
Agenda1. Global Energy Demand Outlook2. Unconventional Energy in North America3. Impact from the Shale Drilling Boom 4. Industry Challenges & Constraints 5. Near Term Outlook
1. Global Energy Demand Outlook – Offshore Deepwater “Golden Triangle”
Global Energy Demand Growth To Decelerate • ExxonMobil sees global energy demand rising by 20% from 2010 to 2025, but by only 10% from 2025 to 2040. • Many OECD countries, plus China – populations will change little by 2040. This global population growth deceleration, coupled with gains in energy efficiency, will add significant slowdown to the historical energy demand growth trend. • Energy demand growth in Non‐OECD countries will continue to outpace developed nations of OECD – China’s CNOOC recently paid 60% premium to acquire Canada’s Nexen.Source: 2012, The Outlook for Energy: A View to 2040, ExxonMobilNote: OECD: Organization of Economic Co‐operation & Development
Oil & Gas Still the Top Two Energy Sources• By 2040, oil and natural gas will be the world’s top two energy sources, accounting for about 60% of global demand, compared to ~ 55% todaySource: 2012, The Outlook for Energy: A View to 2040, ExxonMobil
Offshore Deepwater Golden Triangle • Producers continue to focus and increase Exploration & production (E&P) spending on the “Golden Triangle” ‐ mostly offshore deepwater West Africa ‐ Sierra Leone, Liberia, Angola, Ghana’s Jublee South America ‐ Brazil/Petrobras $236.5B spending plan through 2016 U.S. ‐ Gulf of Mexico restart• Benefiting OSV (Offshore Supply Vessel) & Petroleum Aviation sectors Chart Source: Schlumberger Investor Presentation, March 2012
2. Unconventional Energy in North America
Unconventional Energy in The U.S. • New technologies such as hydraulic fracturing & EOR (Enhanced Oil Recovery) and relatively high oil prices could mean continuing increase of crude oil production in the United States to 2030‐2035 • In the U.S., crude oil production for the lower 48 states is estimated to have reached a 23‐ year high in June of 5.74 million bbl/d driven primarily by unconventional oil resources in formations such as Bakken in N. Dakota, and Eagle Ford in Texas • EIA projects the United States become a net exporter of natural gas by 2022 • Rising unconventional oil and natural gas production in North America could bring a more stable energy price environment Source: Annual Energy Outlook, 2012, EIA, June, 2012
Unconventional Energy in Canada• The main driver for future Canadian oil production growth continues to be oil sands development• Growing domestic U.S. crude oil production will increase competition for western Canadian crude oil. Nonetheless, the U.S. Gulf Coast remains a significant market opportunity for Canadian supplies given the region’s huge refining complexSource: CAPP (Canadian Assoc. of Petroleum Producers), June 2012
3. Impact from The Shale Drilling Boom
Brent to WTI Premium • North Sea Brent has been trading at a premium of $15‐$20 per barrel over U.S. WTI since 2011 vs. the historical $1 to $2 per barrel discount • Rising production, lack of take‐away pipeline capacity and a sluggish economy have contributed to rising inventory levels, particularly at Cushing OK, depressing WTI benchmark • Potential delay in pipeline projects and weak economy in the U.S. could mean WTI will continue to trade at a considerable discount to Brent in the next few years • U.S. WTI crude oil discount to the North Sea Brent is expected to give cost advantages to U.S. refiners versus other Atlantic Basin rivals Chart Source: The Finite WorldChart Source: This Week in Petroleum, EIA, Aug. 8, 2012
Heat Wave Can’t Lift Natural Gas • Supply glut has brought U.S. natural gas price (spot Henry Hub) to a 10‐year low of $1.907/mmbtu in April, 2012 • Significant profit hit across the oil supply chain from producers (e.g., Noble, Marathon) and oilfield services companies (e.g. Baker Hughes, Halliburton) ‐ Producers shut in production and laid down rigs • Henry Hub price has surged ~ 44% since the April low mainly due to hotter than normal weather forecast, and coal‐gas switch by the power sector • Weather conditions are temporary, and electricity companies will switch back to coal when prices of natural gas become highChart Source: EIA Annual Energy Outlook, 2012; Reuters; EconMatters research
Henry Hub Natural Gas Price Decoupled • Supply glut and lack of exporting capacity has brought the Henry Hub price significantly below LNG and natural gas global price benchmarks in other regions • NBP (U.K. benchmark natural gas prices) averaged more than four times the price in the U.S. in the second quarter • Cheap natural gas price could bring lower utility costs to consumers, and provides a cost advantage to U.S.‐based petrochemical plants Source: Valero Investor Presentation, July 2012; EconMatters research
Oil to Gas Price Ratio • Theoretically, based on an energy exchange equivalent basis, crude oil and natural gas prices should have a 6 to 1 ratio • Due to various market characteristics, the price of oil (WTI) has been following a pattern of 8‐12X that of natural gas (Henry Hub) between 2006 and late 2009 • The ratio between WTI and Henry Hub shot up to a historical record high of 52:1 when natural gas dipped to a 10‐year low in April, 2012 • This ratio is expected to remain significantly above the historical level in the medium termSource: ICIS.com, EconMatters research
Natural Gas Pain Spilled Over to Oil Markets • The sharp decrease in NGL pricing is spreading the pain of low natural‐gas prices to the oil markets • NGL (Natural Gas Liquid) – By‐products of natural gas, including propane, butane, pentane, hexane and heptane • Prior to mid‐2008, a mixed barrel of NGLs usually followed crude oil prices at 60% to 70% of the price of crude oil – Partly contributed to the rising natural gas production • With low natural gas prices, producers have shifted drilling to NGL‐rich shale plays to improve economics ‐‐ Shale Drilling Boom = Oversupply of NGL • The price of an ethane‐ propane NGL mix was down about 58% from January ‐ producers such as Devon and Chesapeake feeling the pain Mont Belvieu, TX Propane Spot Price FOB ($ / Gallon) Source: Index Mundi, Aug. 3, 2012; Reuters, Aug. 2012
4. Industry Challenges & Constraints
Peak Energy Labor ‐ The Big Crew Change • The 16 years of low oil prices after 1986 has resulted in very little investment in R&D and recruiting in the oil industry • The need for experienced project managers and engineers is becoming acute with more larger projects requiring more complex technologies and processes • Based on Schlumberger survey data for 2010, the number of inexperienced industry professionals will have increased, and become a major headache by 2015 • This talent war and cost pressure will be inflationary and disruptive • Potential consequences include project delays, poor risk management, and increasing non‐operating assets Chart Source: Guardian.co.ukSource: Schlumberger Investor Presentation, March 2012
Rising E&P Project Costs • The IHS Upstream Capital Cost Index (UCCI) rose at a more accelerated rate of 2.3% over the six‐month period ending March 31, 2012, compared to 5.3% increase for the entire 2011 • The cost increases were driven by strong oil prices increasing demand for oilfield goods and services • Costs are rising with more larger and difficult projects in remote or complex formations, as well as a shortage of experienced and skilled personnel • Rising costs could have a negative impact on future investments driving up energy pricesSource: IHS‐CERA, July 2012
Oil and Gas Pipeline Crunch • Growing unconventional energy production has created an urgent need for additional transportation infrastructure in North America • Producers have turned to rail, barge and even truck tankers to transport oil to refineries – Rail costs about $15/barrel, 3x the cost of pipeline • Reversing the oil flow for the past 40 years ‐ Seaway Pipeline, owned by Enterprise and Enbridge, — is moving 150,000 bbl/d out of Cushing, OK to Texas, 400,000 bbl/d by 2013 • $10B a year planned in 2012 and 2013 on pipeline build‐out, four times the average of the previous 7 years • Potential shortfall of specialized materials like valves and pumps ‐‐ Projects (e.g. TransCanada proposed $7.6 B Keystone XL pipeline) could be at risk of significant delays Source: Reuters, July, 2012
5. Near Term OutlookNote: The near‐term price outlook in the presentation reflects only the current market fundamental factors, and does not include a scenario of extreme geopolitical or weather events.
Near Term Oil Market Outlook • Reduced oil production by Iran due to Western sanctions has not affected the oil market much, as Saudi Arabia stepped up production this year to near 30‐year highs • Recent data suggest the economic picture in emerging Asia (China) could worsen further in 2H 2012 • Sovereign debt crisis and recession in the Euro zone is further depressing global economic and oil demand outlook ‐ OPEC output fell in July to its lowest since February • Brent is expected to stay above in the $100/bbl, while maintaining a $10‐$15 premium to the U.S. WTI in the next 2‐3 years • A Trader’s Market ‐ more correlation to the broad equity market (QE3 from the U.S. Fed?) • Longer term, sustained high oil prices lead to higher margins, more investment and energy efficiency, which ultimately rebalances the market Increasing Correlation ‐ Crude Oil vs. S&P 500 Chart Source: Ft.com, Aug. 10, 2012Note: The near‐term price outlook in the presentation reflects only the current market fundamental factors, and does not include a scenario of extreme geopolitical or weather events.
Near Term Natural Gas Market Outlook • U.S. EIA raised estimate for domestic natural gas consumption this year, expecting demand to climb 4.9% YoY in 2012 driven by a 21% jump in utilities coal‐to‐gas switching, offsetting declines in residential and commercial use • Consultancy Spears & Assoc. estimated coal should provide a floor for natural gas at around $2.40/mmbtu in the near term. Demand increase from Canadian oil sands could also provide support for natural gas prices • North America LNG export capacity is not expected to come online till around 2015 (Cheniere Energy’s Sabine Pass plant), and may have logistic disadvantage competing with Australia or Quatar • A momentum‐driving market, but in general, Henry Hub price could stay at below $4.00/mmbtu for the next 2‐3 years Note: The near‐term price outlook in the presentation reflects only the current market fundamental factors, and does not include a scenario of extreme geopolitical or weather events.
Carlos Góngora-Caamal