Oil & Gas Markets Outlook National Ocean Industries Association Dr. Helen Currie, Senior Economist January 31, 2017
2
Oil Market
3
Global Oil Market: The Past Decade Global Oil Prices and Volatility
% Volatility
Price/Bbl
100
$150 Brent Crude Oil Price (left hand scale)
$125
80
$100
60
$75 40 $50 20
$25
Oil Volatility Index (right hand scale)
$0
0 2007
4
Source: Bloomberg
2008
2009
2010
2011
2012
2013
2014
2015
2016
Global Oil Market: Rebalancing and Recovery Imminent? Rebalancing Begins in 2017: OPEC Cuts Will Help to Lower Global Inventories (MMBD)
99
2.0
98
1.5
Production (left axis)
97
Production w/Full OPEC + non-OPEC cuts
96
95
93
1Q
2Q
3Q 2015
5
(0.5) (1.0)
Inventory Draw w/Full OPEC + non-OPEC cuts
92
Source: COP, IEA, OPEC
4Q
1Q
2Q
3Q 2016
4Q
0.5
0.0
Bars are Inventory Build/Draw (right axis)
Demand (left axis)
94
1.0
(1.5) 1Q
2Q
3Q 2017
4Q
U.S. Crude Oil Production Expected to Grow EIA Projects Significant Upside to U.S. Oil Production with Additional Efficiency and Technological Improvements (MMBD)
15
High Resource & Technology EIA Base Case
10 Prior Base Case
5
0 2005 6
2010
Source: U.S. Department of Energy, EIA Annual Energy Outlook 2017
2015
2020
2025
2030
U.S. Crude Oil Production Growth Led by Onshore Fields Lower-48 Offshore vs Onshore Oil Production (MMBD)
Challenges to Offshore development vs Onshore Unconventional Plays:
14 Onshore High Case
12
• High initial capital
10
commitments
8
Onshore
• Relatively long lead times 6
• Less flexibility 4
• Greater complexity
Offshore High Case
2
Offshore
0 2015 7
2020
Source: U.S. Department of Energy, EIA Annual Energy Outlook 2017
2025
2030
U.S. Unconventional, Light Tight Oil Plays Account for Future Growth Lower-48 Oil Production by Region (MMBD)
Key Issues in Projecting Future Tight Oil Supply:
4.0 3.5
• Pace and Magnitude of
High Resource/Technology Cases
3.0
additional technology &
Permian
efficiency improvements
2.5 Bakken, Niobrara/Rockies
2.0
• Cost escalation as activity Gulf Coast
1.5
accelerates
1.0
• Infrastructure needs
East & West Coasts
0.5
• Environmental compliance
Midcontinent
0.0 2015 8
2020
Source: U.S. Department of Energy, EIA Annual Energy Outlook 2017
2025
2030
Lower-48 Unconventional Oil Breakeven Costs Contribution to Drop in Median Breakeven Cost of Five Major U.S. Unconventional Plays ($WTI/bbl) $90
• Higher well productivity o High-grading o Well design (lateral length, proppant intensity)
$80 $70
• Cost deflation
$60
o Equipment o Labor
$50 $40 $30
• Efficiency gains
$20
o Less waste in materials and equipment downtime
$10 $0 3Q 2014
9
Higher Cost Deflation Productivity
1Q 2016
Source: ConocoPhillips based on IHS Energy “Why US Crude Oil Supply Is Ready to Resume Growth” November 2016
Efficiency Gains
o Better integrated supply chain
Incremental Global Oil Supply for 2020 Higher Cost Supplies Must Compete with Relatively Low Dost U.S. Tight Oil (Indicative Volume, Cost Range by Category)
L48 Tight Play
Existing
OPEC
Deepwater
Oil Sands
Other Non-OPEC
$80 Oil Sands
$60 $40 $20 Existing
$0 65
Russia Mexico
Saudi Arabia Gulf States
70
75
Ghana Azerbaijan
U.S. Tight Oil
80
Algeria Venez. Nigeria
US & Canada
U.S. Tight Oil
85
Brazil GOM
90
Million Barrels per Day 8
Source: ConocoPhillips Chief Economists Office, Rystad Ucube; gross production growth before declines, boxes are indicative of the types of assets from each category not a fully inclusive list
95
U.S. Tight Oil
China Other Non-OPEC
$100
100
Other Deepwater
$120
Other OPEC
Real 2015 $/bbl
$140
Global Oil Demand Global Oil Demand Growth
Global oil demand has responded positively to low oil prices
2.0
Total Growth
Annual Growth in MMBD
1.6
Other Non-OECD
1.2
India 0.8 China
Ongoing risks to oil demand growth Decelerating global economy
0.4
Anti-trade policies
Other OECD U.S.
0.0
Strong U.S. dollar weakens demand response outside U.S. Removal of subsidies in many developing countries hurts demand when oil prices recover
(0.4) (0.8) 2012 11
Demand grew solidly in 2015-2016
2013
2014
2015
2016
Source: U.S. Department of Energy, EIA, Short-Term Outlook, January 2017
2017f
2018f
Global Economy: Slowing Growth Prospects Scenarios for Global Growth 4.0 3.8
The IMF consistently lowered growth projections for 2015 and 2016
% real GDP, PPP
Slowing Growth Fiscal in the Global Loosening Economy (10%) Brexit slows EU (5%)
Base (40%)
3.6
Secular Stagnation (10%)
3.4
China Tightens (15%)
3.2 3.0
Strong US AntiTrade Stance (3%)
2.8 2015 12
Sources: Oxford Economics
2016
2017
2018
2019
2020
The IMF lowered its GDP forecast for 2016 by 0.2% in its January 2016 forecast. Downside risks to the economic outlook: o Secular stagnation o Hard landing in China’s slowdown o European immigration crisis and Brexit o Anti-trade policies
Natural Gas Markets
13
Resilience of U.S. Shale Gas Production for Major Plays Marcellus Type Curves
50
BCFD
40
30
Permian Niobrara Eagle Ford Bakken Utica Haynesville Marcellus
MCFD
U.S. Shale Gas Production from Top Unconventional Plays
1
3
5
7
9
11
13
15
Associated Gas & Legacy Production
Permian Associated Gas Type Curves
MCFD
Shale Gas Plays
700 600 500 400 300 200 100 0 1
3
5
7
9
11
13
15
Production Month
0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 14
17
Production Month
20
10
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Source: EIA Drilling Productivity Report, January 2017. Type Curves based on data from DrillingInfo
2015
2013
2011
17
North American Natural Gas Production Outlook The Future of North American Production is Shale (Bcf/day)
140
Marcellus is the Growth Leader
Growth in production 2016-2030 (Bcf/day)
20
120 15
100 Shale Gas
80
10
60
5
40
Gas from Tight Oil
15
2018
2021
2024
Source: Wood Mackenzie; U.S. and Canada production combined
2027
2030
Bakken
MidCon
Permian
Haynesville
2015
Eagle Ford
0
Canada
Other
Utica
20
Marcellus
0
U.S. Natural Gas Demand Outlook 18
Demand Growth Led by Export Markets and Power (Bcfd) 8
16
Transport
14
Other
12 10 8
East Coast
Res/Comm Other
Industrial
Power
4
Power Mexico
Mexico
4 LNG exports
2
LNG exports
0
0 2016-2020 16
Gulf Coast
6
6
2
Almost 9 Bcfd (70 MTPA) Lower-48 Liquefaction Capacity Online by 2020 (Bcfd)
2020-2030
Source: IHS Energy, December 2016 N.A. Natural Gas Brief. The use of this content was authorized in advance by IHS Markit. Any further use or redistribution of this content is strictly prohibited without written permission by IHS. All rights reserved
2016
2017
2018 Source: Wood Mackenzie
2019
2020
Global LNG Supply-Demand Balance Global Cumulative Growth 2015-2025 180 Net growth 160 140
Other Pacific Other
MTPA
120 100
Europe Australia Americas
80 60 40
Other Asia U.S.
Existing Excess
20 0 (20)
16
New Excess Other Atlantic Middle East
Japan, Korea, Taiwan
Supply
Demand
Source: IHS Energy. The use of this content was authorized in advance by IHS Markit. Any further use or redistribution of this content is strictly prohibited without written permission by IHS. All rights reserved
Excess Supply
Summary Oil • Prices may continue to experience elevated volatility o Uncertain government policies create headwinds for oil markets
• U.S. production growth expected to be focused onshore o Ongoing improvements to technology, productivity and costs will drive growth in U.S. Light Tight Oil
Natural Gas • Shale gas will continue to be a game-changer o U.S. and Canada will continue to be well supplied by shale resources
• Global gas markets will be more highly linked as LNG trade grows 18