The  low  oil  price:  Is  OPEC  s3ll  in  control?  

 Lucia  van  Geuns  

Amsterdam,  Flevum      12  May  2015  

   

The 2014 Slide

Crude  Oil  (Brent):  11  May  2015:  $64,6/barrel  

Agenda  

•  Context  •  Signs  of  stress    •  Liquid  supply  •  History  •  2014  slide  •  Uncertain3es  

   

 Developing  Economies  Dominate  Growth  

ExxonMobil  2015  

2014  

A  mix  that  is  slow  to  change  

Growth  in  total  primary  energy  demand  

Today's  share  of  fossil  fuels  in  the  global  mix,  at  82%,  is  the  same  as  it  was  25  years  ago;  the  strong  rise  of  renewables  only  reduces  this  to  around  75%  in  2035  

 500   1  000   1  500   2  000   2  500   3  000  

Nuclear  

Oil  

Renewables  

Coal  

Gas  

Mtoe  

1987-­‐2011  

2011-­‐2035  

Source:  IEA,  WEO  2013  

Signs  of  stress  in  the  global  energy  system (IEA WEO 2014)

Difficult  road  ahead    -­‐  Turmoil  in  the  Middle  East:  doubts  over  future  oil  balance    -­‐  debate  over  security  of  gas  supply  to  Europe    

Climate  summit  Paris  2015:  mixed  signales    -­‐  global  CO2  emissions  s>ll  rising    -­‐  fossil  fuels  subsidies  (550  MM$)  4x  >  renewables    -­‐  energy  efficiency  star>ng  to  bring  results  

Will  change  in  global  energy  be  led  by  policies,  or  driven  by  events?  

Liquids  Supply  Con3nues  to  Diversify  

MBDOE  

0

20

40

60

80

100

120

2000 2010 2020 2030 2040

Supply by Type

Other  Liquids  Biofuels  

0

1

2

3

4

5

6

2040

Resource*

TBO  

Conven;onal        Crude  &  Condensate  

Tight  Oil  Oil  Sands  

NGLs  

Deepwater  Remaining Resource

Cumulative Production

* Source: IEA

ExxonMobil  2013  Outlook  for  Energy  

2014  

The Oil Price Slide

Why? –  Weaker oil demand EU/Asia

–  Strong OPEC supply –  Surging US shale production

The Slide & the Stakeholders

•  Majors such as Total, Eni en Royal Dutch Shell need high oil prices to sustain investments in production capacity (oil sands, deep water etc)

•  But also OPEC countries have an interest in stable high prices ($ 100 - $120) to balance their books

from $115 in June 2014 to $65 in April 2015

Some  OPEC  members  need  $120  +  prices  to  avoid  hard  spending  choices  

$65  

Uncertain3es,  Confusion  and  Conspiracy  

•  In  the  oil  business,  the  strongest  players  are  the  Gulf  states  and  the  strongest  of  all  is  Saudi  Arabia  

•  The  sudden  return  to  market  of  Algeria,  Libya  and  Iraq  meant  that  OPEC  began  to  overproduce  

•  This  year,  the  Saudis  switched  tac3cs  and  decided  to  defend  their  market  share  no  maeer  where  the  price  went  

•  At  the  same  3me  that  oil  supply  surged,  demand  for  oil  dropped    

Long  term  survival  tac3cs  of  Saudi  Arabia?  1986  never  again!  

OPEC  and  Saudi  power  •  A  concerted  plan  to  put  pressure  on  Iran  or  Russia?  •  SA  wants  to  maintain  market  share  (10,5%)  no  maeer  what?  •  Discourage  3ght  oil  produc3on  in  the  US  or  elsewhere?  •  Or  has  SA  simply  lost  control?  

Can  SA  afford  its  current  markets  share?    (9,6  mb/d  produc>on;  3  mb/d  domes>c  consump>on)  

Saudi  Arabia  oil:  What  next?  

Most  analysts  expect  con3nuity  under  King  Salman  bin  Abdulaziz  al-­‐Saud  

Source:  BBC,  23  January  2015  

•  oil  price  needed  for  the  government  to  balance  its  budget  this  year  is  $104/  barrel  (DB)  

•  Saudi  Arabia  has  financial  reserves  to  fall  back  on  and  can  cope  with  an  extended  period  of  rela3vely  cheap  oil.  

Growing  3ght  oil  and  offshore  crude  oil  produc3on  drive  U.S.  output  close  to  historical  high  

U.S. crude oil production million barrels per day

Source:    EIA,  Annual  Energy  Outlook  2014  Early  Release  

Projections History 2014

Alaska

Tight oil

Other lower 48 states onshore

Lower 48 states offshore

U.S. maximum production level of 9.6 million barrels per day in 1970

North American Shale Plays - “The Perfect Storm”  

Utica

Delaware Basin

Niobrara Miss. Lime

Tuscaloosa

Alberta Bakken (Exshaw)

Marcellus

Eagle Ford

Collingwood

Bakken Mowry

Granite Wash

Monterey

Brown Dense

Duverney

Mancos Woodbine

Cri;cal  Factors:    •   Land  access  •   Private  ownership  •   Produce  to  hold  lease  rules  •   Clear  regula3ons  •   Efficient  (local)  permimng  •   Available  market  •   Deep  service  capability  •   Exis3ng  infrastructure    

Source:  Schlumberger,  2013  

Not  ALL  N.  American  shale  wells  and  plays  are  successful  

‘Saudi’  Texas  

•  One  in  three  barrels  produced  in  US  comes  out  of  Texas…  •  If  Texas  were  a  member  of  OPEC,  it  would  vie  with  Iraq  for  2nd  place  

         Texas  liquid  output  by  end  of  2014,  es>mated:  3.4  mb/d  

Source:  ConocoPhillips,  BP,  EIA,  WSJ    

0  

2  

4  

6  

8  

10  

12  

Saudi  Arabia   Iraq   Texas   Iran   UAE   Kuwait  

Saudi  Arabia  

Iraq  

Texas  

Iran  

UAE  

Kuwait  

US  Oil  Produc3on:  reversing  the  trend  

Source:  EIA  

•  US  added  2  mb/d  in  the  last  2  years.    •  Output  levels  reach  21  year  high  

Shale  jubila3ons  fades  as  oil  price  falls  undercut  model  

Drilling  for  oil  in  the  Bakken  shale  forma3on  –  Source:    FT  23/11/2014  

In  the  most  profitable  areas  of  the  Bakken,  producers  can  turn  a  profit  on  average  with  oil  prices  above  $65  a  barrel  (Bloomberg,  2014)  

“  the  risk  to  the  smaller  and  mid-­‐sized  companies  that  have  led  the  shale  oil  revolu3on  in  North  America,  is  higher  “due  to  the  increasingly  nega3ve  free  cash  flow  of  a  number  of  E  &  P  companies.”  FT  -­‐  2  December  2014  

Rig  counts  are  an  important  business  barometer  for  the  drilling  industry  and  its  suppliers  

Alan  Greenspan  (in  FT  02/2015)    

“We  are  about  to  find  out  whether  shale  producers,  with  their  backs  to  the  wall,  can  keep  oil  investment  innova3ve  and  profitable”    “OPEC  is  now  relinquishing  its  pricing  power.  It  may  never  be  regained.  The  reason  is  that  shale  technology  is  far  more  flexible.  Shale  oil  wells  can  come  on  stream  faster  than  most  conven>onal  wells  and  drain  far  more  rapidly”    

North  American  oil  produc3on  slows  with  lower  oil  prices  but  remains  the  driver  of  global  produc3on  growth  

•  Russia:  Propping  up  the  rouble  •  Venezuela:  No  subsidy  cuts  •  Saudi  Arabia:  Price  versus  market  share  •  Opec:  Not  all  are  equal  •  United  States:  Fracking  boom  •  Europe  and  Asia:  Mixed  blessings  

Falling  oil  prices:    Who  are  the  winners  and  losers?  

•  The  price  plunge  has  shaken  the  energy  industry  •  Some  of  the  majors’  most  ambi3ous  plans  are  into  doubt  and  oil  

company  shares  are  falling.    

Oil  price:  boom,  bust  and  boom  again  

“  any  pullback  in  investment  now  for  projects  over  the  next  several  years  will  be  semng  the  ground  for  much  more  vola3le  oil  prices  in  the  future  “  FT  10/12/2014  

Various  events  could  change  global  supply  and  demand  and  could  push  future  crude  oil  prices  higher  or  lower:    

Source:  EIA,  Febr  2015  

Instability  in  the  Middle  East:  a  major  risk  to  oil  markets  Source:  IEA  WEO,  2014  

A  short-­‐term  picture  of  a  well  supplied  market  should  not  obscure  future  riks  as  demand  rises  to  104  mb/d  &  reliance  grows  on  Iraq    &  the  rest  of  the  Middle  East  

Looking  ahead  on  the  oil  price    

•  Against  the  backdrop  of  weaker  demand,  buoyant  supply  in  North  America  has  brought  prices  down  –but  can  it  keep  them  down?  

 •  Lower  prices  are  star3ng  to  curtail  upstream  spending  plans,  with  implica3on  for  

future  supply    •  Over  3me,  squeezed  cash  flow  would  constrain  the  capacity  of  North  America  &  

Brazil  to  act  as  engines  of  global  supply  growth    •  Sustained  $80/barrel  oil  could  provide  some  breathing  space  to  major  oil  

importers,  boos3ng  demand  &  GDP  

•  It  would  also  accelerate  reliance  on  low-­‐cost  producers  in  the  Middle  East,  some  of  which  face  major  investment  challenges  

Thank  you