droning on… will recent brent oil price volatility impact ... · will recent brent oil price...

Droning on…

15 February 2019

Will recent Brent oil price volatility impact long term forecasts?

2 | Will recent Brent oil price volatility impact long term forecasts?

Contents

Droning on… 2

Constructive use of drones… in the oil industry 3

1. Brent Oil – Benchmarking 5

2. WTI – Benchmarking 8

3. Henry Hub – Benchmarking 11

4. NBP – Benchmarking 14

Contributors 17

Will recent Brent oil price volatility impact long term forecasts? | 1

Important notice• The following market benchmarking exercise has been performed as at 31 December 2018.

• Due care should be taken when using our conclusions and the market data points. Given the rapidly evolving views by market participants, certain views can become quickly outdated.

• Our market benchmarking data and conclusions should thus not be applied mechanistically. Instead, careful consideration should be given to the purpose of the valuation and to the price forecasts and sensitivity analysis used.

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Droning on…Will recent Brent oil price volatility impact long term prices?

Whilst the Brent oil price rallied to c.US$85/bbl in early October 2018, this was short lived as prices eased by c.35% to $63/bbl by year end.

At the risk of ‘droning on about this’ – how has recent volatility impacted long term Brent oil forecasts?

Additionally, against this volatile price and capital restraint environment, corporates have been considering which technologies to adopt in oil and gas. Mechanical intelligence, adaptive anchoring, string based perching are examples of exciting developments. Whilst drones have had a ‘bad rap of late’ (as unwanted guests at airports), they offer a practical solution to saving costs for offshore inspections and other applications. We explore this further in this edition.

The market verdictOur analysis indicates that in the shorter term, the median Brent oil price has increased by $3/bbl from $60 to $63 in 2019 and by $4/bbl from $66/bbl to $70/bbl in 2021.

From 2022, the medium to longer forecasts are largely similar to a year ago despite the volatility in the Brent price experienced since June 2018.

First, we consider which factors, at a high level, have impacted the Brent oil forecast.

Usual suspects The usual suspects have impacted the Brent oil price including OPEC strategy, US production, concerns about the outlook for global growth, potential increase in Libya production and the US-China trade war, amongst others.

OPEC strategyFrom 1 January 2019, OPEC agreed to cut oil production by 1.2m bbl/d for 6 months of which 0.8m bbl/d will apply to OPEC members and 0.4m bbl/d will apply to countries outside the cartel that have allied with OPEC. As part of this strategy OPEC is seeking a floor price of c. US$ 70/bbl.

Demand and supply Weakening oil demand and supply factors are expected to contribute to global oversupply in the near term as follows:

• Signs of an economic slowdown in China.

• The European Commission predicts that GDP in Europe to rise 1.3% (vs previous forecast of 1.9%).

• The economic outlook for the UK has been cut by the Bank of England given the uncertainty of Brexit.

• US shale production is expected to be strong at 11.7m b/d in 2018.

• American sanctions on Iran export have taken around 1m bbl/d off the market.

Geopolitical instabilityIran, Nigeria, Libya and Venezuela are experiencing ongoing geopolitical instability causing disruptions in production.

Uncertainty over Iranian sanctions (and waivers) and the resolution of the trade war between US-China has also caused an overhang on the Brent oil price.

The recent US sanctions on Petróleos de Venezuela, S.A. (PDVSA), Venezuela’s state-run oil company, are likely to have a further impact on oil production in the country. Under the sanctions US will halt all oil imports from Venezuela which could potentially lead to a overall reduction in oil production that is greater than the 1.2m bbl/d agreed by OPEC.

Jacqueline Chow (Director – Natural Resources Valuations)


Constructive use of drones… in the oil industry (1/2) Addressing visual line of sight

Adrian Del Maestro and Craig Stevens have prepared an interesting thought piece on the practical solutions drones offer in the oil & gas sector.

OverviewWith so much talk about digital solutions, ranging from 3D printing and big data to automation and the Internet of Things (IoT), there is a vast choice over which technologies should be adopted in oil and gas. Faced with a wide array of options, operators must keep asking themselves the simple question – ‘what is the business problem to solve and which technology can best help address the solution?’ Against a backdrop of oil price volatility and the need to maintain capital discipline, drones offer a practical solution to saving costs for offshore inspections with the potential to evolve new capabilities in the not too distant future.

Proof of concept for inspection servicesDemand for drones is growing rapidly. A review of industry forecasts suggests the market for drones with applications in oil and gas could reach between US$1 and US$4bn by the early 2020s and much larger if considering broader energy applications.

In the UK we already are seeing a number of operators deploying drones for visual inspection in niche areas such as flare towers. This application helps improve health and safety standards by replacing the need for more hazardous human intervention using ropes and scaffolding.

Challenges to overcomeOperators using drones still typically need to maintain ‘visual line of sight’. As a result, deployment of drones offshore require two operators, to be launched from a vessel for example, and with extra accommodation to ensure bed space in case of bad weather. This increases costs and reduces the flexibility of deployment.

To overcome some of these issues there are currently trials taking place in the industry around BVLOS (Beyond Visual Line of Site) flights. These on-land trials are part of a large scale UK government project, working alongside the Civil Aviation Authority to help utility companies with the inspection and maintenance of their infrastructure networks. The project is working to create an operational framework for BVLOS flights to become business as usual and drive efficiencies in ongoing asset management and maintenance.

Analyst A Analyst B Analyst C

2014 – 2020Oil & Gas

2017 – 2023

2016 – 2020Oil & Gas

40

35

30

25

20

15

10

5

0

8

7

6

5

4

3

2

1

0

Market sizeUS$bn Energy CAGR%

Source: PwC Strategy& research


Constructive use of drones… in the oil industry (2/2) Inspection and intervention roles

Prepare for changeIn light of all these changes and developments, how should oil and gas operators prepare for drone adoption?

Clearly those companies most directly impacted by the evolution of drones and broader technologies will need to consider how they transform their business. Offshore helicopter services is a case in point. Bristow provides helicopter transportation and search and rescue to a number of sectors including the offshore oil and gas sector. In 2016 they invested some US$4m in Sky-Futures, a provider of drone inspection data services. This partnership now gives Bristow access to the fast growing UAV market and as the sector evolves Bristow will be well placed to adapt its business model.

As the industry pursues greater automation, such as that found on Equinor’s Valemon platform – the first in the Norwegian Continental Shelf to be operated remotely from land, and the proliferation of smaller unmanned platforms, drones will need to play a greater role in inspection and eventually intervention.

And what of the implications for employment as the use of drones proliferates? Clearly some inspection roles based on scaffolding and ropes will be disrupted by drones. But how much more efficient can these inspectors be when they can view engineering grade imagery from anywhere in the world? The growth of drone technology will generate new jobs and will certainly require parts of the workforce to upskill.

What the future holdsSupported by the Oil & Gas Technology Centre, Air Control Entech (ACE) has developed three drones to assess offshore sites and confined spaces more efficiently. The drones use live video streaming, ultrasonic testing and 3D laser scanning respectively to gather and relay data in real time.

The benefits of this approach include live video stream (reducing the size of the inspection team) and greater mobility through electromagnets to clamp onto a structure to take ultrasonic readings (also reducing power consumption and thereby increasing flight time).

In the future, as well as inspection and monitoring, drones could be used in areas such as exploration and ongoing operations. Drones for transporting goods and materials from vessel to platform and from land to platform also offer advantages in logistics. There is also the potential of combining robotics with drone technology to develop new capabilities.

Adrian Del Maestro(Director – Director of Research, Strategy&)

Craig Stevens(Senior Business Manager – Energy, Utilities & Resources)


Brent OilBenchmarking1


Broker and consultant Brent oil price forecasts(31 December 2018)

We have collated 19 Brent crude oil price forecasts of market participants and consultants as at 31 December 2018.

The graph on the right illustrates the brokers and consultants views against the Capital IQ Brent (ICE) forward curve as at 31 December 2018. The values shown are in nominal terms.

In the shorter term, the median Brent oil price has increased by $3/bbl from $60/bbl to $63/bbl in 2019 and by $4/bbl from $66/bbl to $70/bbl in 2021.

From 2022 the medium to longer forecasts are largely similar to a year ago despite the volatility in the Brent oil price experienced since June 2018.

Source: Consensus economics, various broker reports, Capital IQ

40

50

60

70

80

90

100

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

$/bb

l

Brent price forecast – nominal

Broker 50% interquartile range Brokers median Consensus economicsCapIQ futures curve Consultants median


Broker and consultant Brent oil price forecasts (contd.)(31 December 2018)



WTI Benchmarking2


Broker and consultant WTI oil price forecasts (31 December 2018)

We have collated 16 WTI oil price forecasts from brokers and consultants.

The graph on the right illustrates the low, median, high and inter-quartile views against the Capital IQ WTI (ICE) forward curve as at 31 December 2018. The values shown are in nominal terms.

In the shorter term, the median WTI price has increased by $3/bbl from $58/bbl to $61/bbl in 2019 and decreased by $3/bbl from $72/bbl to $69/bbl in the medium term when compared to a year ago.

WTI price forecast – nominal


40

50

60

70

80

90

100

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

$/bb

l




Broker and consultant WTI oil price forecasts (contd.)(31 December 2018)


Henry Hub Benchmarking3


Broker and consultant Henry Hub gas price forecasts (31 December 2018)

We have collated 16 Henry Hub gas price forecasts from brokers and consultants.

The graph on the right illustrates the low, median, high and inter-quartile views against the Capital IQ Henry Hub (NYMEX) forward curve as at 31 December 2018. The values shown are in nominal terms.

In the shorter term, the median Henry Hub gas price is largely the same as a year ago at $3/mmbtu and slightly down in 2024 at $3.47/mmbtu from $3.50/mmbtu when compared to a year ago.


Henry Hub price forecast – nominal


2.00

2.50

3.00

3.50

4.00

4.50

5.00

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

$/m

mbt

u


Broker and consultant Henry Hub gas price forecasts (contd.) (31 December 2018)



NBP Benchmarking4


Broker and consultant NBP gas price forecasts (31 December 2018)

We have collated 12 NBP gas price forecasts from brokers and consultants.

The graph on the right illustrates the low, median, high and inter-quartile views against the Capital IQ NBP (ICE) forward curve as at 31 December 2018. The values shown are in nominal terms.

Market participant forecasts are generally in line with the liquid period of the futures curve.

In the shorter term, the median NBP gas price has increased by 15 p/therm from 45 p/therm to 60 p/therm in 2019 and in the medium term by 5 p/therm from 54 p/therm to 59 p/therm when compared to a year ago.

NBP price forecast – nominal

Broker 50% interquartile range Brokers medianCapIQ futures curve Consultants median

45

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55

60

65

70

75

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

p/th

erm




Broker and consultant NBP gas price forecasts (contd.)(31 December 2018)


Contributors

Jacqueline ChowDirector – Valuations Energy, Utilities, Mining & Infrastructure

T: +44 (0)7818 427307E: [email protected]

Adrian Del Maestro Director of Research and Head of Global Thought Leadership in Energy


Craig StevensSenior Business Manager Energy, Utilities & Resources


Matthew WilliamsE: [email protected]

Chris BallerE: [email protected]

Adrian KwanE: [email protected]

Stuart HughesE: [email protected]


pwc.co.uk/valuations

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2019 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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