oil macro - jan 2016 uoi

7/25/2019 Oil Macro - Jan 2016 UOI

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Supply, demand, investments

What are the revoilution implicatiofor oil prices ?

North Dakota

January 11th, 2016

Alexandre AndlauerHead of oil & gas sectorAlphaValue

Founder and manager US OIL INVEST


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Co-aut

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Alexandre ANDLAUER


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Supply

Demand

Oil companies strate

KEY FINDINGS


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Supply

Revoilution in progress


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Market share battle around the world

Biggest players in the

world have increasedtheir output, driven

by high capex in the

2012/2014 period.

Capex maintenance

in 2014 has been thehighest in a decade,

leading to higher

production from

mature fields


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Investments have been high

The 2.5tn cumulated capex is an absolute historical record, even when taking in

specific inflationary pressure which increased upstream costs by more than twice

Source: Leonardo Maugeri Report Havard Kennedy School


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Market share battle around the world

Supply is inelastic in the short term (at least above $40/bbl).

OPEC has been the major contributor of global supply growth in 2016.

Source: Oxford Institute for Energy Studies


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OPEC production: December 2015 data

OPEC quota ? What quota ?

Cartel has never really existed (only temporarily), but now it is clear in the market


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OPEC output 80% driven by Saudi Arabia (+0.8mbpd)and Iraq (+0.6mbpd) at end November 2015


Saudi Arabia has been producing consistently above

10mbpd in part to meet the increase in domestic demand

and to maintain market share in key markets

Despite the deteriorating sec

deteriorating finance, Iraq surprise

Iraqi output above the 4mbpd in an

revenues


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Saudi Arabia: No cut to expect before end 2016 (if one occurs

Saudi Arabias production will remain in the 10.2-10.5mbpd (0.3mbpd maintenanc

Cut in production unexpected as long as the impact is uncertain (stockpiles, China,

Production will rise to meet demand increase and market share (Asia vs. Russia)



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Saudi Arabias recent decision can create short-term instabilitbut long-term opportunity (for the country)

Source: Bloom


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Saudi Arabia Thatcher Revolution

Decision in 2016

- Riyadh-based Jadwa Investment Co. estimates that the Saudi budget for next ye

on a price of $40.3 a barrel for Saudi export crude or about $42.8 a barrel for Breproduction level of 10.2mbpd

- Increased oil prices at the pump by 50%, taxes could be next

- Privatisation in some parts of Saudi Aramco (downstream + petrochemical) on th

Ossified political structures are highly vulnerable precis

seek even partial reform. Any destabilisation in Saudi Aprovide the supply shock that clears the glut in oil and r

But in the long term

Warning global demand may face a Black Swan mean

pump as much as they can (by 2020) 12.5mbpd ?


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Iraqs growth to slow down

Iraqs rig count halved with government

facing serious fiscal pressures

Under fiscal pressures, the Iraqi

been forced to revise downward

target negotiating new plateaus



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Is Iran coming back to the market ?

Latest tensions between Riyadh and Tehran could have an impact of a further supply battle betw

BUT

Short-term potential is limited in our view for both countries (market has already integrated +5

ANDAttracting foreign investment will be more difficult after the diplomatic rift with Saudi Arabia. Region

all efforts made over the last months.

=

It already becomes clear that investments will be delayed and output un


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Is Iran coming back to the market ?

Source: Oxford Institute for Energ


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Venezuela: highest risk

As of October, Venezuela had $15bn in foreign reserves ($1

and was selling its gold holdings in order to be able to finan

With a CCC credit rating and a negative outlook, Venezu

markets is very limited.

Venezuela will not make it through 2016 without defaulting

in our opinion. Venezuela has $5.2bn of bonds and interest

months


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Russia: record production at 10.9mbpd in December

Production has continued to increase in 2015

The increase has be driven by small producers

Impact of tax changes, sanctions and rouble exchange rate key

Source: Oxford Institute for Energy studies

Russia: limited upside in the current environment battle with


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Russia: limited upside in the current environment, battle with China

- Focus on core asset and short-term results only

- Devaluation of the rouble has mirrored the decline in oil prices

(80% cost, 50% revenues in $). Benefit of the rouble for 2 years,

helps capex

- Strong market share battle in China

- Key concerns are:

- Specific limits on finance-raising for some companies

- The downgrade of Russian sovereign debt to junk status



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Conclusion on OPEC & Russia and other producers

The cost of finance is increasing

Political instability and policy uncertainty will

not help to reach the potential

There will always be an inability to

implement large infrastructure projects in

some countries

Weak institution and bureaucratic delays will

not disappear


We see limited potential in OPEC countries + Russia. At the best by 2018 (mbpd)

Iraq: +0.5, Iran: +0.7, Saudi Arabia: +0.5, Libya: +0.3, Russia +0.3

Brazil, Norway, North Sea will have a limited impact


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Demand



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Demand growth slows : but still above 1mbpd


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China and US to world demand growth


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The amount of energy consumed per unit of GDP, or the energy intensity

economy, has declined by 13% since 2005

EIAs 2015 Annual Energy Outlook: the administration expects energy ef

result in a 0.4% annual reduction in energy use per capita from 2013 thr

Efficiency impact back in 2017


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China doesnt need to grow in 2016 : +0.5mbpd

Demand will be driven by

(1)Stockpiling (+200kbpd in 2016)

(2)Independent refiners (+300kbpd in 2016)

(1) Stockpiling

- China will add petroleum reserves t

ultimate goal of stockpiling enough

worth of imports by 2020 (vs 29 toda- The country has currently 8 strategi

and may start 4 new (74mb)


Chi d t d t i 2016 0 5 b d


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(2) Independent refiners: Teapot

- Teapots account for a 1/3rd of the nations

processing capacity- Demand is further expanding as the

government relaxes rules to allow imports by

private refiners to promote private

investment and boost the economy

- The three teapots with the biggest import

quotas have said theyll utilise their permitsthis year. 300kbpd looks like being

conservative regarding the speeches of the

three biggest refiners (Shandong Dongming

Petro-chemical, Panjin North Asphalt Fuel Co.

and Baota Petrochemical Group)

The economy will determ

consumption, but even wi

demand decrease, which loo

case, in 2016 Chinese demand

300kbpd

China doesnt need to grow in 2016 : +0.5mbpd

I di Af i


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India + Africa

Africa is one of the world's

continents with almost 1.2 billio

demand in 2020 is expected toby 2020, up from 3mbpd in 2000

be the main oil demand growth d

Oil i diffi lt t l i th h t / di t


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Oil is difficult to replace in the short / medium term

Consumption decrease may only be a fact of lower economy, motor efficiency and life

Renewables will have a limited impact until 2020, and a step by step process in a coup


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Oil companies strate


Big Oil higher volatility shorter cycle lower prices : what is t


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Big Oil, higher volatility, shorter cycle, lower prices : what is t

2015 - First answer

2016-2018

Implementation of

new strategy

- Further Investment reduction + d

- Fully Leverage Technology

- Partnership and alliances

- Build a flexible responsive organis

- Focus on core asset - Re

- Improve productivity - D

More swap and share-based deals, non-

cash deals can mitigate oil price risk.

In 2015, M&A value of transaction fell by

22% to $143bn despite the Royal Dutch

Shell BG deal.

Chinese oil companies spent less than$5bn on acquisitions for the second

straight year.

Dividend to impact future production potential


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Dividend to impact future production potential

While the world E&P companies need to replace 35bn of o

every year to meet consumption needs, the companies wil

made investment decision that may result in only 5bn in

2016.

Big Oil companies bet on a $60/bbl on

their decisions. Further capex to come.

With the current cut ($50bn), $100bn

may miss still miss to stabilise debt.

Refining may no longer help.

From over investment to under investment


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From over investment to under investment

Globally spending on exploration and production

could fall by $100bn in 2016, after $200bn in2015

Capex maintenance in 2013/2014 helped to

support production growth, but forecast will be

revised down.

More than 1.5mbpd from listed companies have

cash cost above $40/bbl


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Conclusion


Marginal cost before 2015 : $90/bbl


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Marginal cost before 2015 : $90/bbl

Source: JOSCO

Marginal cost after 2015: $70/bbl


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Marginal cost after 2015: $70/bbl

North American unconventional business has been the fastest reacting area so far.

Majors and international players lack exposure to this flexible investment.

Source: JOSCO

Market is rebalancing, slightly on the physical market, rapidly


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investment decision

mbpd 2015 2016e 2017e 2018e 2019e 2020e

Demand +1.8 +1.2 +1 +0.8 +0.8 +0.7

Supply +2.4 +0.2 +0.7 +0.8 +0.8 +0.7

Gap -0.3 -1 -0.3 -0.0 -0.0 0.0

Source: AlphaValue with our oil prices assumption

Each barrel counts in the market


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Each barrel counts in the market

2010/2014 average stockpiles were close to 2.7bn.

A 1mbpd drawdown over 365 days would decrease OECD stocks to below

average. We believe that in the very short term, this is a key determinant to

that oversupply concerns may disappear in one year.

Source: EIA - B

Bet on a $60/bbl in the long term. Upside will be a short-term b


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et o a $60/bb t e o g te Ups de be a s o t te b

Market is rebalancing, even more slightly (Emerging Markets) h i l k t idl th i t t d i i


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physical market, rapidly on the investment decision

mbpd 2015 2016e 2017e 2018e 2019e 2020e

Demand +1.8 +0.5 +0.7 +1.0 +0.9 +0.9

Supply +2.4 +0.2 +0.7 +0.8 +0.8 +0.8

Gap -0.3 -0.3 -0.0 -0.2 -0.1 -0.1

Source: AlphaValue with our oil prices assumption

Bet on a $60/bbl in the long term. Upside will be a short-term b


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g p

Key Conclusions


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There is no risk premium so far on the current oil prices (due to stockpiles an

appear suddenly (Saudi, Venezuela, Iraq, Algeria) but it is unpredictable.

After 2018, oil prices above $60/bbl will be a catalyst for the industry (excluding

again.

Oil demand may reach a plateau by 2025. At that time, only depletion of mat

need to be replaced: 3% or 3mbpd a year.

If there is a (big) upside for oil prices, it would be in 2020-2025 with the lack of

2015-2018 and India + Africa pushing to a triple-digit number. But betting on oil

is too difficult and unpredictable. Technology may all the time change the picture

Main risk is more on Demand than Supply in 2016. US consumption + Chin

determine the trend (again)

y

Th k !


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Thank you !

There is always a light

at the end of the tunnel

[email protected]

+ 33 6 20 12 30 00
mailto:[email protected]:[email protected]

oil macro - jan 2016 uoi

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