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Oil price view for 2015 Free is the Way! Oil and the global asset crunch Edion Thirty Five – February 2015

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The 35th edition of the OilVoice Magazine, February 2015

TRANSCRIPT

Page 1: OilVoice Magazine | Edition 35

Oil price view for 2015

Free is the Way!

Oil and the global asset crunch

Edition Thirty Five – February 2015

Page 2: OilVoice Magazine | Edition 35
Page 3: OilVoice Magazine | Edition 35

Issue 35 – February 2015

OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 207 993 5991 Email: [email protected] Advertising/Sponsorship Mark Phillips Email: [email protected] Tel: +44 207 993 5991 Social Network

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Read on your iPad You can open PDF documents, such as a PDF attached to an email, with iBooks.

Adam Marmaras

Manager, Technical Director

Hello and welcome to the 35th edition of

the OilVoice Magazine.

2015 is set to be a year like no other for OilVoice. For starters, we have completely redesigned the site from the ground up. This was to service our growing user base of mobile and tablet users. The new design is responsive which means it works beautifully on all devices. A mammoth task, but well worth the end result.

We have also introduced training to OilVoice - which we took over from our sister company Finding Petroleum. We're lucky to have some of the best trainers in the business working for us. Take a look at our upcoming courses.

This month is another great edition of the magazine. We received a lot of excellent content in January, and I’m sure you’ll enjoy

reading it.

Hope you have a prosperous 2015!

Adam Marmaras

Managing Director OilVoice

Page 4: OilVoice Magazine | Edition 35

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Page 5: OilVoice Magazine | Edition 35

OilVoice Magazine 1

Table of Contents

Tech Talk - Projections 2 by David Summers

2

Hey Bo Didley, do you know this RIF? by David Bamford

5

Whither Oil Prices? by Stephen A. Brown

7

Bernstein Energy: up or down? An oil price view for 2015 - highlights by Oswald Clint

11

Free is the Way! by David Bamford

13

Oil price volatility - take the long term view and ride out the storm by Henry Hawkins

15

Here for Deeper Knowledge by David Bamford

17

Must do better, can do better!! by David Bamford

19

Oil and the global asset crunch by Andrew McKillop

21

European Oil & Gas 2015: why the majors remain attractive - highlights by Oswald Clint

25

Where to do better! by David Bamford

27

Page 6: OilVoice Magazine | Edition 35

OilVoice Magazine 2

Tech Talk - Projections 2

Written by David Summers from Bit Tooth Energy

It is the end of another year, or more optimistically the start of a new one. Last year I

was tempted to make a couple of predictions for the future. And while I can make the

case that they were not too wrong, they did not include the drop in oil prices, which

has now taken the price of our local gas to below $1.85 a gallon. China has, in

recent months, seemed less belligerent about claiming large sections of the China

Seas. Whether this has anything to do with the relative success of rigs that have

drilled in those waters is something that still remains an unknown.

But it is the changing price of gasoline, itself reflective of the drop in oil prices that is

the big news. WTI closed at $53.56 today, and Brent at $57.50 a barrel. Predictions

include some who would suggest that the price will continue to fall, until it reaches

$20 a barrel, and there it may stay for some time. Well it certainly grabs a headline,

but that is about all the value that particular forecast contains. The futures prices

suggest that the price has yet to bottom out, though it may be getting close to that

value.

Figure 1. Crude oil futures prices (EIA TWIP)

None of the recent news suggests that there will be a further increase in supply to

sustain the current imbalance between available supply and demand. Libya is

descending even further into a mess, with the oil facilities at the port of Es Sider

now being destroyed.

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OilVoice Magazine 3

The likelihood of significant increases in production and the return to export levels

achieved earlier this summer seems increasingly nonexistent. Neither Russia nor

Saudi Arabia are likely to increase production, although the latter are continuing to

produce the increased volume that they originally put on the market to replace

Libyan losses. And so this leaves Iraq and the United States as the key producers

who can significantly change the current supply:demand balance in any significant

way.

It is probable that, with the agreement between the Kurds and the Central

Government now having generated a second payment of $500 million to the KRG

that the agreement may be sustained and grow. At present the Kurds are to supply

about 550 kbd, of which 300 kbd will travel through the new pipeline to Turkey and

thence onto the world market. The rest will be supplied to Baghdad. Meanwhile

production in the south (which gets exported through Basra) has seen some

increase.

Whether the Kurdish production can increase to over 1 mbd by the end of next

year remains open to some doubt, given the ongoing conflict, and the target 6 mbd

by the end of the decade for the entire country will likely require changes that the

current conflict, which shows no signs of ending, will inhibit.

One of my responses, when the drop in price first started, was to note that the oil

supply system has a certain inertia to it. And here I am not talking about the

fluctuations in price that one sees in the stock market, and in the price of the crude,

but rather in the time that it takes to stop current drilling, postpone future plans and

to reduce the production from existing and new developments.

Thus the drop in investment in new production, whether in Russia, Iraq or the United

States takes some time to have an impact. Unfortunately for those expecting the

price to continue to fall, in the face of the overabundant supply, the situation has

changed since historic times, where well production was relatively stable and the

oversupply situation was corrected by shutting in production (mainly by Saudi

Arabia). Even then it was the perception of the response that drove price rebounds,

rather than the immediate reality of the changes.

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OilVoice Magazine 4

The system this time is different. The increase in production in the United States has

been sustained, and over the last two years has produced more than 2 mbd more

than at the start of that period.

Figure 2. US crude oil production over the past two years. (EIA TWIP)

The rig count in North Dakota has already fallen to 170 rigs compared with 187 at

this time last year. Concern about the oil price has led companies to cut their

investment plans for next years, in some case by 20% so that the rig count is likely to

continue to fall. And with the short life at high production values for most wells that

will soon affect production. The North Dakota Oil and Gas Division of DMR shows

the consequences of this:

Figure 3. Future production estimates from the ND DMR Oil and Gas Division.

The blue line requires about 225 rigs in continuous action, so that won’t happen. By

the same token the black line is with no more drilling, and that won’t happen either.

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The result will be somewhere in between, probably moving the peak out beyond the

current projection, but also lowering it as the existing baseline drops with less wells

significantly contributing. (Bear in mind it is taking 11,892 wells to sustain current

production levels.) But in the short term the line will likely dip down until the price

rebounds.

The question now becomes how soon that drop in US production will become

evident, and have some impact. I doubt that it will be before June of 2015.

On which note may I wish all readers a Happy, Healthy, Successful and Prosperous

2015.

View more quality content from Bit Tooth Energy

Hey Bo Didley, do you know this RIF?

Written by David Bamford from PetroMall "Those who fail to learn from history are doomed to repeat it." -Sir Winston Churchill

Once again, there is a lot of excited chatter about cost cutting in our industry.

Oftentimes in the past, this has meant cutting great swathes of people (also known in

better times as 'our most valuable resource') out of the team. Of course now it's

happening again - RIFs are in progress at, for example, Schlumberger and Genel

Energy to highlight just two.

Here's something to think about: perhaps the only person you can trust to manage

your career to your expectations is yourself, unless companies change their

behaviour significantly!

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A brief history of RIF-ing

So what is a RIF?

Please note I am not talking about a riff which I understand in music is a repeated

chord progression, pattern, or melody, often played by rhythmic instruments.

No, I am talking about the tendency of folk in our industry (let's blame HR, it's easier

that way!) to hide redundancies under a veneer of verbiage.

After all, 'job cuts' is too blatant and incomplete, 'manpower reductions' only slightly

less so: so we get to terminology like 'rightsizing the organisation' and my favourite

(which I learnt in the USA in the mid-1980's) which is 'RIF-ing'. RIF = Reduction in

Force, you see.

And it was accompanied by such delights as folks' swipe cards not functioning when

they arrived at work; Town Hall meetings in which everybody received an envelope

on arrival, to be opened on command, those with a green slip being told to return to

their desks etc etc.

All this was the part of the cost cutting wave of the second half of the 1980's; there

was another one in the second half of the 1990's. The latter especially 'benefitted'

from the synergies available from the various mergers of the time.

With the extreme benefit of hindsight, we can see that this bloodletting has had two

profound effects on our industry, driven by the fact that:

Many experienced people were let go.

Graduate recruitment dried up to a trickle.

By 2005+, when our industry was back in better times, the realisation had dawned

that this RIF-ing had resulted in:

1. An 'underweight' generation of folk approaching 50, who were going to retire

fairly soon, taking their knowledge with them. This was sometimes referred to

as 'The Great Crew Change'

2. A real shortfall in the absolute number of petrotechnical staff available to fill

the mushrooming number of jobs. CERA foresaw a 10% global shortage by

2010.

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There was some wailing and gnashing of teeth, with various industry luminaries

going so far as to blame the shortage of decent staff for the widespread failure of

development projects to be delivered on time (though our Finding Petroleum Forums

have revealed that there is in fact a different root cause). This presentation is a good

example of the genre.

So as oil prices rose - with optimistic forecasts of their remaining permanently above

$100/barrel, perhaps even reaching $200 - the industry set about hiring, hiring, hiring

and you could read of this sort of thing!

In view of the history and precedents of the last 30 years in our industry, you would

be perhaps unwise to manage your career by taking too much notice of what

companies say at high price times and rely on managing your own career!

View more quality content from PetroMall

Whither Oil Prices?

Written by Stephen A. Brown from The Steam Oil Production Company Ltd The recent collapse in oil prices has taken pundits and oil producers by surprise. It

was only six months ago that prices were over $100/bbl and at that time they had

been above $100/bbl for three and a half years. In fact the stability had become

uncanny, so perhaps we should have seen the collapse coming. I would like to claim

I had been prescient but sadly I wasn't.

There are lots of conspiracy theories on offer, but it seems to me the root of Saudi

Arabia's refusal to defend the oil price lies in its fear of a repetition of the loss of

market share that OPEC suffered in the early eighties. But there are good reasons

why the 2010's are not the 1980's.

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I like to analyse the numbers, therein lies the explanation for OPEC and more

particularly Saudi Arabia's stance. Lets look back to the early eighties and see what

happened to OPEC's market share after the oil price shocks of the seventies.

Oil prices since 1965, in 2015 dollars with both total world oil supply and OPEC

market share capacity up until 1990 shown in the background.

OPEC hiked prices twice in the seventies; the first jump in prices slowed down the

growth in oil consumption and OPEC's market share slowly eroded, but the move

was essentially a triumph for the organisation. Their revenue tripled and while their

exports were no longer growing that was a small price to pay.

The second jump in the oil price did not turn out so well for OPEC; this time their

market share was not just eroded, it collapsed; and on top of that ignominy global

consumption fell for four years in succession. By 1984 OPEC's market share had

dipped below 30%. The organisation went from being the masters of the oil market to

its victims. By the end of the eighties the price was back down to $30/bbl (in 2015

money) and oil companies everywhere had embarked on the endless rounds of

redundancies, rationalisations, mergers and cutbacks that has characterised the

industry ever since.

It took until 1996 before OPEC's could regain a market share of more than 40%.

OPEC, and the Saudi's in particular, learned the lesson that you can price yourself

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out of the market. High oil prices encourage energy savings and unconventional

production techniques. If you charge too much for your product buyers find

alternatives and other smart people find new ways to take your market share away. It

is easy to lose your customers and damned hard work to get them back.

So what has happened recently?

Well it took a long time, but eventually world oil demand grew to the point where

OPEC no longer had a lot of spare capacity unused. It seems pretty obvious now

that we can actually chart all the data, but once OPEC spare capacity fell to around

2% of world oil consumption, the oil price was on a hair trigger. From 2004 onwards

the price marched upwards, breaching $100/bbl with ease and briefly touching

$147/bbl (in 2008 money) before that high price tipped the world into recession.

The ascent in prices wasn't really OPEC's work, speculators and traders got the

blame, but the oil producers basked in the revenues and the pundits and bankers

predicted ever higher prices. But as the saying goes "what goes up must come

down" and, just as it has done recently, the oil price collapsed at an alarming pace.

That price collapse, along with a massive injection of cash in the euphemistically

labelled "Quantitative Easing Programme", took the nasty edge off the 2008

recession and it wasn't long before oil consumption restarted its modest march

upwards. Prices recovered from their lows, and OPEC was once again able to

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rebuild its market share. But what is really interesting is that this time round OPEC

was able to increase its market share, while the oil price averaged $80/bbl. There

was no need to endure a prolonged period of $30/bbl oil to recover the ground lost in

the price exuberance of 2008.

So it turns out that the early years of the twenty-first century are indeed different from

the eighties. In the eighties $100/bbl oil destroyed OPEC's market share; $40/bbl to

$60/bbl oil eroded OPEC's share and it took prices as low as $20/bbl to $30/bbl to

grow OPEC's market share. Nowadays, $100/bbl to $120/bbl oil slowly erodes

OPEC market share, and OPEC can grow exports and market share with an oil price

of $80/bbl oil. Why? Well, "Peak Oil" might be an unfashionable theory but the world

is slowly marching up the supply cost curve.

The futures market sees this too. Two years ago when the oil price was $115/bbl the

futures market predicted that the price would correct back to $90/bbl. Last Monday

with Brent trading at $51/bbl the futures market thought that the price will correct

back to $77/bbl.

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So what is an oil producer to do? Well, for sure the stability of the past few years has

gone, the notion that oil would stay steady at $100/bbl for a long time was tempting,

but only a chimera. For what its worth, it seems to me, that a sensible oilman or wise

oil investor can plan for $80/bbl prices, they might hope for $100/bbl prices and for

prudence they should stress test their projects, business and investments at $60/bbl,

but $80/bbl seems the price that we will oscillate around for some time to come.

For traders I have no advice, the price tomorrow could go down just as easily as it

could rise, but the longer the price stays below $60/bbl the more dramatically the

price will spike when events eventually turn the tide.

View more quality content from The Steam Oil Production Company Ltd

Bernstein Energy: up or down? An oil price view for 2015 - highlights

Written by Oswald Clint from Sanford Bernstein

In 2014 we had the strongest non-OPEC supply in over 30 years followed by one of

the largest intra-year (negative) demand revisions (Europe, Russia, Ukraine, Syria,

Iraq, Japan). We also had the warmest weather on record across Europe, the

second lowest Chinese oil demand since 1990, and an unusual OPEC decision not

seen for 30 years (1986). A 50% price correction ensued from this string of unusual

events. We've updated our supply and demand model to help form a view on prices

from here.

Global Oil Demand should rise by at least 1Mbpd in 2015 up from a weak

0.7Mbpd in 2014.

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GDP is the greatest cyclical driver of oil demand growth and set to accelerate, from

3.3% in 2014 to 3.8% in 2015. In our models we forecast oil demand as a product of

population growth, GDP per capita growth and long-term average oil intensity; hence

this year's global oil demand growth should exceed last year's (all non-OECD).

Structurally, the world's oil intensity (i.e., oil consumption per $1000 of GDP) has

been declining at a 2.4% 10-year CAGR, and the 2014 average was in line at 2.3%.

Non-OPEC supply should rise by 0.9Mbpd in 2015 down from the 1.9Mbpd in

2014.

Last year's non-OPEC supply was monumental as it was the highest in 30 years and

the first time growth was greater than 1.5Mbpd. Within this 1.47Mbpd was US. In

2015, the main sources of supply in our model are the US (0.6Mbpd) and Brazil

(0.3Mbpd) as other regions net out to zero. Downside surprise to non-OPEC supply

is more likely in 2015 due to the impending 20-30% capex reductions we expect.

IOC's had already deferred $300Bn of capex and 2Mbpd of future oil production

during 2013 and 2014.

Increases in global spare capacity have added additional price concerns.

Specifically, spare capacity rose to 3.2Mbpd in 2014 up from 3.1Mbpd in 2013 but

reached 3.45Mbpd by November. If we look back over the last 45 years, then spare

capacity remains low at 4.4% of global demand in 2014 including ineffective spare

capacity. Only in the demand surprise period of 2004-2008 did it average lower

around 3%. Up to 2004 and throughout the 1990's it was 6%, and 14% on average

before the 1990's. For the next five years our model suggests 4-5% which means

prices should be at marginal cost.

Increases in global inventories in the short term could dampen price recovery

until mid-2015.

We expect supply reductions from the impending 2015 capex collapse though have

not yet factored them into our estimates. While they may take 6-12 months to filter

through, our quarterly global supply and demand balances suggest inventory

building in 1H 2015, which could prevent rapid price recovery until mid-2015. As

demand and supply are revised positively and negatively (respectively) through

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2015, we wouldn't expect the inventory builds to continue into 2H 2015.

Updating oil price estimates and still seeing undeniable upside for long term

investors.

Rolling forward from the 2014 supply strength, lower than expected demand together

with spare capacity and inventory increases, we cut our Brent forecasts to $80/bbl

(from $104/bbl) in 2015 and $90/bbl (from $109/bbl) in 2016. Our estimates are 5%

ahead of consensus in both years and 13% ahead over the medium term, while

falling substantially ahead of the forward curve (30% on average in 2015 and 2016).

View more quality content from Sanford Bernstein

Free is the Way!

Written by David Bamford from PetroMall

To everybody who went to the 2014 EAGE in Amsterdam, I hope you enjoyed

yourselves, especially considering how much it cost you and your company:

So, you took what, 4 days away from the office? Call that a week and let's divide the

typical built up cost of a FTE of 200-250,000 Euros (do we still have them?) by 50 to

get a cost of 4-5,000 plus your hotel and travel - hmm, another 1000 at least - plus

registration, somewhere between 500 and 750 depending on your timing. So let's

agree on ~ €7000 in total?

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Of course if your company wanted to exhibit; well, my brain isn't agile enough to

work it all out but I did hear that one well-known oil field services contractor figured

that all-up it was going to spend ~$800,000 on the EAGE in Barcelona, and decided

to give it a miss!

And, apart from having a 'good time', what do you expect to get out of it that you

couldn't find by browsing companies' web-sites where all their papers, products and

services appear anyway, and for free?

For example, most seismic companies do a really good job of showing you their

multi-client data on their website.

You can browse all of this in an hour or so, and you don't have to go to any of those

unnecessary parties or eat any 'cake'……..

Before I go any further, I should say that I don't mean this as an attack on the EAGE,

or the SPE or the AAPG or the SEG. It's just that some things' time has passed…….

There are plenty of other entities, noticeably commercial companies, that charge

amounts getting well into four figures - in €, £ or $ - to attend one of their events. Of

course there are some that CEOs and CFOs go to that cost big wedges of

money……….but that's OK? Or maybe not!

My point is, to repeat:

We are increasing living in a world where you can download more or less anything,

certainly more or less anything that conference presenters and exhibitors are willing

to stand up and talk about and put on a slide, for free, more or less instantly - well, if

you have decent broadband that is. And from the comfort of your own desk or study

at home - without having to fight your way through LHR, ABZ or IAH!

As the author of this article in the Telegraph pointed out 'All sorts of things we used

to pay large sums of money for are now nearly or completely free.'

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SUPPORTING THE DEVELOPMENT OF NATURAL RESOURCES

rpsgroup.com/energy [email protected]

Operations Support | Technical Studies | Advisory Services Project HSE & Risk Management | Training

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So if you are thinking of going to the 2015 EAGE in Madrid, here's a simple question:

WHY?

And if you agree you shouldn't go when the oil price is less than $60 a barrel, why

would you go when it's $120?

View more quality content from PetroMall

Oil price volatility - take the long term view and ride out the storm

Written by Henry Hawkins from Palantir

The press suggests that oil companies are cancelling field development projects in

the current low price environment. This made me question these decisions since oil

companies should be long-term thinkers. Cash flow constraints aside, are they really

making decisions based on 45 $/bbl oil?

Much is made of the volatility of oil prices. One of the great challenges of oil and gas

companies is managing the uncertainty around future oil prices when making

investment decisions. Indeed, 2014 has been a prime example with major indices

such as Brent and WTI tumbling from 110 $/bbl down to 45 $/bbl recently. Many

projects are simply not viable at such prices and this affects investment decisions. In

addition it can lead to project termination of late-life projects, even if they might

remain viable at slightly higher prices.

How do oil companies make decisions about viability and how do they select a long-

term price forecast? The truth is that most companies take a slightly simplistic

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approach which is very heavily oriented towards using the current prices with bands

either side. Many argue that they are notoriously bad at even considering extreme

price events. The truth is that 9 $/bbl and 180 $/bbl are within the realms of

possibility.

Certainly extreme price volatility affects the day-to-day operations of E&P

companies. When prices are low, costs must be cut and it can be hard to gain

approval for new fields. However, a typical field will produce for 20 years or more so

really the investment decision should be based on a twenty year view of prices. In

that context the month-on-month or year-on-year volatility is of little consequence.

Perhaps the secret is to take a long view and ride out the storm.

The graphic below shows West Texas Intermediate (WTI) from 1946 to the present.

It has been converted to 2014 real terms in order to present a trend that it is easier to

interpret. The grey dotted line shows the monthly spot price with all the volatility. This

could have been shown as daily prices which would have shown a little more

volatility along with a few more extreme events. The orange curve shows a twenty

year point-forward rolling average. There if a project had been sanctioned in 1985 it

would have experienced an average price of 38 $/bbl over its producing life.

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Viewing this from the perspective of a life-time price paints a very different picture.

Perhaps E&P companies are not so flawed when they fail to consider the extremes.

This analysis does nothing to help answer the all-important question of what the

forecast should be for 2015 and beyond, except perhaps to suggest that a long-term

forecast of 45 $/bbl might be an extreme view.

View more quality content from Palantir

Here for Deeper Knowledge

Written by David Bamford from PetroMall … and Wider Opportunities?

If we do not act quickly, the UKCS and NOCS will soon be on 'life support'

Naturally, first reactions have been 'Give us a Tax break!' and 'How do we

get Costs way down?'

Yes, these are important because they finish up in the Numerator of the crude

economic equation that describes profitability.

But there is also a Denominator which is, or are, barrels of oil or cubic feet of gas.

How do we input more of these into the equation?

I have two thoughts:

Firstly, and beginning with a 'story'. Many years ago I had a minor role in BP's

takeover of Britoil (previously of course BNOC, the government's national oil & gas

company). This takeover was underpinned by profound understanding of North Sea

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geology, of Yet-to-Find volumes, of undeveloped discoveries, of upcoming

development projects, of producing fields. In point of fact, BP probably understood

Britoil's acreage and fields better than Britoil did itself.

Today it is difficult, impossible actually, to see such a profound underpinning

anywhere, perhaps because lots of key individuals have 'moved on', perhaps

because of lazy assumptions that the North Sea's best days are somehow behind it.

And yet the significant Johan Sverdup discovery in the NOCS, in a well-explored

area, was as I understand it, the result of deep geological knowledge and innovative

thinking.

We know perfectly well how to do these things - see for example this summary of

how work on Nova Scotia revitalised exploration there.

Something similar, of similar scope and imagination, is needed for the North Sea

and, arguably, NW Europe as a whole. Somehow this has to be a 'multi-client' study,

driven and delivered by oil & gas industry folk, not some academic or research

exercise.

Secondly, we geoscientists have developed a lazy dependence on 'yet-another-

towed-streamer-3D-seismic-survey' which we need to move beyond. There are all

sorts of new technologies 'out there' - from seismic nodes, passive seismic, fibre

optics, full tensor gravimetry, electro-magnetics - that can tell us much more about

the sub-surface, bringing better predictions, and higher volume successes.

Deeper knowledge and wider opportunities indeed!

View more quality content from PetroMall

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OilVoice Magazine 19

Must do better, can do better!!

Written by David Bamford from PetroMall

Our industry finds itself at a bit of a watershed moment. No, not because of the oil

price!!

We are perceived - by the owners of our companies, the shareholders - as having

failed to deliver:

Exploration

Field Development Projects on time, on budget and as promised

Reliable Reservoir Management

IOR/EOR schemes as promised.

We need to up our game! We need to do better!

I believe that our problems stem mainly from our failure to perceive and describe

more complex targets, more difficult reservoirs, properly. What is to be done?

Way back in the early 1990's, the twin 'disruptive' technologies of inexpensive 3D

seismicand powerful interpretation workstations - the latter pioneered by Geoquest

and Landmark - transformed the quality of our sub-surface insights. Hasn't little

happened since then!

We need to move beyond the tired remedy of "yet-another-towed-streamer-3D

seismic-survey", and start applying new "disruptive" technologies such as seismic

nodes, fibre optics, non-seismic geophysics, permanent reservoir monitoring.

And then.....

Integrating, analysing, visualising and correctly interpreting these multi-

measurements goes way beyond the 'lowest common denominator' desktop

applications available today where the world of innovation has been replaced by 'one

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OilVoice Magazine 20

size fits all'.

I have always believed that the best insights are found when everybody - for

example, geologists, geophysicists, petrophysicists, reservoir engineers, commercial

folk - are looking at the same thing, and working on the problem at hand as a team.

Working in an integrated way................................preferably looking at a big screen

together.

On a lighter note…….

Sometimes, maybe after too many mince pies and red wine, I mull over a collective

name for the disciplines I just mentioned - in a way, we are always explorers but that

strikes the wrong note, I think.....much too restrictive.

And then, watching The Bridge (Series 2), Lewis, Wallander, The Killing,

Montalbano, Homicide Hunter.....you get the genre!!......, I realised that we are really

detectives, taking scraps of evidence, all sorts of expert insights, and coming up with

a story.

So, how about:

Sub-surface Detectives!!

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Page 26: OilVoice Magazine | Edition 35

OilVoice Magazine 21

Oil and the global asset crunch

Written by Andrew McKillop from AMK CONSULT Canary in the Coalmine

Huge attention given by world media to the collapse of oil prices has diverted

attention from similar falls in market prices for a range of other traded financial

assets. These range from other commodities are called "bellwether" for their

predictive role in major financial and economic change, such as copper. Others

include the other base metals, food and non-food agrocommodities - and "pure

financial" assets such as a range of national currencies, interest rate futures,

government and corporate debt, and others. Often these "pure financial" assets are

treated as if they were separate from the commodities, as two unrelated asset

classes, but this is an illusion.

In some cases the existence of a “seamless asset space” is easy to prove. Starting

with oil, the well-known ratio of "paper-to-physical" asset trading is itself a bellwether

– using the ratio of futures contracts traded daily, versus the actual number of

physical barrels of oil finally settled and cleared by futures trading. Taking some

approximate figures, about 51 million barrels daily of the world's total 90 Mbd of oil

production and consumption is market-priced and traded, but world total traded oil

can exceed 5000 Mbd, for a 100-to-1 ratio of paper to physical oil. With oil-related

derivatives creation and trading, the ratio climbs even higher. Although little

remarked by the financial and other media covering the present and ongoing "oil

price crisis", the crisis has created a probable long-term several-year trend of low

prices and low-volatility of price, similar to the previous context of slow and small

changes of high oil prices – in both cases resulting in less investor interest in

"playing the market".

This tends to lock-in either high or low prices, after a period of major volatility, and

provides us another bellwether. Using data from, for example, the US CFTC

(Commodity Futures Trading Commission), the US "financial watchdog" for

commodities trading, any major decline in daily purchases and trade of futures

options will tend to indicate a lock-in of prices, whether they are high or low.

Conversely during periods of major volatility, speculators and traders will be more

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active, and will buy and play a larger number of futures and options contracts. Even

the cost of buying and holding these options and related assets will weigh on the

decision to abandon any speculative moves, such as “bear raids”on the daily price

when volatility declines.

The Bigger Picture

To be sure, oil is the single largest traded commodity - but all commodities only

represent a small percentage of total traded financial assets. Commodities trading is

dwarfed by equities, foreign exchange, national and corporate debt, interest rate

futures and other non-commodity asset trading, by a very approximate multiple of

about 8 to 1, and the ratio is tending to grow...

Separating the "hard and soft asset" classes is always difficult - as already

mentioned we have the general class of assets termed "derivatives" which mix and

mingle all kinds of tradable assets on a daily basis. What counts is that today's major

macroeconomic trends - dominated by debt and deflation causing slow growth – can

add derivatives proliferation to make it a "3D crisis". Any pullback of investor interest

affecting these three factors will have a major knock-on to global, regional and

national macroeconomic trends.

Taking oil as the “global macro” bellwether and ignoring the geopolitics (such as the

need for high revenues from oil for Iraq to be able to fight ISIS), the price collapse

can be explained as a "classic supply-demand" process, due to rising output

featuring US shale oil and rising output by new small producers, especially in Africa,

and what is politely termed "sluggish global demand".

This demand growth constraint on oil price recovery in fact hides a picture where

major regions and countries featuring the OECD group (taking about 48% of global

oil output), and particularly Europe, Japan and South Korea are continuing and

deepening their energy transition away from oil. In some cases this is already a

decadal or 10-year-long trend of annual declines in national oil demand. For the EU,

Eurostat data shows decline trends, for some countries, that have continued from

well before the year 2000. These pre-existing decline trends have been intensified by

post-2008, post-crisis economic conditions. Similar long-term trends are almost

certain for the US and Canada, although short-term economic recovery may raise

demand on a few-years basis.

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Simple and basic energy economics, rather than ecology, lifestyle change, economic

policy and structure changes featuring de-industrialization helps explain this long-

term trend for oil, firstly bringing demand growth to zero, and then installing long-

term decline, which on a worldwide basis using the metric of oil's role in primary

energy, has been declining for 30 years! The energy economics of oil are negative,

due to oil being overpriced relative to coal, and to natural gas in a growing number of

regions and countries. In addition, in a growing number of "niches" the renewables

can deliver cheaper energy than oil. Adding national energy security and

environment policies, the negative long-term outlook for oil demand recovery is

rather clear, even in the emerging and developing economies, starting with China

and India, both of which have oil-saving policies and programs in place.

When we add the bigger financial-economic dimension of debt restructuring and

reduction, which is a global problem and global necessity, we can see why the

"bellwether commodities", including oil, are performing as they are!

The Post-2008 World

Oil and energy economists are obliged by facts to accept that the so-called "short

term correction" of prices on 2008-2009 when oil prices hit a low of around $40 a

barrel was in fact the long-term trend towards lower prices for global oil pricing and

natural gas prices in Europe and Asia, driven by major macroeconomic change.

Capacity growth in almost all domains and sectors - including global manufacturing,

not just commodities - was phenomenal in the decade 1998-2008 following the

bellwether Asian and Russian financial-economic crises.

Highly related to this, in the energy sector, the shorter-running asset spiral and

decline in the renewable energy domain through the period of about 2005-2012 was

a bellwether sub-sector crisis, including classic "boom-busts" such as global solar

PV and wind turbine capacity growth, and the attempted lift-off for electric cars and

vehicles.

Upstream of this we find what can be called the "general financial crisis",

fundamentally based on debt, with a typical profile of fast growth and fast decline. To

be sure, oil was a big winner for a long time, but past energy economic history shows

us what can happen.

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The 1973-1986 oil boom, driven by an approximate 400% growth of oil prices in

1974-1981, was followed firstly by the 1986-1987 oil price crash, in which prices fell

about two-thirds, and then followed by over 15 years of low or very low oil prices

during whhich $18 a barrel was the “new normal”.

Whether or not this can happen again is certainly open to debate. Reasons why it

might not happen, apart from geopolitical strains and pressures will surely include

corporate debt restructuring which will be severe in the energy sector. Other factors

that may “intensify the pain” of low oil prices will include national debt dilution by so-

called “debt monetization or QE”, by competitive national currency devaluation, or by

pure and simple debt abandonment, of course implying new and additional debt

crises for a global financial-economic system that is still trying to work its way out of

the 2008 crisis!

Arguments that for oil, this will shake-out high cost producers and speed oil price

recovery also aided by cheap oil spurring oil demand - can be set against the

experience of the previous 15-year trough in oil prices through 1987-2002. The 67%

fall of oil prices in 1986-1987 was not followed by “instant price elastic recovery” of

global oil demand. However, as in previous oil price crises and in general terms the

present crisis, is a bellwether. How it is responded and reacted to will concern us all.

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European Oil & Gas 2015: why the majors remain attractive - highlights

Written by Oswald Clint from Sanford Bernstein

2014 was the roller coaster year for European Oil & Gas stocks.

Overall, the Oil & Gas sector swung 26% intra year from +11% at the end of June to

-15% by year end. Against the European SXXP which climbed 4%, this left the

energy sector worst relative performer. Across the individual sub-sectors then the

European SuperMajors did best falling only 8%, then the Refiners -9%, Integrateds -

14%, Services -30%, E&P's -31% and Russian's -38%.

In 2015, we still like the Majors and they remain our favourite positioning

ahead of E&P's due to:

More constructive oil supply & demand balance than 2014. While we didn't

expect it, during 2014 the industry managed to add the most non-OPEC

supply in over 30 years just as demand growth was cut in half from mid-year.

Our companion note today finds it difficult to envisage such a scenario in 2015

especially when industry capex will fall 20-30% and demand upside surprises

are now more likely. Our $80/bbl 2015 and $90/bbl 2016 Brent estimates

thereby offer earnings support.

LNG cashflows and increasing chance of further capacity reductions in

European refining. Most of the Majors have material LNG portfolios which

offer stable production and contracted sales reaching 10-30% of earnings.

Price floors in these contracts will mitigate against some of the recent Brent

decline. In Downstream, capital rationing means less for Refining and more

shuttering of underperforming European assets should be expected in 2015

while margins are up 100% as oil fell.

Twins drivers of volume growth and capex flattening off. Industry capex will

fall >20% in 2015 but the Majors capex had already peaked in 2013. This

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hasn't changed and will drive FCF improvement. Volume growth should be

strong in 2015 around 5% on average for the Majors and 13% including the

Integrateds BG, GALP and Repsol. We had capex falling 5% naturally in 2015

but it will be more.

Valuation remains attractive. The Majors PCF multiples expanded 25% by

June 2014 on expectations of this better FCF sustainability. While the sector

gave this back in 2H 2014 relative yields at 1.92x, which have only occurred

once over the last 30 years, now appears to indicate dividend risk. We see

dividends (6% yields) as safe and to be confirmed in the strategy days.

We have not changed our preference for Brazil exposure and therefore BG and

Galp.

Both stocks still offer peer leading volume growth of 10% and 50% CAGR

respectively to 2018. Both companies also moved forward with the Iara development

last week. Brazil is volume growth but the Santos Basin barrels are also 24% net

margin barrels versus 12% for peers. For BG, the start-up of QCLNG in Australia,

also last week, marks the end of a major capex phase and a new long life volume

project.

We have updated our earnings, cashflow and price target estimates for the oil

price correction of 2H 2014 and our new Brent estimates.

Our 2015 Brent estimate of $80/bbl is now 23% lower than before. Hence our EPS

estimates fall 23% on average leaving us 6% ahead of current consensus while our

price targets fall 16% on average. We still see undeniable upside for long term

investors.

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Page 32: OilVoice Magazine | Edition 35

OilVoice Magazine 27

Where to do better!

Written by David Bamford from PetroMall

One of the benefits of being involved in an events business such as Finding

Petroleum is that I get to meet lots of people and hear the opinions of all sorts of folk

in our industry - from Majors, Independents, Oilfield Service Companies,

Consultants, Investors, Analysts, Journalists etc etc.

I thought it might be worthwhile laying out some of the things I have heard over the

last 12 months; obviously the current oil price implosion has added some 'colour'

and, in some cases, invective! I have already touched on some of these inputs in

my article from earlier this week.

Today I am asking, where - and how - do we 'do better'?

'Performance' issues:

First of all, we have to admit that we need to 'do better' because:

1. Exploration has been very unsuccessful over the last 2-3 years, both in

success rate and in the discovery of 'giants'. This prompts two questions -

where should we explore and how should we explore?

o Can we find 'New Geographies' (see below), new provinces where

'giant' fields remain to be discovered?

o Have we reached the 'end of the road' with regional towed streamer 3D

as our main offshore exploration tool?

o And how do explore efficiently and effectively onshore?

2. 'Reservoir Risk' is a key contributor to the failure of Development projects; too

much uncertainty is carried beyond Appraisal and FEED into project design

and execution.

o Can any new technologies help reduce uncertainties?

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3. Poor understanding of reservoir dynamics has led to expensive Reservoir

Management and unsatisfactory IOR/EOR projects.

o Can we improve our understanding of reservoir dynamics with 'richer'

surveillance?

4. We have no control over oil or gas prices; can we get Costs (way) down? Is it

time for CRITE (Cost Reduction In This Era)?

o Are there new, better cost/barrel, development technologies?

o Can Standardisation deliver 10's of % cost reductions?

o What about Automation/Remote Control?

'Geography' issues:

5. Shouldn't Deep Water and the Arctic be avoided?

o The former is too just expensive - both to explore and to develop - at

any imminent oil price, given the outrageous costs of drilling. The latter

has this problem too but also incorporates unmanageable

environmental risk.

o In general, onshore anywhere - for conventional and unconventional

resources - looks like a better bet.

6. Are there 'New Geographies' with Cost-of-Supply advantages?

o Perhaps we should focus on Mexico which will open in 2015. Iran is a

possibility but one that depends on the major political issues being

resolved. Libya is probably not for just now, given the security situation.

7. Can we re-charge Mature Provinces?

o How do we re-invigorate the UKCS and NOCS; and much of South

East Asia? Using some new 'disruptive' technologies perhaps. And

driving Costs down, down, down……..

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