Structural Characteristics of the Oil and Gas...

Structural Characteristics of the Oil and Gas Industry

© Warren Business Consulting 2015

Potpourri

WARREN BUSINESS CONSULTING

General Granting instrument price sensitivity: service contract <<< PSC << concession

(tax and royalty)

Oil IOC/NOC price assumptions:

ExxonMobil: $109/bbl assumption (analyst meeting, March 2014)

Chevron: $110/bbl assumption (security analyst meeting, March 2014)

BP: $80/bbl benchmark (investor presentation, March 2014)

Total: $100/bbl scenario (investor’s day, September 2013)

Petrobras: Brent $90-100/bbl (2030 Strategic Plan published in 2013)

Oil price and the strength of the USD $

Gas Shale oil and gas limit exposure to short term price movements

Oil indexed gas contracts as a hedge against oil price

Gas price re-openers now rare

Increasing gas-gas pricing like NBP (UK) and Henry Hub (US)

Shale gas LNG priced against HH will challenge oil-linkage for Asia


Break Even Cost by Country


Source: Sanford Bernstein


Economic Rent is a Moving Feast – and so are Fiscal Regimes!


Source: Petroleum Review February 2005


Economic Growth Has a Strong Impact on Oil Consumption


Source: EIA


OPEC Spare Capacity (plus Oil Price 4)


Source: EIA

© Warren Business Consulting 2015 WARREN BUSINESS CONSULTING

2006 World Oil Consumption Growth

Source: Douglas-Westwood


OPEC Production vs. Capacity

Source: Oxford Institute for Energy Studies, Sept 2006. Data from BP and IMF


OPEC – Supply (Dec vs. Nov 2007)

Source: Citi Investment Research Suspended Membership 2009


Importance of Economic Growth in Consuming Countries

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Costs and Investment Data

Source: Douglas-Westwood


The Hydrogenisation of Fossil Fuel Usage



Energy Consumption


Source: OECD/IEA Word Energy Outlook 2009


The Cost of Motor Gasoline


Source: Wood Mackenzie


Motor Gasoline vs. Oil Price


Source: AA


Factors that Impact IOC E&P Plans in the Middle East

Source: 8th Arab Energy Conference (2006)

Introduction to Gas and Markets


Gas versus Oil


Gas Markets and Pricing (24 Feb 2010)

Source: Platts


U.S. Gas Price – Loosing Link to Oil?


Source: Credit Agricole Securities


Energy Consumption and Fuel Mix


Source: BP


Natural Gas Trade in 2010

Source: BP Statistical Review of World Energy 2011

bcm



LNG Export Capacity

Source: www.LNGpedia.com


Growth In Gas Demand

Source: The Economist


Gas Displaces Coal in OECD Power Generation


Source: BP


Unconventional Gas Resources



World’s Biggest Gas Producers



Wholesale Gas Price Formation


OPE: oil price escalation GOG: gas on gas competition BIM: bilateral monopoly NET: netback from final product RCS: regulation, cost of service RSP: regulation, social and political RBC: regulation, below cost NP: no price NK: not known (<1%)

Source: IGU

Oil and Gas Supply Chains


Offshore Infrastructure


The Gas Supply Chain

Unconventional Oil and Gas


The Unconventional Challenge is Underway…


Source: Sanford Bernstein Research


The Challenge of Unconventional Oil and Gas (cont’d)


The Challenge of Unconventional Oil and Gas (cont’d) Deepwater Reserves


The Challenge of Unconventional Oil and Gas (cont’d) Deeper Water


The Challenge of Unconventional Oil and Gas (cont’d) Growth in Deepwater Production

Source: Douglas Westwood


The Challenge of Unconventional Oil and Gas (cont’d) Growth in Deepwater Drilling Capex



The Challenge of Unconventional Oil and Gas (cont’d) Location of Deepwater Resources


The Challenge of Unconventional Oil and Gas (cont’d) Growth in Deepwater Capex



The Challenge of Unconventional Oil and Gas (cont’d) Floating Production Units Installed Per Year


Market Drivers •Move to deepwater (64% of spend) •Remote locations •Re-deployable •Can lease (lower capex) •Small fields economic •Early first oil


The Challenge of Unconventional Oil and Gas (cont’d) Floating Production Units Capex



The Challenge of Unconventional Oil and Gas (cont’d) Deepwater in West Africa



The Challenge of Unconventional Oil and Gas (cont’d) Deepwater in Brazil

Source: Financial Times

Geopolitics of Oil and Gas

Examples Taken from Around the World

Russia Case Study

Venezuela Case Study


Russia Case Study


Russia: Gas

Russia holds approx. 25-30% of the world’s gas reserves

Russia supplies approx. 25% of Europe's gas

Gazprom produces approximately 90% of Russia’s gas

Jan. 2006: supplies cut to Ukraine

Jan. 2007: doubles price to Belarus and Georgia

2006-07: “renationalisation” of Sakhalin, Kovykta and others from Shell, BP, others

“OGEC” an OPEC for gas? Source: IEA


Russia: The 2006 Ukraine Problem

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Shale Gas in Europe



Russia: The Major Issues

Russian and Europe – NOW

Russia and China

Russia and Central Asia

Russian Upstream developments and Western JVs – history and current issues

Russian LNG – why, ambitions

Russia – the Growing Domestic Problem

Russia, Gazprom and the World in future years


Russia: The Artic


Venezuela - Background

Long history of asserting State’s rights over IOCs

First mover in establishing OPEC approached Iran, Iraq, Kuwait and Saudi Arabia

Oil dominates the Venezuela mixed economy 1/3 GDP

80% of exports

>1/2 gov’t revenues

Largest reserves of oil in the world Also large unconventional oil resource (e.g. tar)

Downstream position (e.g. Citco in US)

Heavy oils

The Chavez agenda

http://upload.wikimedia.org/wikipedia/commons/7/7b/Flag_of_Venezuela_(state).svg

http://upload.wikimedia.org/wikipedia/commons/7/72/LocationVenezuela.svg


Venezuela Reserves

Source: www.opec.org


Nationalisation Efforts

History of nationalization (1976)

What does it mean?

reduced equity shares for investors (e.g. BP, Chevron, ExxonMobil)

less attractive tax regime

payment to investors for assets and equity shares ($1.8B to French, Norwegian and Italian firms)

Court action

ExxonMobil, ConocoPhillips challenge to Venezuelan gov’t

ExxonMobil seeking $12B for its nationalised interests

Venezuelan foreign assets frozen


The Impact on Venezuela

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The flipchart will be used to discuss the impact on Venezuela – please feel free to make notes here.


Venezuela – 2013 Production


mm

bd

Source: BP Statistical Review of World Energy 2014

2012 Exports to U.S. approx. 0.9mmbd (EIA)

Kurdistan Region of Northern Iraq


Kurdistan Region of Northern Iraq

WARREN BUSINESS CONSULTING Source: www.old.krg.org


Iraq Region of Kurdistan – Land of Opportunity?

>50Bbbl of oil and gas – U.S. Geological Society

Unexplored until 2004 – recent discoveries found ~5Bbbl

“No dry holes” – 71% success rate

~25 E&A wells over next year

Low cost operating environment Attractive PSCs

~35% IRR (F&D costs of $3-4/bbl; operating costs $4-6/bbl)

Regional Consolidation (Vallares, Afren Maersk, ExxonMobil)

But

Iraq Petroleum Law to be ratified

Validity of KRG PSCs (Central Gov’t vs. KRG dispute)

Oil contractors in KRG not receiving full payment for exports

Local oil sales at lower than international prices



KRG Potential


Num

ber

of

Wells

Source: Citi Investment Research


European Companies in Iraq Region of Kurdistan

DNO, Norway (merger with RAK Petroleum)

Afren

Heritage

Gulf Keystone

Genel Energy

Repsol

Perenco

OMV

Petroceltic

MOL



KRG Licences and Discoveries


Source: WoodMacKenzie


Key KRG Discoveries




Key E&A Wells




Northern Iraq Oil Infrastructure


Source: WoodMacKenzie


PSC Terms

10% royalty

Cost recovery cap 40-50%

Profit Oil R-factor:

10-38% contractor take

based on cumulative costs recovered

No corporate income tax

Infrastructure tax: up to 40% of contractor profit oil entitlement

Minimum 20% KRG carry in all contracts



Catalysts for Increased M&A

De-risking: geology now better understood

Oil field services availability better

Low acquisition costs: Vallares – Genel 2P at $6/bbl

Afren $2/bbl

Many licences held by small companies with limited access to capital

Bilateral agreement between Iraqi Central Government and KRG KRG investors “black-balled” by Iraqi Central Government

ExxonMobil


NOCs, IOCs and Service Companies


Service Companies (cont’d)



Oil Company Returns



Large Company Oil Price Breakeven After Capex and Dividend ($/bbl)

Source: Goldman Sachs Research

Shale Gas


48 Major Shale Gas Basins


Source: EIA


Shale Gas Plays in the U.S.


Source: Halliburton


U.S. Shale Gas



Shale Basins in the U.S.

Source: Alberta Geological Survey


European Shale Gas



Poland: Shale Gas Leasing Activity



Poland: Shale Gas Leasing Activity

WARREN BUSINESS CONSULTING Source: Polish Ministry of Environment


Majors’ Unconventional Gas Transactions


Source: Oxford Institute of Energy Studies


Shale Gas Well

Source: www.geology.com


Gas Production in China, Canada and the U.S.


Source: EIA

tcf


Shale Gas Production in North America


Source: Advanced Resources International


Shale Gas Production Forecast (excl. North America)




Barnett Shale Gas Production

Source: www.geology.com


Unconventional Gas Production in North America


Source: Advanced Resources International


Natural Gas Trade in 2010

Source: Poten



Projected Gas Growth

Source: Morgan Stanley Research


Haynesville Drill Site


Source: Goodrich Petroleum


First Year Decline Rates of Texas Natural Gas Wells

Source: Swindell


Shale Gas: The Impact of Technology


Source: Rigzone


Break Even Henry Hub Price


Source: Cheniere


Unconventional Gas Costs

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Structural Characteristics of the Oil and Gas...

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