SPRE 2017 oil price outlook final

Society of Petroleum Resources Economists Presentation

2017 Oil Price Outlook

Society of Petroleum Resources Economists

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Carl Larry, Frost & Sullivan

Raoul LeBlanc, IHS

Afolabi Ogunnaike, Wood Mackenzie

Anthony Starkey, S&P Global Platts

SPRE Oil Outlook 2017: Distinguished Experts Carl Larry is the Director and Principal Consultant for O&G at Frost & Sullivan and he is the President of Oil Outlooks and Opinions.

He has spoken at oil conferences around the world and is a contributor to CNBC, CNN, Bloomberg and PBS. From APPEC in Singapore to OPEC in Vienna, his views and insight into the oil markets are highly regarded. His experience in the industry has covered financial funds, commercial producers and physical trading shops.

Prior to Frost & Sullivan, Carl has worked at Credit Suisse, Citi Bank, Barclay’s Capital, ABN AMRO and Calyon Financial.

Raoul LeBlanc is a Vice President of the IHS Financials team evaluating the dynamic North American onshore arena.

As a veteran of the industry and a former partner at PFC Energy, Raoul brings 20 years of experience in strategic and industry analysis. Familiar with a wide range of corporate and market issues, he has extensive experience with North American independents, upstream assets, and natural gas markets. Prior to IHS, Raoul worked at Anadarko Petroleum where he directed the company's Strategic Planning effort and was a member of it’s Mergers and Acquisitions team.

Prior to Anadarko, Raoul was a senior oil analyst at Energy Security Analysis.

SPRE Oil Outlook 2017: Distinguished Experts Afolabi Ogunnaike is a Senior Analyst at Wood Mackenzie focused on the North America crude oil markets.

He develops short and long term oil price forecasts for North American crude oil grades. Recent projects include assessments of Canadian crude oil transportation constraints, US oil exports and impact of changing crude slate on refineries profitability. Afolabi provides support for strategic planning and market analysis professionals in industry, finance and government. He is also often invited to provide expert commentary to the media on developments in the refining industry and the oil markets.

Prior to Wood Mackenzie, Afolabi worked for Chicago Bridge & Iron as a process design engineer for a variety of refining projects across the world. He worked across a spectrum of refining process technologies.

Tony Starkey manages the Crude Oil Team at Platts Analytics’ Bentek Energy.

He also is the lead contributor to Bentek’s PADD Balances and associated models, and

contributes to Bentek’s price forecasting.

Prior to joining Bentek, Tony was Vice President of Oil Trading at Bank of America Merrill Lynch, where he helped manage day-to-day trading operations, including executing hedges for producers and consumers in the financial derivatives markets. He specialized in the futures, swaps, and options markets in the oil space.

Oil Outlook 2017: A lack of change and more of the same

Carl Larry Director, Principal Consultant - Oil and Gas Frost & Sullivan



Source: EIA, Frost & Sullivan analysis.

2016 Review

US demand was strong from refiners and consumers • Refinery runs average well over 16M bd for second straight year • Overall demand tops 20M bd for first time since 2008 • Gasoline demand hits a record average through October at 9.5M bd • Jet fuel demand hits YTD high of 1.63M bd. Highest since 2006

2017 Forecast

Supply continues to outpace demand • Refineries hit capacity constraint in the US – Operable capacity is limited • Imports of crude are capped at 8M with more coming in from Canada/Mexico • Increasing crude oil exports restrain OPEC ability to control price • Consumer demand increases demand from foreign refiners (gasoline, jet)

$26 2016 WTI AVG 41.25 $51


Prices: WTI $44 to $54

• A range is the best we can do with markets like this. We’re likely to be in a period where high prices warrant increased North American production (US, CAN, MX)

• Crude oil prices in the US may be limited to restrained demand from constrained capacity in US refining

Brent $46 to $58 • Foreign benchmarks are still more susceptible to geopolitical events and

have higher risk to the upside • Lack of investment into new production and focus unto other areas

(storage, refining) may increase system shock if demand rebounds

Distillate (Diesel, Jet) $1.92 target • High supply and moderate demand

cap any major spikes • The one fuel that will be most

sensitive to macro economic swings • Consumers not as important

Gasoline $2.55 target • High employment in the US

driving higher demand • Lack of stable foreign production

puts cost at risk to upside • Better fuel efficiency offset by

sheer increase number of autos



Survival of the Fittest Supply War of Attrition Begins as Permian, Gulf Grow and Mega-Projects Stream

Roger Diwan, Managing Director, Financial Services, +1 202 721 0317, [email protected]

Raoul LeBlanc, Managing Director, Financial Services, +1 713 568 8842, [email protected] Karim Fawaz, Principal Analyst, Financial Services, +1 202 721 0307, [email protected]

mailto:[email protected]



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US-Canada-Russia Gulf 6 Rest of World (RHS)

Global Crude Production 2014-2018

© 2016 IHS

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b/d

Source: IHS

Nov ’14 OPEC

Meeting

Supply Dynamics: Growing Again at $50/bbl The Permian and slew of sanctioned projects join Gulf producers in restarting supply growth

10 Outlook for Global Oil Fundamentals and Prices in 2016-2018 / September 2016

• In our view, three phases define global production in the aftermath of the price collapse:

1. Phase 1 (3Q14-4Q15): First Wave of Gulf-6 Growth Compounds US Momentum and Early ROW resilience

2. Phase 2 (1Q16-4Q16): Cash Suffocation Hits Global Production, Second Wave of Gulf-6 Growth Tempers Declines.

3. Phase 3 (1Q17-3/4Q18): The Rise of the Permian, the Wave of New Projects and Continued G-6 Growth Breathe New Life into Global Supply Growth.

Key Risks: Aggregate growth in Phase 3 masks increasing strain for many producers, increasing disruption risk across the system. The increase potential in localized disruptions is a factor that potentially pushing ROW production declines to accelerate further in Phase 3.

We are here

Phase 1

Phase 2

Phase 3

Global Oil Market Balances: Waiting for Draws Weakness in refining and subsequent restart in supply growth will impede sustainable move to crude stock draws


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-1.0

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018

2015 2016 2017

Implied change in commercial crude inventories Implied change in ref prods and NGLs/condensate inventories

Total strategic crude injections Total liquids inventory change

Change in global oil inventories

© 2016 IHS

MM

b/d

Source: IHS

$/bbl 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016 2016 1Q 2017 2Q 2017 3Q 2017 4Q 2017 2017 2018

WTI $48.71 $33.33 $45.34 $44.66 $46.00 $42.33 $47.00 $53.00 $50.00 $47.00 $49.25 $52.00

Brent $52.49 $33.92 $45.41 $45.21 $47.00 $42.89 $48.00 $54.00 $51.00 $50.00 $50.75 $55.00

© 2016 IHS

IHS Herold crude oil price forecast

NGL Mask Underwhelming Global Demand Story Demand growth does enough to tighten markets in 2016, but creating room for supply upside through 2018 requires an acceleration only an economic recovery can provide

12

IHS Herold annual growth in world oil (liquids) demand (thousand barrels per day)

2015 2016 2017 2018

North America 186 223 137 214

United States 256 252 116 199

Canada (70) (29) 21 15

Europe 249 103 (52) (4)

OECD Asia 62 (75) (56) (61)

Japan (68) (162) (115) (108)

Non-OECD Asia 976 859 940 821

China 507 334 499 408

India 346 372 280 201

Non-OECD Asia excl. China and India 122 153 161 213

Total Asia Pacific 1,038 784 884 760

Latin America 79 (82) 9 83

Brazil 24 (47) (36) 30

Middle East 156 117 294 243

Saudi Arabia 150 53 130 66

Eurasia/CIS (97) 1 31 30

Russia (96) (21) 4 12

Africa 142 143 141 129

Total world liquids demand 1,752 1,287 1,443 1,456

Source: IHS Herold

Outlook for Global Oil Fundamentals and Prices in 2016-2018 / September 2016

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2014 2015 2016 2017 2018

North America Europe OECD Asia Non-OECD Asia Latin America Middle East Eurasia/CIS Africa

Annual global liquids demand growth

© 2016 IHS

MM

b/d

Source: IHS

13

The Push And Pull Of Decline & Growth Areas Outside US & Gulf-6 Rest of World flips to growth in 2017 as project starts wash out declines elsewhere


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(600)

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2010 2011 2012 2013 2014 2015 2016 2017 2018

Decline Areas: ROW excl. politically challenged &

growth areas crude delta

Source: IHS © 2016 IHS

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b/d

Production is more sensitive to oil prices, as it is driven by investment levels in the current period

(200)

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2010 2011 2012 2013 2014 2015 2016 2017 2018

Growth Areas: Russia, Brazil, Canada, Europe, and

Kazakhstan annual crude delta


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b/d

Production impact lags oil price and is mainly driven by pipeline of long lead projects

Zones of vulnerability: Some producers are now charting the extremes

@2016 IHS

Bubble size represents 2015 oil and gas production (million tonnes of oil equivalent)

0

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0 2 4 6 8 10 12

Eco

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stn

ess

*

Political robustness*

Nigeria

Venezuela

Iraq

Algeria

Kazakhstan

Angola

Qatar

Russia

UAE

Saudi Arabia

Iran

Kuwait

Azerbaijan

Russia

Many producers look set to weather the down-cycle with limited long-term damage, but others are nearing the

extremes of political and economic resilience

Source: IHS

*Economic robustness is drawn

from the aggregate of OGRS risk

factor scores for Transfer Risk and

Primary Fiscal Balance, on a scale

from 1–10 with 10 as the most robust.

*Political robustness is the

aggregate of OGRS scores for State

Capacity, Political Legitimacy, Facility

and Personnel Violence, and Civil

Society Risk, on a scale from 1–10 with 10 as the most robust.

US Production Forecast Trough in 4Q2016 with growth accelerating in 2H2017

• Consistent with our theme of a resilient and reset crude oil production system, we expect US production to bottom in 4Q2016 and begin to show modest growth during 2017. With prices in the $40/bbl range, cash constraints will limit the size and speed of expansion, but we believe the contraction has ended.

• We expect Permian growth of just over 1.0 MMb/d by the end of 2018 from August 2016 levels. Outside the Permian, the overall decline of legacy production should continue to outweigh pockets of excellent wells in the sweet spots of the major plays until mid-2017, after which we forecast that non-Permian production should also turn back to expansion mode. This dual growth means that 2018 growth in the US accelerates in a $50/bbl environment.

• The GOM will be hindering growth for the US system, with deepwater production shifting from the rapid expansion of recent years to flat to declining output.


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)

Permian Unconv Bakken Eagleford Other Oil Shale Gassy Plays

Alaska GOM Conventional Total (rt axis)

US Crude production forecast by major asset type


Capital efficiency has doubled since prices began to fall

Surging capital efficiency renews onshore competitiveness - Rate of improvement jumped 1000%

• Over the last decade, US producers have obviously made gains in de-risking, optimizing, and growing a variety of tight oil plays. To benchmark performance and assess the impact on supply of assets, plays, and capital programs, IHS has created a metric called production efficiency of capital, which combines near-term oil and gas productivity with the drilling and completion capex spent to generate it. We have calculated this metric for the 650,000 wells brought onstream in the US since 2001.

• As shown in the graph below, the industry was able to raise the average production efficiency productivity even as activity exploded from 2010 to 2014. However, the pace was tortuously slow, averaging just 1% per quarter from 2010 to mid 2014.

16

• Starting in 3Q2014, a confluence of factors – some sustainable, and some cyclical – allowed producers to massively increase the rate of gain. In the six quarters from 3Q2014 to 1Q2016 (the last period we can reasonably measure), the production efficiency of capital rose by 75%, roughly 10% per quarter, about 10 times its longer-term pace.

• This improvement translates directly to reduced breakevens (a longer-term metric); current level of capital efficiency have transformed the US onshore from a system with an average breakeven in the mid-$80/bbl range into a low-cost behemoth with breakevens in the mid-$50/bbl range.

Bubble size represents estimated drilling and completion capital spending


175%

124%

168%

156%

131%

76%

110%

Avg. Peak Well Production (Boe 20:1)

Lat Length

Avg. Proppant per Horiz (MM

pounds)

Horiz Share of All Wells

Major Play Share of Horiz

Wells

Est. Horiz Well Capex (actual)

Est. Horiz Well Capex (current

costs)

1Q2014 (100%)

1Q2016

Headline Productivity

Well D

esign

Mix Shift

Co

st

Operators Successfully Adapting Across the System Accelerating change on every front

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• North American onshore has 3 factors that allow it to adapt faster than the offshore/ international system:

1. Each well is a low-cost iteration, so experimentation is easy and lessons leveraged

2. Numerous operators have very different approach

3. Service companies seek to amortize learnings as broadly as possible

• Changes have focused on three primary aspects:

1. Unit Costs: Competition among service sector providers and pressure from operators has led to a 40% drop in the cost structure

2. Well Design: Operators have reworked well designs to achieve larger wells with more powerful fracs

3. Mix Shift: Capital has re-focused on the most prolific assets – either through intentional high-grading or Darwinian culling of the weak


94%

60%

5% 5%

5% 11%

7% 1% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dissection of gains in production efficiency of capital from 1Q2014 to 1Q2016


From “Amazing” to “Meh” Success from compounding small gains, not technological breakthroughs or learning

• In disentangling the factors that have compounded to create a virtuous circle driving the headline improvement on capital efficiency, we have found that astonishingly little of the overall advancement appears to derive from true subsurface learnings that extract more hydrocarbons per foot of reservoir.

• Efficiencies that reduce costs (e.g., faster drilling times, cheaper inputs, etc.) are not captured in this analysis. We estimate that they are substantial, about 10-15% in the system at large.

• Overall, we estimate that about 45% of the total gain is structural, while 55% would unwind, degrading capital efficiency in a medium to longer term upcycle.

18 Outlook for Global Oil Fundamentals and Prices in

2016-2018 / September 2016

Excludes 10-15% gains that reduce costs due to efficiency.

Mostly cyclical, eroding in an

upcycle



Survival of the Fittest Supply War of Attrition Begins as Permian, Gulf Grow and Mega-Projects Stream

Roger Diwan, Managing Director, Financial Services, +1 202 721 0317, [email protected]

Raoul LeBlanc, Managing Director, Financial Services, +1 713 568 8842, [email protected] Karim Fawaz, Principal Analyst, Financial Services, +1 202 721 0307, [email protected]




Where are crude prices headed?

Afolabi Ogunnaike, Senior Analyst



Disclaimer

This report has been prepared by Wood Mackenzie Limited. The report is intended solely for the benefit of attendees, its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie’s prior written permission.

The information upon which this report comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them.

Strictly Private & Confidential

1. Oil market is rebalancing

3. US crude oil markets

2. Demand outlook


Shift in the fundamentals is underway

Year-on-year change in global supply and demand

Oil prices to recover as fundamentals tighten

Outlook for Brent and WTI

Global oil demand growth to remain robust Outlook based on 2.3% global GDP growth in 2017; any slowdown poses risk to demand

Year-on-year change in global oil demand

China’s oil demand growth forecast is underpinned by our expectation of robust household Growth of 350 kb/d in 2017, contributing 1/3 global growth

China’s oil demand growth by product

This year, 2016

What happens as US crude oil supply recovers and surges? Rising US crude oil exports could lead to a widening differential between Brent and WTI

Outlook for US crude oil supply and exports


Afolabi Ogunnaike, Senior Analyst





Anthony Starkey, Manager, Energy Analysis S&P Global Platts

Fundamentals Matter

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Brent (LHS) Model (LHS) Cumulative Diff (RHS)

Source: Platts Bentek

Physical Hedging Matters

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Producer/Merchant Net Length Model

Source: Platts Bentek, CFTC

Speculative Money Flow Matters

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Managed Money minus Producer/Merchant Net Length WTI (inv)

?

Source: Platts, CFTC

Demand Has Not Been an Issue…Yet

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GDP per Capita (YoY Growth) Oil Demand (YoY Growth)

10 YEARS 9 YEARS 8 YEARS 7th YEAR

Source: World Bank, EIA

What do Fundamentals Say Now?

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Brent Model Forecast Forecast (w/ 700 Mb/d cut in OPEC)

Source: Platts Bentek

WTI 2017 Price Forecasts

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Dec'14 Dec'15 Jan'16 Sep'16

Forecast Date

Platts Bentek Forecast NYMEX Fwd Curve

Source: Platts Bentek, NYMEX

Thank you for your time Anthony Starkey ([email protected])

Manager, Energy Analysis

S&P Global Platts




Carl Larry, Frost & Sullivan

Raoul LeBlanc, IHS

Afolabi Ogunnaike, Wood Mackenzie

Anthony Starkey, S&P Global Platts


Announcements:

CAPA Symposium, Friday Nov. 4 (joint session)

SPRE Meeting, Thursday Nov. 10

Chinese American Petroleum Association

• Who – Non-profit, non-political, professional – Founded in 1983 – 1000+ members

• Why – Promotes technical exchange between Mainland China, Taiwan, and

the United States – Provides value-added services and promoting continuing education,

technical exchange, and career development of its members

• How – Community enrichment activities – Technical exchange forums – Collaborations between CAPA and other professional associations

Navigating and Repositioning for the Future

Friday 11/4/2016 at Marathon Oil Tower

Keynote Speakers at Morning Session • Dr. Steve Johnson, Exploration Manager Colombia, Upstream Exploration,

Shell (Houston) • Andrew Slaughter, Executive Director, Deloitte Center for Energy Solutions,

Deloitte LLP • Dr. Jeff Pan, Subsurface Manager, International Business Services

Department, Anadarko Petroleum Corporation • JC Rovillain, Managing consultant at Enhanced Value Recovery, President,

Society of Petroleum Resources Economists (SPRE) • Gabriel Guerra, New Business Development Manager, Upstream

Exploration, Shell (London)

Technical Sessions in the Afternoon • Deepwater and Conventional Exploration & Production • Unconventional Plays • Petroleum Economics (Co-organized with SPRE) • Engineering and HSE • Business Development • Student paper contest (Sponsored by SEG)


‘Our US Oil Patch Tomorrow’

Thursday Nov. 10, 6 – 9 pm Allen Gilmer, Chairman TIPRO and Founder & CEO of Drillinginfo

SPRE 2017 oil price outlook final

Economy & Finance

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