OIL: IMPLICATIONS OF A SHIFTING PARADIGM - …lambertwillis.com/files/10-May-2015-Oliver-Wyman-Oil-Report.pdfOIL: IMPLICATIONS OF A SHIFTING PARADIGM ... Implications of a Shifting
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Authors Dr. Bernhard Hartmann (Partner, Oliver Wyman) Saji Sam (Partner, Oliver Wyman) Bruno Sousa (Principal, Oliver Wyman) Floris Ansingh (Former CEO Royal Dutch Shell KSA; Advisor, Oliver Wyman)
DRAFT
CONFIDENTIALITY
Our clients’ industries are extremely competitive. The confidentiality of companies' plans and data is obviously critical. will protect the confidentiality of all such client information.
Similarly, management consulting is a competitive business. We view our approaches and insights as proprietary and therefore look to our clients to protect 's interests in our presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the written consent of .
In the last 5 decades oil price disruptions were mainly driven by political factors, while in the future supply-demand fundamentals gain importance
Oil price evolution In US$ per barrel, 1970-20151
1. 1970-1983 Arabian Light in Ras Tanura; 1984-2015 Brent 2. Based on 2014 US$ Source: BP, Bloomberg, US Energy Market Emergency Act of 2008, Oliver Wyman analysis
Real Nominal 2
Drivers
6 0
10
20
30
40
50
60
70
80
90
100
110
120
2015
2012
2008
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
• Demand slowdown • US Unconventional • Iraqi resurgence • Fight for market share
1 2 4
5
3
1 • Yom Kippur War 1973 • Iran revolution 1979 • Iraq-Iran war 1980+
Political stability combined with attractive fiscal regimes for IOC participation could add significant low cost oil into the market in the long term
Oil production of select countries Million barrels per day
Theoretical production levels1 Million barrels per day
Oil proven reserves Billion barrels, 2013
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2014
20
13
2012
20
11
2010
20
09
2008
20
07
2006
20
05
2004
20
03
2002
20
01
1. Obtained by dividing reserves by the average reserves to production ratio of GCC countries (54.5) 2. Based on November 2014 Source: Oil & Gas journal, OPEC, EIA, Oliver Wyman analysis
Assuming an R/P ratio similar to the GCC, Iran, Iraq, and Libya could bring another 11 mbpd to the market – their low production cost would be competitive vis-à-vis other sources (e.g. DW or oil sands)
Governments, NOCs and IOCs who think longer term and act now to remain competitive will come out as the winners
Government NOC IOC
Actions that “winners” will take to remain competitive in the short, medium and long term
Withstand the storm
Survive the storm
Ride the storm
Short Term Implications Actions to stop the bleeding and prevent failure and loss of competitiveness in current “market driven” low price regime
Medium Term Implications Actions to remain competitive through a protracted low price regime in a “market driven” or “managed system”
Long Term Implications Actions to take advantage of market distress in order to come out a winner when cycle reverses in a “managed system” or “price umbrella” scenario
Re-negotiate supplier contracts for favorable terms
Review and rationalize buybacks and dividend payouts
Realign energy policy to optimize resources and manage energy demand and efficiency
Localize supply industries to reduce imports and generate employment
Reform E&P fiscal regime to attract, transfer and retain capabilities
Review project portfolio to improve capital productivity and efficiency
Improve operational and supply chain efficiency
Grow and complement capabilities through acquisitions
Build local talent aligned to local industrial demand
Optimize human capital base and retain talent
Diversify export oriented industries
Expand, integrate and diversify along value chain
Regardless of where the oil price may head, there is a set of strategies that will enable players to remain competitive at low oil prices and come out as winners
An unexpected drop in the world’s most important commodity is generating significant turmoil for large producers
Selection of emerging perspectives in the media
Oil price - from decline to collapse
• "With no sign that Opec will do anything about over-production, it seems likely that we could well see further declines towards $40“ – BBC, 07Jan2015
• “Oil prices will reverse their recent gains as global crude inventories begin to increase again, with US crude likely to drop as far as $40 a barrel in the near-term” – Goldman Sachs, Reuters, 08March2015
Oil war – Saudi Arabia vs. US unconventionals producers
• “We are about to find out whether [US] shale producers, with their backs to the wall, can keep oil investment innovative and profitable”
– Alan Greenspan, FT, 19Feb2015
• “For years Saudi Arabia acted as a safety net in the market, but as prices fell the game changed” – Financial Times, 10March2015
• “The Saudis permitted a big surplus to grow and served notice on higher-cost rivals (Russia, Venezuela, US shale) that they would not prop up other people’s profit margins at the expense of their market share”
– The Economist Magazine, 21Feb2015
Russian economy Doomed?
• “Vladimir Putin has burnt a lot of bridges and there are some seriously big economic gorillas out to get him”
– Managing Director of a Swiss private bank, FT, 01March2015
• “It’s the biggest crisis since the collapse of the Soviet Union” – Vladimir Mirov, FT, 26Feb2015
• “Russia faces a perfect storm of lower prices, international sanctions and currency depreciation that could threaten its’ oil output” – Reuters, 10Feb2015
Venezuela headed for default?
• “Sliding oil prices deprived the government of its’ main source of dollar earnings, curbing Caracas’ ability to import even basic food items”
– FT, 19Feb2015
• “The government is running a budget deficit equal to more than 10 % of GDP. The strain on its’ ability to pay its debts is clearly great – FT, 10March2015
A wave of nationalization and organized approach to set prices shifted the paradigm of a century-long low cost resource into a complex market & political price discovery regime
Average historical real price per barrel of oil across major periods has ranged between $35 -$60 1. 1861-1944 US Average; 1945-1983 Arabian Light in Ras Tanura; 1984-2015 Brent 2. Based on 2014 US$ Source: Bloomberg, BP, Oliver Wyman analysis
Resource Nationalization: Sonatrach 1963, Aramco 1973-80, Petronas 1974, PDVSA 1975, KOC 1975, Sonangol 1976, NNPC 1977 Organized price setting: OPEC membership more than doubled by 1972 controlling >50% of production; OPEC demonstrated the organisation’s power through coordinated supply restrictions in 1973 following the Arab-Israeli war
Departure from the average real price of oil (less than $40 over last century) has been accompanied with increased volatility
In the last 5 decades oil price disruptions were mainly driven by political factors, while in the future supply-demand fundamentals gain importance
Oil price evolution In US$ per barrel, 1970-20151
1. 1970-1983 Arabian Light in Ras Tanura; 1984-2015 Brent 2. Based on 2014 US$ Source: BP, Bloomberg, US Energy Market Emergency Act of 2008, Oliver Wyman analysis
Real Nominal 2
Drivers Implications
1
• Nationalization of oil concessions • Reduced dependence on OPEC
oil from the US • Significant investments in
alternative energy research
2
• OPEC unity challenged • Development budgets tightened in
oil-exporting countries • Decline in US exploration • Introduction of netback pricing
3
• Economic slowdown • Policies to limit commodity speculation • Oil-importing developing countries
under stressed • Investments in US unconventional
• Yom Kippur War 1973 • Iran revolution 1979 • Iraq-Iran war 1980+
The collapse of crude oil prices in 2014-15 can be mostly explained by an unconventionals boom in NA combined with lower economic growth
Main drivers for price collapse in 2014
1. Annual GDP growth rates for 2014 are Jan. 2015 forecasts Source: IMF; EIA; World Bank; Oliver Wyman analysis
Global crude oil and liquid fuels production Million barrels per day, 2013 - 2014
Global GDP and oil demand growth % Growth pa 2013 - 2014
About 40% of US production comes
from unconventional oil
• World production grew by 1.8 million barrels per day, resulting mainly from NA unconventionals boom
• US light tight oil production pushes non-OPEC production to record growth (+1.6 MBPD)
• OPEC did not cut their oil output despite falling prices, resulting in an unchanged output from the previous year
• China’s growth rates have been significantly below the levels observed over the past decade due to a shift from manufacturing to services and from investment to consumption
• Euro Area: The Euro area managed to eke out positive growth, despite a challenging external environment (sanctions ag. Russia)
• Japanese decline stems from structural factors, such as fuel substitution, a declining population, and government-mandated energy efficiency targets
1.5
0.2
7.7
2.23.3
0.91.4
7.4
2.23.3
-3.4
-1.0
2.5
-4.8
-1.1
3.4
0.51.0
3.2
1.5
Oil demand growth 2014
GDP growth 2013
Oil demand growth 2013 GDP growth 20141
World USA China Euro Area Japan
Global incremental surplus of ~1 MMbpd cannot alone explain the price collapse
• Changes in OPEC objectives with leader Saudi Arabia holding back in terms of production cuts - arguing that OPEC needs to ride out lower prices in order to defend market share
• The Kingdom still recalls the 1980’s production cuts in response to the rapid growth of non-OPEC oil supplies – Siberia, North Sea and Alaska - which led to a significant market share loss for the Kingdom (10 mbpd peak in 1980 to a low point of 3 mbpd in 1986)
Storage and trading
• Unprecedented growth in global storage • High oil inventories buffers production cuts • Spare storage capacity can absorb surplus for another 6-12 months • Traders and tanker-owners with storage facilities cash-in on falling oil
prices, when market enters steep contango
Capital
• Reduced cycle-time between capital deployment and production in unconventional
• Liquidity and availability of capital • Perceived price upside boosts investments and supply side expectations
Hedging • Oil producers hedged at higher prices than spot price fall in oil
• Producers able to continue selectively develop plays until their hedging contracts reach maturity
Source: Oliver Wyman analysis
Other drivers impacting oil price
Other factors too that have contributed to the price drop to varying degrees
Energy efficiency • Increased fuel efficiency in mature markets driven by carbon
friendly regulation – even during periods of low oil price • Drive towards overall lower energy intensity
Economic growth • Demand correlation with economic growth (or slowdown) • Growing demand through urbanization and emerging markets
Supply portfolio shift
Supply
Geopolitics
Energy independence
Demand
Substitution
• Production of unconventional resources such as shale oil & gas • Exploitation of new frontiers – deep-water, sub-salt, arctic • Conversion of alternate resources to liquids – CTL, GTL
• Continuation of Iranian crude embargo • Impact of Russian sanctions on oil production • Political stability in producing countries (e.g., Iraq, Nigeria)
• Drive towards long term energy independence of major demand centers – N. America, China, S. America
• Regional oil markets and global price de-coupling
• Oil demand in transportation substituted by electric cells, gas, hydrogen, biofuels
• Liquids demand in power generation substituted by gas, renewables, nuclear
a
b
c
d
e
f
Major drivers impacting oil industry
Supply and demand factors are reshaping the global oil landscape – some may have the potential to become disruptive
*Estimated based on the 30 largest projects within each group , which are expected to start up in the period 2014-2020 and it assumes US$90/bbl oil price Source: Rystad energy/research and analysis; Oliver Wyman analysis
For example, shale is already more attractive than other competing sources
42
80
66
45
80
Key economic metrics for principal sources of oil supply 2014
Unconventional development is a game changer for the global Oil & Gas markets and will act as a counter balance to OPEC swing production
Fast ramp-up through factory mode drilling
Relatively low level of capital outlay with limited E&P risk $
Large scale deployment of rigs and pad drilling to drill large number of wells
Large number of operators in a competitive environment adding to scale
Continuous cost and efficiency improvements
Fast production ramp down without shut-in taking advantage of high decline rates
Shale oil becomes a market driven counter balance for OPEC swing production
1
New innovative business model Potential for global roll out
DRAFT
Unconventional oil and gas have reached maturity in the US providing a blueprint for other basins around the world
World total unconventional oil
1. Incudes Shale gas, CBM, and tight gas Source: EIA, Gulf Petroleum and Chemicals Association, Oliver Wyman analysis
345 1241
World total unconventional gas
Unconventionals – technically recoverable resources In billion barrels of oil equivalent, 2013
Argentina
US China
Europe
Venezuela
9
58
13
13
27
13
26
76
32
18
9
99
98
94
29
138
81
18
49
192
75
42
21
Algeria
122 6
South Africa
0 67
5
Brazil
Countries with significant potential for unconventional oil and gas recovery
Russia Canada
Libya
Pakistan
Australia
Mexico
Unconventional oil production Million barrels per day
0.3
2014
4.3
4.1 (94%)
2010
0.8
0.8
0.0
United States
Rest of the world
Unconventional gas production1 BCM
2013
627
459 (73%)
168 (27%)
2010
485
365 (75%)
120 (25%)
2
KSA: Unconventional gas estimates commonly exceed 600 tcf UAE: Substantial, but unquantified amount of tight gas in Diyab Qatar: not assessed Kuwait: Initial studies indicate onshore and offshore resources. Heavy oil, tight gas, shale gas & shale oil Oman: Khazzan-Makarem field has estimated 100-150 tcf tight gas. Block 65 has potential to contain LTO Bahrain: Preliminary estimates for possible unconventional gas exist; unconfirmed
• Strong base of diversified and market driven OFS industries
• R&D and Innovation focused on continuous technology and cost improvements
• Availability of water in many basins needed for fracking
• Entrepreneurial mindset
• Well developed midstream oil & gas evacuation & processing infrastructure
• Well developed transportation infrastructure to mobilize equipment and material
• Mineral rights laws that enable exploration and production on private lands
• Access to data
Key factors contributing to unconventional boom in the US
There are several success factors that enabled the shale revolution in the US that are hard to replicate but not impossible to do so eventually with time
Note: 1. EIA total oil reserves (incl. EIA/ARI 2013 shale oil technically recoverable resources) 2. Countries included are India, China, Australia, Indonesia, Mongolia, Thailand and others. Source: IEA; EIA; Oliver Wyman analysis
Asia-Pacific2
Regions with shortage of supply might tap into their unconventional oil reserves
Regions short of supply
Regionalized/independent
Demand
594,096
87%
13%
Supply
7,555
Reserves
6,424
4,161
643,864
9%
91%
Demand
2,555
Supply Reserves
1,679 3,832
Demand
67%
33%
Supply
39,286
Reserves
6,387
Demand
17,447
Supply
3%
Reserves
1,373,770
97%
310,567
76%
4,416
Reserves
24%
Supply
1,898
Demand
Supply Demand
2,701
14,199
Reserves
193,697
62%
38%
Unconventional Reserves
Conventional Reserves
Overall oil demand and supply 2040 per region and respective oil reserves1 In million barrels, 2040
As conditions for shale development proliferates globally, it would decouple geographies towards regionalized oil markets in the long-term
Most of the global oil is produced in countries with geopolitical risk
Source: Marsh Political risks and trends 2014;EIA, Business Monitor International, Oliver Wyman analysis
Top 10 oil exporter countries
in thousand barrels of oil equivalent per day, 2014e
Norway 1,653
Angola 1,704
Venezuela 1,705
Canada
Others 6,318
Russia 7,337
Saudi Arabia 8,630
2,084 Nigeria
2,440
Iraq 2,500
UAE
1,943
2,521
Kuwait
Extreme risk High risk Medium risk Low risk
22.2%
18.9%
6.5%
6.4%
6.3%
5.4%
5.0%
4.4%
4.4%
4.3%
16.3%
3
Involvement in Ukraine conflict combined with economic hardships
Arab Spring unrest and instability and the overthrow of old long-standing regimes
Syrian conflict and Iraq insurgency
Political instability, ethnic strives and militant group insurgency
Iran’s nuclear program lead to global economic sanctions triggering to economic hardships
Political instability, ethnic strives and militant group insurgency (ISIS
Having its’ economy and foreign reserve inflow highly dependent on oil exports, Venezuela is bound to experience political unrest, economic hardship and rising debt levels with declining prices
Political stability combined with attractive fiscal regimes for IOC participation could add significant low cost oil into the market in the long term
Oil production of select countries Million barrels per day
Theoretical production levels1 Million barrels per day
Oil proven reserves Billion barrels, 2013
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2014
20
13
2012
20
11
2010
20
09
2008
20
07
2006
20
05
2004
20
03
2002
20
01
1. Obtained by dividing reserves by the average reserves to production ratio of GCC countries (54.5) 2. Based on November 2014 Source: Oil & Gas journal, OPEC, EIA, Oliver Wyman analysis
Assuming an R/P ratio similar to the GCC, Iran, Iraq, and Libya could bring another 11 mbpd to the market – their low production cost would be competitive vis-à-vis other sources (e.g. DW or oil sands)
• Due to its continuously decreasing price, natural gas has become a credible replacement for oil in heating and power generation, though at a slower pace in transportation
Biofuels • Reports indicate that biofuels could provide >37% of US transport fuel in the next 25 years
CTL/GTL • Coal/Gas to Liquid requires substantial capital investments and is only economical at a oil prices above $35
• An MIT study found that CTL might become economical in 2015 in coal-abundant countries like US and China
• Rising public concern about risks of nuclear facilities
• Possibility of small regional reactors in the future, which produce less radioactive waste
• Asian investment in nuclear projects could reach $780 billion by 2030
Emerging competing liquids supply Emerging substitutes for liquids demand
Nuclear
• Wind and solar world energy contribution will almost quadruple by 2035 according to the EIA
• Technological breakthroughs in energy storage and transportation are necessary
• Solar is forecasted to become competitive (grid parity without subsidies) in parts of the US within 5 years
Wind and Solar
• Hydrogen is environmentally friendly, produces no greenhouse gases, and is available abundantly
• Hydrogen production costs have significantly dropped in the past decade from around ~$6 per gasoline gallon equivalent to ~$1.5 per gasoline gallon equivalent
Hydrogen
1. Assuming high volume production (500,000 units per year) Source: EIA, Wood Mackenzie, World Nuclear News, UN International Energy Agency, National Mining Association, MIT, Worldwatch Institute, Oliver Wyman Analysis
Substitution of oil on both the supply and demand side will put downward pressure on oil in the long-run
6
2.0
2009
1.8
1.0 2008
1.6
2010
1.4
2011
1.2
2012
+8.4%
Biofuel production
Biofuel consumption
Biofuel production and consumption in millions barrels per day
Governments, NOCs and IOCs who think longer term and act now to remain competitive will come out as the winners
• Capital productivity and asset portfolio optimization • Cost optimization beyond the obvious • Human capital optimization and talent retention • Operation and maintenance excellence • Procurement and supply chain optimization • Rigorous risk management
• Energy policy review to rebalance allocation of resources between domestic demand and exports
• Value chain expansion, integration, and diversification • Asset acquisition - acreage, capabilities, technology • Localization - supply chain and human capital development • Restructure and reform fiscal regimes in E&P to attract,
transfer, and retain capabilities
Government NOC IOC
Actions that “winners” will take to remain competitive in the short, medium and long term
• Cut of discretionary non-value added expenditures • Reprioritization of capital expenditure • Re-negotiation of supplier contracts for favorable terms • Review and rationalization of shareholder value
redistribution through buybacks and dividend payouts
Short Term Implications Actions to stop the bleeding and prevent failure and loss of competitiveness in current “market driven” low price regime
Medium Term Implications Actions to remain competitive through a protracted low price regime in a “market driven” or “managed system”
Long Term Implications Actions to take advantage of market distress in order to come out a winner when cycle reverses in a “managed system” or “price umbrella” scenario
This section will ponder on the actions that those governments emerging as winners will likely undertake
Actions that “winners” will take to remain competitive in the short, medium and long term
Short Term Implications Actions to stop the bleeding and prevent failure and loss of competitiveness in current “market driven” low price regime
Medium Term Implications Actions to remain competitive through a protracted low price regime in a “market driven” or “managed system”
Long Term Implications Actions to take advantage of market distress in order to come out a winner when cycle reverses in a “managed system” or “price umbrella” scenario
In a low price regime there is high risk of collapse of socio-political systems with high population, low financial reserves, and over-dependence on oil
Ability to withstand current oil prices Figures in US$ billions, 2013
24
42
8
34
10048
114
138
439
303
78
1,000
100
10
1 10 + 9 8 7 6 5 4 3 2 1 0
Nigeria
Iraq
Libya4
103
Venezuela
Kuwait
Qatar
Iran
Russia
Saudi Arabia
Bahrain
Oman
UAE
1. All figures on graph are for 2013 government budgets in US$ billion 2. Oman and Iran oil and gas revenues are from 2012 3. In log scale; 4. Libya with a 6M population, will become more stressed once a fully functional Government is established and expenditure increases
Source: World Bank, IMF, Citi research, CIA World Factbook, Deutsche Bank, EIA, Market watch, Oliver Wyman analysis
High
Low
Low High
Scenario assumptions
• Deficit is calculated using $50 a barrel against the countries’ break even point per barrel
• For the purpose of this analysis, it is assumed that countries are unable to diversify their economy in the short-term to reduce their dependency in hydrocarbons
• Countries are keeping their export volumes constant with 2012 levels
• Static production costs are
assumed
• 0% interest applied to reserve funds during the depletion timeframe
Level of financial reserves robustness ─ Number of years to deplete reserves and
sovereign wealth funds based on 2013 levels
Non-oil and gas revenue Oil and gas revenue
Relative size of government budget in 2013, US$ Billions
Some countries will be obliged to issue debt in order to meet growing deficit
Withstanders
Cautious Heavyweights • Will lower oil export dependence focusing on
capital productivity to maximize local content and employment generation
• Will not be challenged to raise debt • Will allow a “markets driven” scenario to try shake
out new shale supply
• Robust with high flexibility on how they act in the short term
• Robust with less flexibility
• Will focus on export diversification
• Will push towards a “managed system” scenario
Social Pressure Total Population 3
A
• Higher stressed countries like Iran and Iraq will push to diversify away from oil & gas
• Raising debt will be costly • Will push towards a “price umbrella” scenario
In this context, Governments who will come out winners will pursue actions to stay competitive in the long term
• Cut non-critical public expenditure and focus on capital productivity • Renegotiate major government contracts to secure better terms • Manage short-to-medium fiscal deficit through reserves or raising debt • Rationalize social and industrial subsidies
• Energy policy: introduce renewables (e.g., solar, wind), and nuclear • Capital productivity: drive localization to further develop export based
industries to serve the regional and global markets • Energy efficiency: pursue demand side management to manage domestic
energy demand
• Energy policy: rebalance energy mix and allocate resources between domestic demand and exports
• Capital Productivity: prioritize projects that develops local content that reduces imports and generates employment
• Local Talent: align educational system to supply talent to meet the demands of the local industrial base
Governments: Actions “winners” will take to stay competitive in the short, medium and long term
The evolution of oil price is largely an exogenous variable, however Governments of oil exporter countries may influence their growing internal demand…
Breakdown of Crude Oil Consumption In millions of barrels per day, 2014
32%
21%
53%
23%
20%
64%
31%
76%
41%Libya 1.0 59%
Mexico 2.8 24%
Venezuela 2.8 69%
Iran 2.8 36%
Kuwait 2.6 80%
UAE 2.8 98% 2%
Iraq 3.4 77%
Canada 4.5 47%
Saudi Arabia 9.6 79%
Russia 10.9 68%
Domestic Consumption Net Exports
…otherwise they risk that increases in local supply will be absorbed by growing local demand
Energy intensity of GDP1 Constant ppp (koe/$2005p), 2013
Turkey Japan Germany Chile Mexico Norway Argentina Netherlands France Brazil Sweden Australia US Belgium Egypt New Zealand Malaysia South Korea Indonesia India Finland UAE Canada Venezuela Kuwait China Iran South Africa Saudi Arabia Russia Ukraine Kazakhstan Uzbekistan
1. In bold GCC countries Source: BMI; Enerdata; Oliver Wyman analysis
• Direct retail fuel subsidies have been a feature of many developing economies – not all of whom are producing nations – for decades
• Recent drops in oil prices have enabled developing country lawmakers to cut or eliminate these subsidies in the face of mounting budget pressure and widespread market inefficiencies
• Savings made from removing subsidies can be used to build up financial reserves
• Indirect (e.g. industrial) subsidies remain in many developed economies, despite G20 commitments to phase out fuel subsidies by 2020
• Reducing fuel subsidies increases the relative attractiveness of alternative (bio)fuels, while also freeing up government resources towards incentivising their development
“The IMF had lauded India's efforts to cut fuel subsidies, saying the fall in global crude oil prices provides a golden opportunity to reduce energy subsidies”
Indian Times,18 January 2015
“The government will save 230 trillion rupiah ($18 billion) in total from the fuel subsidy change and 60 percent of that will be spent on infrastructure” Bloomberg, 5 January 2015 “Malaysia also decided to abolish fuel subsidies, scrapping both gasoline and diesel support from December 1st last year, a move that will save the government nearly $6 billion a year” Reuters, 23 January 2015
“Venezuela will announce a change of policy soon on gasoline”
Reuters, 13 February 2015
In producing countries, these measures will also help to discipline internal consumption, and enable higher exports generating more revenues for the Government
India
Indonesia
Malaysia
Venezuela
In the short term, producing countries can increase the phasing-out of fuel subsidies to survive the storm
Source: Press research, Overseas Development Institute, IEA
In the medium term, Governments can ride the storm by developing more sustainable energy policies such as the Saudi Government is doing
KSA Energy System Energy Demand TWh, 2013 – 2030F
Generation portfolio GW, 2013 – 2030F
• Implement a comprehensive Energy Efficiency Program driven by the SEEC1 addressing the three largest consumer segments
Residential: Increasing the minimum energy performance standards for Air conditioning and lighting; Developing a new building code
Industrial: Setting aspirational energy intensity targets for Petchems and cement, and steel industries accounting for 80% of industrial energy consumption
Transportation: Introducing a new fleet average fuel economy standard for Light Duty Vehicles (LDVs)
• Shift energy mix from fossil fuel to renewables and nuclear
• Further develop the unconventional gas resources to replace burning fuel oil and diesel
• Further develop the transportation & distribution grid
• Develop a local value chain in the energy industry
Key initiatives to reduce energy intensity
1. SEEC – Saudi Energy Efficiency Center; Source: EIA, KACARE,CWC, MEED
In a scenario of lower oil rents, Governments should also rethink their economic development policies and their focus on heavy industries…
GDP composition per sector % of total, 2013
Initiatives for economy diversification from oil
Level of economy diversification
United Arab Emirates
• Traditional focus on heavy industries such as Metals (e.g., Dubal, and Emal)
• UAE is becoming a rival to Saudi Arabia in becoming the region’s manufacturing base
• Over 2/3 of UAE’s economic output now comes from non- oil sources
• Dubai has become a well-connected transport/aviation hub; overtaking London Heathrow as having the world’s busiest international airport
• In the past 10 to 15 years, Dubai focused on developing a service based economy taking advantage of its location and focusing on the following industries
Financial services Tourism Shipping
Saudi Arabia
• Traditional focus on heavy industries such as Petrochemicals
• More recently the Kingdom is pursuing a broader economy diversification agenda through NICDP1 aiming to develop five national clusters
Minerals and metals Automotive Plastics and packaging Solar Energy
Example - GCC
100
Mining and utilities
Agriculture, hunting…
Manufacturing
Construction
Wholesale, restaurants…
Transport & comm.
Other activites
Oman
40% 48%
Kuwait
16%
Qatar
42%
UAE
43%
KSA
30%
100 100 100 100 100
Bahrain
Exports composition per sector % of total, 2013
1. NICDP – National Industrial cluster Development Program Source: BMI, ITC, UN Comtrade Statistics, NICDP, IMF, Worldbank, OPEC, Oliver Wyman analysis
75%
50%
Kuwait
94%
Qatar
88%
UAE
67%
Oman
86%
Bahrain
100
KSA
100 100 100 100 100
Hydrocarbons
Organic Chemicals
Fertilizers
Machinery
Iron and steel
Plastics
Precious stones
Aluminium
Other
A
DRAFT
…in this context, medium-light industries may be the solution by generating substantially more jobs with lower energy requirements
1. 2010 data from MECS EIA 2. Considering USD 50per barrel of oil Source: EIA, Oliver Wyman analysis
Energy consumption per job in million BTU per year, US1
Energy consumption per dollar of value added in thousand BTU per year, US1
Industrial sectors
Hea
vy
indu
strie
s
Energy cost of industrial development Energy cost per 1,000 jobs in million USD per year
MMBTU at 9 USD/ MMBTU2
MMBTU at 0.75 USD/ MMBTU - KSA industrial tariff
110183224253259259408417512872
Furniture
Machinery and equipment
Textiles
Transport equipment
Consumer durables
Electronics and components
Pharmaceuticals
Packaging
Automotive
Food processing
Construction material 2,790 Mining and processing 2,790
Steel processing 12,697 Paper making 12,886
Petrochemical processing 66,746
1.10.92.4
1.01.71.7
0.73.2
1.34.3
25.5 25.5
29.8 34.1
16.9
1.6 2.0
1.0
2.3 2.3 2.3 3.7 3.8 4.6 7.8
25.1 25.1
114.3 116.0
600.7
Example - KSA
These estimates may be considered conservative for the GCC, as water consumption contributes heavily to its energy demand
Governments can jumpstart their medium-light industries development by focusing on those with high imports and potential to develop a globally competitive value chain
This section will ponder on the actions that NOCs who will emerge as winners would likely undertake
Actions that “winners” will take to remain competitive in the short, medium and long term
B
Short Term Implications Actions to stop the bleeding and prevent failure and loss of competitiveness in current “market driven” low price regime
Medium Term Implications Actions to remain competitive through a protracted low price regime in a “market driven” or “managed system”
Long Term Implications Actions to take advantage of market distress in order to come out a winner when cycle reverses in a “managed system” or “price umbrella” scenario
NOC’s have a major control over the global oil industry
4%
25%
Total Production
87
75%
Total Reserves
2,002
96%
Top 30 companies in proven reserves In billion barrels of oil equivalent - 2014
Top 30 companies in production Million barrel of oil equivalent – 2014
NOC IOC
2.32.8
4.2
36.09.4
0.50.71.92.52.6
2.82.8
3.39.5
90.2
36.0 (40%)
Can
ada
Rus
sia
Braz
il
Mex
ico
15.8
Chi
na
Oth
er
USA
2.2
4.2
52.0 (58%) 10.9
11.8
OPE
C
Oth
er
Liby
a
Tota
l
Nig
eria
Vene
zuel
a
Kuw
ait
UAE
Iran
Iraq
Saud
i Ara
bia
Qat
ar
Major OPEC producers control ~28% of global production
Major Non-OPEC producers control ~42%
1. Other includes Angola, Algeria, Ecuador, and Neutral Zone and OPEC NGLs 2. Processing Gains: Net volumetric gains and losses in refining and marine transportation losses. Source: Petrostrategies, IEA, Oil and Gas Journal, BP Statistical Review of World Energy 2014, Oliver Wyman analysis
2
1
Breakdown of liquids production In million barrels per day – 2013
NOCs also face other challenges ranging from cost performance, capital projects efficiency, talent development and catering to national duties
Cost and operational performance
• Manage increasing cost structure with higher level of human resources and less rigorous cost control
• Higher operational complexity with more complex plays and mature fields
Talent development
• Need to develop local talents to ensure its future sustainability
• Ensure skills development is aligned with international benchmarks and adjusted to the NOC assets
• Reduce dependency on external suppliers and expatriates
Capital project efficiency
• Address the typical cost and time overruns in the industry through better planning (e.g., value engineering)
• Implement a robust capital projects management process balancing control with agility (e.g., different gates procedures for large and small capital projects)
Diversification from core business
• Address the increasing demands from Government requiring the NOC’s capabilities to address pressing issues in their national agenda (e.g., power generation, major infrastructure)
• Ensure core business is treated as such and receives sufficient management attention and has the best resources allocated to it
In this context, NOCs who will come out winners will pursue actions to stay competitive in the long term
• Identify and eliminate waste; cut discretionary non-value added expenditures • Reprioritize and redefine CAPEX outlay • Re-negotiation of supplier contracts for favorable terms • Focus attention on core hydrocarbons business
• Acquire assets and integrate along the value chain • Build long term capabilities and localize for sustainability
(e.g., develop a competitive local supply chain) • Drive localization through being the key nexus between government, supply
chain, and educational institutes • Restructure and review existing business models
• Capital productivity and asset portfolio optimization • Cost optimization beyond the obvious • Drive operational excellence through rigorous cost analysis and optimization • Human capital optimization and talent retention • Work strategically with supply chain beyond typical discounts • Rigorous risk management
NOCs: Actions “winners” will take to stay competitive in the short, medium and long term
This would be especially true for NOCs in net import countries
Crude oil price vs. market value of Top-25 IOCs and independents by production volume Weekly, rebased to 2014 price peak (w/s June 20)
Valuations for the Top-25 IOCs (by production) are ~25% lower which will drive M&A deals and lead to a new wave of industry reorganization and opportunities for NOCs
0.25
0.50
0.75
1.00
01/11/2014 01/01/2015 01/09/2014 01/07/2014
-23%
Top-25 companies
Oil price
Source: Bloomberg, OPEC Oliver Wyman analysis
Country Potential investment strategy to expand production footprint
• Shift to value-driven investing • Focus international M&A on
small, distressed companies in stable countries, such as US shale
• Build on existing relationships to participate in strategic projects in Mexico and Russia
• Improve and build infrastructure in line with world-class standards
• Design targeted policies at attracting investment from international players
• Diversify import links away from Middle East
China
India
Energy importer NOCs will look to expand their resource base seeking self-sufficiency
This section will ponder on the actions that IOCs who emerge as winners will likely undertake
Actions that “winners” will take to remain competitive in the short, medium and long term
C
Short Term Implications Actions to stop the bleeding and prevent failure and loss of competitiveness in current “market driven” low price regime
Medium Term Implications Actions to remain competitive through a protracted low price regime in a “market driven” or “managed system”
Long Term Implications Actions to take advantage of market distress in order to come out a winner when cycle reverses in a “managed system” or “price umbrella” scenario
Going forward, there will be more focus on value growth vs. volume growth
2001 2013
$81.7
$186.4
Source: Thomson Reuters: Datastream, Oliver Wyman analysis
Total annual capital expenditures by the world's six largest international oil companies
Total annual depreciation and depletion for the world's six largest international oil companies
During the high oil price regime IOCs invested on production growth spending 5x more capital than 10 years ago, breaking the historical link with depreciation
Evolution of CAPEX and depreciation Six largest IOCs, in US$ billion, 2001 - 2013
In this context, IOCs who will come out winners will pursue actions to stay competitive in the long term
• Reprioritize and redefine CAPEX deployment into major projects • Improve capital efficiency • Rationalize non-operating costs and CAPEX (e.g., HQ, SG&A) through reviewing SLAs,
and improving utilization (space and resources) • Renegotiate discounts with supply chain • Increase procurement of non-critical standard items from LCCs
• Drive operational excellence in across upstream assets • Work strategically with supply chain beyond typical discounts
(e.g., demand management, guarantees for critical parts, innovation) • Develop partnerships with competitors to reduce costs in non critical areas (e.g., logistics
fleets – helicopters, vessels) • Review shareholder value distribution policies in periods of lower FCF – namely through
share buybacks
• Review exploration and production portfolios • Acquire and integrate elements along the value chain • Increase shared services reach to eliminate regional redundancies • Review maintenance strategies to review level of preventative vs. breakdown maintenance
per major equipment (RBM) • Leverage opportunity to acquire distressed operators (e.g., unconventional players) • Gain access to reserves to take advantage of a market upturn
C
IOC
IOCs: Actions “winners” will take to stay competitive in the short, medium and long term
In the short term, IOCs will reduce their E&P spend while ensuring lower cost reserves are adequately replaced
Middle East
Latin America India, Asia & Australasia
Africa
North America
Russia
Actual and expected E&P spend by region In US$ millions, 2013 – 2015F
E&P spend by customer type In US$ millions, 2013 – 2015F
Europe
Source: Barclays 2015 E&P spending outlook; Oliver Wyman analysis Note: Surveys with 255 companies taken between 1/12/14 and 5/1/15 with Brent at $72-$54/bbl.
-14% +9%
2015E
168,377
2014E
196,088
2013
179,179
-5% +6%
2015E
74,934
2014E
78,671
2013
74,137
-17% 0%
2015E
38,248
2014E
45,921
2013
46,014
+14% +16%
2015E
46,000
2014E
40,180
2013
34,777
-13% +6%
2015E
44,606
2014E
51,348
2013
48,317
-6% +4%
2015E
105,735
2014E
112,499
2013
108,534 +5% +9%
2015E
27,725
2014E
26,286
2013
24,225
A continued decline or a U-shaped recovery to the current oil price levels will accelerate the reduction in E&P spend in 2015 as more operators delay or abandon their capital projects
IOC will review their portfolio’s ability to withstand ‘market driven’ lower prices for a long period of time
During this review, it is important not to rush into decisions due to the long life span of existing assets and the historically proven inaccuracy of oil price predictions
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Shell ExxonMobil BP Chevron Total Conoco Phillips
Oil sands
Tight oil
Oil shale (kerogen)
Unconventional gas
Conventional
Extra heavy oil
Overview of liquid resources per IOCs In million barrels, 2014
Source: Rystad Energy Upstream UCube 2014, Oliver Wyman analysis
Total Conoco Phillips
BP Chevron Shell ExxonMobil
South Asia East Asia South America Southern Europe
South East Asia
Central Asia
Western Europe North Africa Russia East Africa
North America Middle East West Africa Australia
For example, higher exposure to Oil sands will have to be reviewed under a scenario of continued oil prices below USD60 per bbl
IOCs will address capital and operating costs that have been increasing
60
80
100
120
140
160
180
200
220
240
2000 2002 2004 2006 2008 2010 2012 2014
Evolution of upstream costs IHS-CERA cost indices
Increase in costs from 2008 peak to 2012 % change in costs
1. LCC – Low cost countries; 2. Non-core items (e.g., logistics for oil rigs) Source: IHS, CERA, Deutsche Bank
CAGR: 6.23%
Capital costs
Operating costs
CAGR: 5.09%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Con
stru
ctio
n la
bor
Eng
inee
ring
& PM
Sub
sea
Equ
ipm
ent
Bul
k m
ater
ials
Yar
ds a
nd fa
bric
atio
n
Offs
hore
inst
alla
tion
Land
rigs
Offs
hore
rigs
Ste
el
This can be achieved through a robust value sourcing consolidating volumes across regions, managing demand (e.g., standards), increasing non-critical purchases from LCCs1, working collaboratively with suppliers, and developing partnerships with competitors2
Source: Thomson Reuters: DataStream, Oliver Wyman analysis 1. Levered free cash flow is defined as the amount of cash left over for stockholders and for investments after all obligations are covered
-$28.8
2013
-$52.9
2009
-$11.8
2008
-$1.8
2001
-$4.4
2002
-$11.9
Levered free cash flow1 for the world's six largest international oil companies
Total dividends paid and stock repurchases by the world's six largest international oil companies
In a scenario of continued low oil prices, IOCs will review their share buyback policy to align shareholder value distribution with free cash flow
Evolution of dividends, buybacks and FCF Six largest IOCs, in US$ billion, 2001 - 2013
Dividend + Repurchases Levered FCF Total Stock Repurchases Total Dividend payment
Re-negotiate supplier contracts for favorable terms
Review and rationalize buybacks and dividend payouts
Realign energy policy to optimize resources and manage energy demand and efficiency
Localize supply industries to reduce imports and generate employment
Reform E&P fiscal regime to attract, transfer and retain capabilities
Review project portfolio to improve capital productivity and efficiency
Improve operational and supply chain efficiency
Grow and complement capabilities through acquisitions
Build local talent aligned to local industrial demand
Optimize human capital base and retain talent
Diversify export oriented industries
Expand, integrate and diversify along value chain
Regardless of where the oil price may head, there is a set of strategies that will enable players to remain competitive at low oil prices and come out as winners
Organization Design and Operational Governance Organization Transformation
DRAFT
Oliver Wyman’s Energy Practice Section 5
DRAFT
Oliver Wyman is an international consulting firm with more than 40 years experience serving Global 1000 clients. Our staff of 3,700 operates from offices in more than 50 cities in 26 countries
• Revenue 2014: US$1.7 BN • Staff: ~3,700 • Offices: 50+ in 26 countries
To bring exceptional people together to create value by
making lasting contributions to our clients, industries and
societies
• Dedicated partners AND consulting staff, resulting in deep industry knowledge from day one
• Organized around global practice units, resulting in the best possible team for each client
• Practices include both consulting experts and former industry executives with hands-on experience
• Hundreds of engagements and transactions completed within each sector and niche sub-sectors
• Clients include many of the leading corporations and investors in each sector
• Specialisation by industry: consulting staff dedicated to specific industries
• Strong expertise in functional areas in different sectors, consolidating best practices
• Global view with Local knowledge: leveraging global trends with local experienced in each country to provide customized solutions
A
B
C
Fina
ncia
l Ser
vice
s
Ener
gy: o
il &
gas
and
util
ities
Info
rmat
ion
& C
omm
unic
atio
ns T
echn
olog
y
Ret
ail,
Con
sum
er G
oods
& H
ospi
talit
y
Avia
tion,
Aer
ospa
ce &
Def
ence
Infr
astr
uctu
re &
Tra
nspo
rt
Hea
lth &
Life
Sci
ence
s
Industry Sectors A
Customer Value Management
Publ
ic s
ecto
r
Oliver Wyman is organized globally combining deep industry expertise and functional capabilities to develop practical and impactful solutions to our clients
Our combined teams also bring significant experience working in the MENA energy sector
List of key topics addressed in Energy in the region1
Note: 1Detailed list of credentials in the region and worldwide can be found in appendix 1; 2Previous project experience from energy practice member prior to joining OW
UAE • Process and operation improvement plan definition
(‘Petrolean’) • Development of models to estimate EML (Estimated
maximum loses) potential • Operating safety policy and process review • Assessment of business continuity plan • Operational improvement plan • Energy demand-side planning and management
Oman • Organizational restructure and enhancement of
performance review metrics • Operational performance assessment and
improvement plan • Development of models to estimate EML (Estimated
maximum loses) potential • Operating safety policy and process review
Qatar • Business unit performance review and operational
improvement plan • Risk benchmarking of different upstream and
downstream topics • Risk improvement investment analysis and
prioritization of initiatives • Development of models to estimate EML (Estimated
maximum loses) potential
Iraq • Definition of the national energy strategy, including
implementation plan and varying economic impact scenarios2
• Definition of cost improvement initiatives oil upstream player
• Institutional and governance mechanisms required to implement the integrated national energy strategy
Saudi Arabia • Unconventional gas exploration master plan and
supply chain opportunities • Enterprise risk management plan • Strategic review of key assets • Alternative energies program • Risk improvement investment analysis and
prioritization of initiatives • EML (Estimated maximum loses) evaluations and
scenarios • Marketing and sales transformation program • Operating safety policy and process review
Bahrain • Risk engineering studies and key assets and facility
assessment • Site quality assessment • Operational performance review and optimization plan • Development of models to estimate EML (Estimated
maximum loses) potential
Yemen • Risk benchmarking of different upstream and downstream
topics • Site quality assessment • Development of models to estimate EML (Estimated
maximum loses) potential
Egypt • Benchmarking of different upstream and
downstream topics • Operational improvement plan and operating safety
policy and process review • Organization transformation including definition of
key governance structures, business processes, R&R and performance measurement
Corporate Executive Board survey of 517 CEOs placed Oliver Wyman at the top for overall satisfaction out of 140 consulting firms
• Our clients are universally and routinely satisfied with our work • Exceptional client list, e.g. 75 of the global top 100 financial institutions; 3,500 staff; Global business
model to ensure first-hand experience of best-practice examples is delivered to clients by strong international staffing