Oil and Gas in 2018:New Competition

Bob Tippee

Editor, Oil & Gas Journal

NOMADS

February 13, 2018

What the “experts” said in 1977

Global oil reserves, Jan. 1, 1977: 600 billion bblGlobal oil production, 1977: 21 billion bbl

600 billion bbl ÷ 21 billion bbl/year = 29 years

“We’ll soon quit producing oil!”

The “experts” were wrong in 1977

• Global oil reserves, Jan. 1, 1977: 600 billion bbl

• Global oil reserves, Jan. 1, 2017: 1.65 trillion bbl

• Cumulative production, 1977-2016: 958 billion bbl

“We’ll soon quit using oil!”

Crude oil prices…

Source: Charts from US Energy Information Administration Short Term Energy Outlook, February 2018

Increased in 2017 because… Supply deal trimmed stocks, and…

● The Forties Pipeline closed Dec. 11-Jan. 2● Production fell in Venezuela, was under question jeopardy in Iran, Libya, etc.● Belief grew that the slump was ending

Production agreements start?

Main points

• Oil market is balanced as 2018 begins — BUT THE BALANCE IS PRECARIOUS

• US gas exports will increase in 2018 and beyond — FURTHER RESHAPING GAS TRADE

• Oil abundance + increasingly flexible gas trade = NEW COMPETITION IN ENERGY MARKETS

Data in slides labeled “OGJ F&R” are from Oil & Gas Journal’s annual Forecast & Review, January 1, 2018, by Conglin Xu, Senior Editor-Economics and Laura Bell, Statistics Editor

OGJ F&R: The global oil balance (MMbd)

Current view of

2018F 2017E 2016

Global demand 99.1 97.8 96.3

Non-OPEC supply 59.6 58.0 57.4

OPEC NGL 7.0 6.9 6.8

Need for OPEC crude 32.5 32.9 32.1

OPEC crude 32.5* 32.4* 32.8

Stock change & other 0* -0.5* +0.7

Source: International Energy Agency Oil Market Report, December 2017

*OGJ estimates for 2017, 2018 OPEC crude and stock change.

Supply-agreement compliance rates,

average 2017

OPEC 12 95%

Non-OPEC 10 82%

Source: IEA Oil Market Report, January 2018

Oil balance from February reports (MMbd)

IEA EIA OPEC

2018 Y-Y change 2018 Y-Y change 2018 Y-Y change

Demand 99.2 +1.4 100.23 +1.73 98.6 +1.6

Non-OPEC supply 59.9 +1.7 61.04 +2.35 59.3 +1.4

OPEC NGL 7.0 +0.1 6.96 +0.12 6.5 +0.2

Call on OPEC crude 32.3 -0.4 32.23 -0.23 32.8 NC

OPEC crude 32.5* +0.2 32.43 -0.25 32.5* +0.1

Stock change, etc. +0.2* +0.7 +0.20 +0.72 -0.3* +0.1

*OPEC crude for IEA, OPEC from OGJ F&R; stock changes calculated accordingly

All increased projections for demand and non-OPEC supply from January.IEA and EIA see more growth in non-OPEC supply than demand.

OGJ F&R: US oil outlook for 2018 (MMbd)

Demand 20.140 +1.6%

Field production* 14.170 +9.9%

Renewables, etc. 1.180 NC

Exports 7.000 +13.5%

Imports 10.200 +1.0%

Proc’ing gain, etc. 1.110 NC

Stock change -0.480 --

*Field production

Crude + condensate 10.020** +8.4%

NGL + LRG 4.150 +13.5%

Refinery operations

Crude runs 16.670 +0.7%

Tot. inputs 16.890 +0.2

Tot. capacity 18.530 -0.2%

Utilization 91.1% +0.4%

Import dependency

Total imp. % of demand 50.6

Net imp. % of demand 15.9

**Previous record: 9.6 MMbd in 1970.EIA February STEO: 10.6 MMbd in 2018, 11.2 MMbd in 2019.

US oil supply flux: 2015-17

WTI near-month futures price

Oil-well drilling

Crude oil production

Source: US Energy Information Administration

$28.15/bbl, week of Feb. 12, 2016

320 rigs, May 2016

8.553 MMbd, September 2016

Tight-oil plays push US production

Global offshore recovery beginsGreenfield offshore capex commitments—2017*

*After spending drought in 2015-16.

Source: Rystad Energy

Shale vs. offshore unit costs (capex), indexed to 2014**

**Shale overheating; offshore took longer responding to low oil prices.

Supply management’s geopolitical challenges

Saudi Arabia IranIraqSyriaYemenQatar

Russia

LibyaUAE

TurkeyEgypt

Saudi Arabia, UAE, Bahrain, Egypt

Economic restructuringSaudi successionAramco IPO in 2018?ADNOC new partnerships

Friendly Unfriendly

?

?

Turkey?

?

Lebanon

!

Geopolitical variables in the oil price

• Developments that would lower supply and increase the crude price:• Iraq disrupts pipeline exports from Kurdistan• Iranian protests spread to oil fields• Venezuela collapses• Nigerian militancy resumes (as Niger Delta Avengers promise)• Libya sinks further into civil conflict• Saudi-Iranian conflict escalates, by proxy or otherwise

• Development that would raise supply and lower the crude price:• Saudi Arabia abandons supply restraint because it…

• Uses confiscated wealth instead of Aramco IPO to finance economic reform• Sees strategic advantage in lowering crude price to weaken Iran and Russia

Can tight-oil production keep growing?

Why no? Why yes?

Permian basin surge motivated by HBP drilling

Productivity, ultimate-recovery improvements continue

Resources (or sweet spots) have limits The resource is (exponentially) huge

Operator refocus on free cash flow will moderate investment

Technical progress continues:● Longer laterals, more frac stages, higher sand-fluid volumes and pressures, better lateral placement and frac monitoring with microseismic● Sand + slickwater vs. designer proppants + gels● High-grade to best rock● New completion design: denser fracs, closer to wellbore, tighter lateral spacing

Capacity contraction: equipment, supplies, workforce

End of sacrificial pricing by contractors

Operators have changed frac strategies

Source: EOG Resources, 3Q 2017 presentation

Room to run:Operators have much to learn about what really happens in the subsurface.

How big-data analytics leverages knowledge

• Frac fluid analysis

• Proppant loading

• Perf cluster spacing

• Reservoir characterization

• Choke management

• Lateral length efficiency

• Formation targeting

(Source: Chesapeake Energy corporate presentation)

Supply grows with improvements in knowledge and know-howAnalytical methods leverage knowledge and know-how

OGJ F&R: US gas outlook for 2018 (tcf)

Consumption 27.594 +2.4%

Production 31.000 +7.6%

Imports 2.864 -3.8%

Exports 3.778 +19.0%

Not shown: supplemental gas, losses, storage

Marketed production

Alaska 0.325 -4.3%

Fed. Gulf of Mexico 1.205 +6.6%

Lower 48 ex GOM 29.471 +7.8%

Gas trade

IMPORTS EXPORTS

Canada 2.785 -3.9% LNG 1.113 +56.4%

Mexico .001 0 Pipeline 2.665 +8.1%

LNG 0.078 +1.8%

Shale making US a major gas exporter

Source: EIA

Supply trends to present… Assure US gas-trade growth

US LNG export capacity ready to zoom

Source: EIA

US LNG is changing the global market

• Price linked to Henry Hub rather than indexed to oil

• Contracts free of destination restrictions

• Combines with new supply from Australia, imminent supply from East Africa, small FLNG increment in West Africa, elsewhere to challenge traditional trade dominated by Qatar

• Competitive so far in Middle East, North Africa, Asia, South America

• Struggling to compete in Europe vs. pipeline gas from Russia• Gazprom dropped price to as low as $4/MMbtu in 2016; now ~$5/MMbtu• US LNG in Europe: ˃$6/MMbtu ($3/MMbtu Henry Hub + ˃$3/MMbtu for

liquefaction, transportation, regasification)*

*Center for Strategic and International Studies, October 2017

Shale drives global gas production growth

Shale gas accounts for 20% of 4.747 trillion cu m of global gas production in 2035, of which:

● 16% is from North America● 2% is from Asia-Oceania● 2% is from elsewhere

Source: CEDIGAZ

Global LNG capacity outlook (CEDIGAZ)

LNG supply capacity exceeds need until 2023-24

LNG to dominate gas trade (CEDIGAZ)

2015 = 444 bcm 2035 = 836 bcm

LNG 44% LNG 55%

Pipeline 56% Pipeline 45%

Result of shift from pipeline to LNG dominance of gas trade: increased flexibility of delivery and pricing

Gas will act more like oil.

Market growth, 2015-35: 88%

The future: gas, oil, energy

Source: EIA International Energy Outlook 2017

0

50

100

150

200

250

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

petroleum and other liquids

natural gascoal

renewables

nuclear

Units:Quadrillion BTU

Gas matches renewable-energy growth rate and is increasingly flexible (acts more like oil) in trade

Oil expands in markets other than cars

Source: International Energy Agency World Energy Outlook, November 2017

A new wildcard: ‘other liquids’ (MMb/d)

0

10

20

30

40

50

60

2005 2010 2015 2020 2025 2030 2035 2040

non-OPEC crude and lease condensate

OPEC crude and lease condensate

other liquids

2015 Other liquids increase by 4.2 MMb/d 2015-40; 95% of growth gas-plant liquids, biofuels, processing gains.

More gas = more liquids.Source: EIA International Energy Outlook 2017

The future: new competition

• Electricity vs. oil in light-vehicle transport (electricity-gas vs. oil)

• LNG vs. pipeline gas in global trade (gas vs. gas)

• NGLs vs. oil in petrochemical manufacture (gas vs. oil)

• Naphtha from NGLs vs. naphtha from crude in gasoline manufacture (gas vs. oil)

• Cheap gasoline vs. increasingly costly electricity in light-vehicle transport (oil vs. electricity-gas)

Contact information

Bob TippeeEditor, Oil & Gas Journal

713 963 6242bobt@ogjonline.com

To subscribe: www.ogjsub@pennwell.com

800-633-1657