The macro themes - EYFILE/... · Page 3 Global oil and gas trends The macro themes US as new Saudi Arabia? European economy –debt, denial and demand destruction Middle East turmoil

Global oil and gas trendsThe macro themesAlexey LozaCIS Oil & Gas Leader

Baku, AzerbaijanMay 2013

Page 2 Global oil and gas trendsThe macro themes

► Extreme economic uncertainty (GDP growth slowdown from 4.3% in 2010 to 2.6% in 2012)

► Unconventional resource boom► Global gas market evolution (including LNG development)► Serial geopolitical uncertainty/unrest► Price volatility (2008 – US$98 per barrel; 2009 – US$62 per barrel; 2010 – UD$80 per

barrel; 2011 – US$111 per barrel; 2012 – US$112 per barrel)► NOC/IOC dynamics:

► Internationalizing NOCs – access to supply, markets and/or technology► Partnership/joint venture model dominates► Some challenges from rising protectionism

► Arctic frontier:► Technically recoverable resources of 412 billion boe (two thirds – natural gas, more than half in

Russian territory)► High cost, high risk► Partnership to be critical

► From the depths of despair to the thrills of discovery and technology

Stormy last five years


► US as new Saudi Arabia?► European economy – debt, denial and demand destruction ► Middle East turmoil again► US gas renaissance sets up confrontation with gas-intensive industries ► Enormous gas potential found in offshore East Africa and East Mediterranean► Second thoughts from Canada about selling its resources ► BP’s sale of 50% share in TNK-BP to Rosneft and acquisition of 20% in Russian

national oil company► Australian LNG needs to find potential costs reductions amid growing competition from

the US and Asia► Strategic east route for Russian gas► The renaissance of coal generation in Europe► Shale gas coverage of new regions: Ukraine, South Africa and China► The agreement for the Trans-Anatolian gas pipeline (TANAP) between Azerbaijan and

Turkey► Gas hydrate in Japan – new challenge?

Top global oil and gas stories of 2012 –1Q 2013

Oil market


► Mixed fundamentals; uneasy global balance► Demand drifting with strong non-OPEC supply gains?► Increasing pressure on OPEC (Saudi Arabia) to curb production

► Continuing geopolitical uncertainty► Who makes room for Iraq production gains?► No progress with Iran; painfully low exports► What will happen to Venezuela?► Two Sudans – one oil?► Will North Africa re-erupt?► Danger from North Korea?

► Light tight oil has changed the global market balance ► North American infrastructure bottlenecks and opportunities (crude by rail to East and West

Coasts and the coast of Gulf of Mexico with new pipeline capacity)► Shifting global crude flows: West African crude displaced from US, moving into Asia

Global oil: recent developments, prospects and risks


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Global oil: supply and demand

Global oil demand growth

* Purchasing Managers' Indices (PMI) are calculated by Markit based on data collected from manufacturers and service firmsSource: BP Statistical Review of World Energy 2012, Oil & Gas Journal, International Energy Agency

► While demand is being driven by the developing nations, supply from both the OPEC and non-OPEC producing regions is struggling to meet demand.

► World oil demand growth in 2013 is expected to be 0.8 mbd, slightly higher than 2012.

► The shift of oil demand from the West to the East is now rapidly accelerating.

► China and Middle East are main drivers of conversion.

► But due to the current development rates US seems to steadily increase its consumption in 2013 (PMI* in Q4 2012, 50.2; in Q1 2013, 54.6).

► OPEC spare capacity is still low, but pressures easing: expectations of 5% of global demand in 2013 (3% in 2011).

OPEC spare capacity (annual average, % of global demand)

-2.0-1.5-1.0-0.50.00.51.01.52.02.5

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mbd

Advanced economies Developing economies


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Global oil: prices

Oil contracts dynamics

Source: Bloomberg

Commodity price dynamics

Oil prices dynamics

WTI is losing the status of market indicator

Brent price forecast

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110 110 110 110

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2011 2020F 2035F

mbd

Baseline scenarioUnconventional oil success in USTechnological achievements

► Growing global demand in spite of uncertainties and rising oil prices to record levels have supported increase in development of unconventional oil resources.

► Undiscovered resources of unconventional oil are estimated at about 50% of all undiscovered resources.

► Yet-to-find unconventional oil resources are estimated at about 40% of total.► Annual production of unconventional oil in case of the modest scenario is expected to

rise from current 1 mbd (50 mln tonnes) to 2.8 mbd (140 mln tonnes) in 2035.

Unconventional oil

Unconventional oil production, forecast

Source: IMEMO RAN

Scenario Costs per barrel

Effects on countries

Baseline scenario

US$50 + inflation North America – growth; Brazil, China, Russia –the same level

Unconventional success in US

US$30-$40 (before 2015) + inflation

North America, Jordan, Australia; Morocco –growth; Israel – start;Brazil, China, Russia –the same level

Technological achievements

US$30-$40 (before 2015) + inflation

Development in Western Europe, North America, Israel

Scenarios of unconventional oil development

Gas market


► Shale revolution, but with collateral damage► North American fundamentals strengthening, but could a price recovery trigger a

relapse?► Increasing politicization of the gas business

► US: environmentalism versus jobs/economic growth; is the re-industrialization dependent on continued very low gas prices?

► Europe: muddled energy policy and power politics► Asia: a historic Russia/China supply agreement (but not detailed)

► North American incubator; replicating the revolution► Chevron to Argentina, Shell to Ukraine, Shell and Eni to China► Chinese shale issues – controlled prices

► Global LNG competition to increase► China buys into Mozambique LNG► Asian NOCs signing North American off-take agreements► Hopes for an Eastern Mediterranean LNG hub dimmed by Cypriot crisis

► Successful Japan gas hydrate test – the next revolution?

Global gas: recent developments, prospects and risks


Global gas: supply, demand and prices

► Gas share of global energy is expected to grow (first of all, CO2emissions).

► Global gas demand is expected to grow more than twice as fast as oil demand.

► Currently there are disparate “regional” markets.

► The gas market is globalizing, and distribution areas are expanding.

► The spread between US and Europe prices remains and creates conditions for export infrastructure in the US.

Natural gas prices dynamics

Source: Bloomberg, Gazprom

2012 2030F

AfricaLatin AmericaMiddle EastEurope (2)FSU (1)North AmericaAsia/Oceania

3.2 tcm

4.8 tcm

(1) Including Baltic states(2) Excluding Baltic states

Global gas demand

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Henry Hub Zeebrugge Gazprom


► Can North American successes be replicated elsewhere?

► International shale development has been mixed.

► The first experience outside of US is important.

► Can development of huge unconventional gas resource base offset/moderate dominance of Middle East/Russia in conventional supply?

► infrastructure and hydraulic fracturing are challenging shale gas development.

Global gas: can the “revolution” be exported?

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100150200250300350400450

Conventional Unconventional

tcm

Eastern Europe/Eurasia Middle EastAsia Pacific North AmericaAfrica Latin AmericaOECD Europe

Global gas resources(technically recoverable resources)

Source: International Energy Agency


► Economic hopes are brightening for US and Asia, but European prospects don’t seem to be improving.

► Special attention should be paid to geopolitics, especially in the Middle East and North Africa.

► Continuing important US energy policy issues:► Environmental law enforcement – Environmental Protection Agency fracturing study deferred

until 2014?► Some LNG exports decisions are possible later this year, but what about crude oil exports?► Keystone XL approval is expected by this summer, but could the recent spills break down

project realization?► New fuel fund proposal – royalties to be diverted to R&D?

► What role is there for “independents” (e.g., Anadarko and Noble Energy) in megaprojects; will East Africa and possibly the East Mediterranean change the traditional “find and farm” model?

► Brazilian royalty distribution debate – could it lead to additional taxes as states look to keep current resources, and could it affect contract sanctity?

Perspectives for 2013


Ernst & Young’s Global Oil & Gas Center

General information 13 Global Oil & Gas Centers

Ernst & Young’s Global Oil & Gas practice consists of a network of more than 9,200 professionals with extensive experience working in the oil and gas industry. Our professionals serve a wide range of companies — independent exploration and production companies, oilfield services companies, independent refiners, major integrated corporations and national oil companies.

Our Global Oil & Gas Centers, like the professionals in our Global Oil & Gas practice, are strategically located in areas that allow us to best serve the needs of the oil and gas industry. In addition to our Houston, London, Moscow and Bahrain centers, we have satellite centers in Aberdeen, Beijing, Brisbane, Calgary, Cape Town, Perth, Rio de Janeiro, Singapore and Stavanger.

Rio de Janeiro

Houston

CalgaryLondon Moscow

Bahrain

Aberdeen

Beijing

Cape Town

Stavanger

Singapore

PerthBrisbane

Americas3,200

professionals

EMEIA4,300 professionals

Asia Pacific1,700

professionals


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Contacts

Alexey LozaErnst & Young (CIS) B.V.Partner, CIS Oil & Gas Leader

Tel.: +7 495 641 2945Email: [email protected]

Ilgar VeliyevErnst & Young Holdings (CIS) B.V. Azerbaijan RepublicAzerbaijan Country Managing Partner

Tel.: +99412 4907020Email: [email protected]

Turgay TeymurovErnst & Young Holdings (CIS) B.V. Azerbaijan RepublicPartner, Azerbaijan ECU Leader

Tel.: +99412 4907020 Email: [email protected]

Alexey KondrashovErnst & Young (CIS) B.V.Partner, Global Oil & Gas Tax Leader

Tel.: +7 495 662 9394Email: [email protected]

mailto:[email protected]




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How Ernst & Young’s Global Oil & Gas Center can help your business

The oil and gas industry is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. Ernst & Young’s Global Oil & Gas Center supports a global practice of more than 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field service sub-sectors. The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key industry issues. With our deep industry focus, we can help your organization drive down costs and compete more effectively to achieve its potential.

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The macro themes - EYFILE/... · Page 3 Global oil and gas trends The macro themes US as new Saudi Arabia? European economy –debt, denial and demand destruction Middle East turmoil