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. Global Upstream Investment Outlook 2014
Citation preview
Global Upstream Investment Outlook
APRIL 2014
KEY QUESTIONS FOR UPSTREAM
IN 2014 AND BEYOND
Information | Analytics | Expertise
Dylan Mair, Senior Director, Head of Upstream Asia-Pacific
+65 9834 5531
Dylan.Mair@ihs.com
Rebecca Fitz, Director, Upstream Research
+1 202 572 0514
Rebecca.Fitz@ihs.com
© 2014 IHS / ALL RIGHTS RESERVED
© 2014 IHS
Terms of Use
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
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2
Top 10
3
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
1. Will Global Player strategies continue to diverge?
2. Will Independents accelerate strategic repositioning?
3. Will relief from crude bottlenecks & differentials be
sustained?
4. Will large projects continue to be curbed by escalating
costs?
5. Can large companies succeed in unconventional plays?
6. Will returns recover in the coming year?
7. Will we see a sharp recovery in asset sales and M&A?
8. Will opening Mexico Upstream launch greater direct
foreign investment in Latin America?
9. Will looming challenges stall deepwater developments?
10. Will INOCs position in frontiers, or return to acquisition?
© 2014 IHS
1. Will the strategies of the Global Players continue to diverge?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
The separation of strategies amongst the
Global Players widened in 2013:
• XOM working through deepening exposure
to unconventional resource plays
• BP re-positioning with Rosneft for growth in
Russia while doubling down DW exploration
• TOTAL strategic associations to accelerate
development in oil sands & Brazil pre-salt
• Chevron deepening its focus on large-scale
project development
• Shell steps back from 4 MMboe/d target by
2017-2018, focus on financial performance
Will these moves deliver the differentiating
returns that shareholders are demanding?
4
© 2014 IHS
Definition of Peer Groups used for analysis
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
5
Global
Players
Tier I
Independents
Tier II
Independents
• Majors or Super-majors;
• Largest of the IOCs;
• Integrated (as opposed to
Upstream only);
• Require scale &
materiality in Projects and
Transactions;
• Compete on ROCE and
Efficiency
• Large Independents;
• One or two Core areas,
one usually in a Domestic
basin;
• International growth
portfolio;
• Captured portfolio has
potential to deliver
production in excess of
1.0 MMboe/d
• Smaller E&P players
with tight basin focus
(resource plays, oil
sands, onshore
conventional, US GOM
deepwater);
• Leverage technology,
skill application, basin
knowledge
BP, Chevron, Eni,
ExxonMobil, LUKOIL,
Petrobras, Shell, Statoil,
TOTAL
Apache, Anadarko, BG
Group, ConocoPhillips,
Occidental, Suncor
BHP Billiton, Hess,
Marathon Oil, Murphy,
Noble Energy, OMV,
Repsol, Santos,
Talisman, Tullow,
Woodside
© 2014 IHS
BP doubles down on deepwater exploration
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
6
Brazil: Farmed-in to four
Equatorial Margin blocks with
Petrobras in 2012; awarded
eight deepwater offshore
exploration blocks in bid Round
11; farmed-in to five additional
deepwater blocks in 2013.
Uruguay: Acquisition of
three deepwater
exploration blocks in
Uruguay’s Round II in 2012.
Angola and Namibia:
Farmed-in to five deepwater
blocks in each country over
2011-2012, all operated by
Petrobras. Testing the Brazil
pre-salt analog play.
India: 2011 strategic
association with
Reliance, yielding a
30% w.i. in 23
blocks, majority
offshore in K-G Basin.
China: Acquisition of an
interest in deepwater S.
China Sea block from
CNOOC in 2012.
Australia: Acquisition of 4
deepwater exploration
blocks in the Ceduna
Sub Basin, Greater
Australian Bight in 2011.
Norway: Awarded two
blocks in Barents Sea
in 22nd licensing round
in 2Q:2013.
Canada: Awarded four
deepwater blocks in 1Q:2013
in Nova Scotia's bid round.
Russia: Rosneft alliance
completed 1Q:2013 brings
exposure to Russia Arctic frontier.
GOM: Acquisition of
43 deepwater leases in
2Q:2012 lease sale.
Source: IHS Upstream Competition Service
© 2014 IHS
Total enters into strategic alliances driving non-operated new source production increases
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
7
Source: IHS Upstream Competition Service
© 2014 IHS
2. Will strategic repositioning among the Independents accelerate?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
Challenges of resource access and regional
market imbalances prompt reconsideration of
growth strategies and objectives.
“Million Barrel per Day Club”: only BG then
Anadarko on pace to join ConocoPhillips.
• Suncor pulls back, focus value over volume
• Apache still searching for new growth
signature
“America First” peers: poor 2013 returns and
an outlook of continued challenges to North
American markets & prices prompts
reconsideration of North America dedication
• Will these trends accelerate? Will staying
the course be rewarded or disciplined for
commitment to the growth challenges?
8
© 2014 IHS
Output from the Tier I Independents: 2012-2022 Few are on target for a million-barrels-per-day
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
9
Mboe/d
Source: IHS Upstream Competition Service
© 2014 IHS
Global Production among North America-focused Tier II Independents
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
10
Source: IHS Upstream Competition Service
© 2014 IHS
Upstream ROCE (3-year roll) North America-focused Tier II Independents compared with Global Tier II Independents
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
11
Source: IHS Upstream Competition Service
© 2014 IHS
3. Will relief from crude bottlenecks & price differentials be sustained?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
Or will it evolve into deepening price cycles
within North American oil & gas markets?
West Texas- & LLS-Brent differentials re-
emerging with coastal capacity constraints.
• Will an annual cycle in crude discounts
to Brent re-appear & deepen in 2014?
• Does uncertainty dampen prospects for
new plays, intensify established plays?
• Will US remove restrictions on crude exports
to boost the North American shale play value
proposition?
• Will challenged 2013 performance lead to
consolidation?
12
© 2014 IHS
Expanded pipeline capacity and growth in rail shipments removed Inland Discount prevailing 2011-2012
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
13
Differentials cost Canada oil
producers ~$2.7 billion/month vs
historic revenues
Also cost billions to provincial and
federal governments
Source: IHS Upstream Competition Service
© 2014 IHS
4. Will development projects continue to be curbed by cost escalation?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
Capacity utilization among major service
companies remains high yet order books
are starting to show signs of weakness.
• Upstream companies likely slowing
FEED work pace & sanction decisions in
response to rising unit costs & concern
over weakening commodity prices.
• Will upward unit cost metrics continue?
Low interest rates keep pressure on E&P
companies to boost shareholder returns
through dividends and share buy-backs.
• How will this impact reinvestment rates?
• For larger Independents, will investment
dollars freed from delays in project
sanction transfer to more (& downward
rigid) returns to shareholders?
14
© 2014 IHS
The reality of a world with shrinking returns
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
15
© 2014 IHS
Cost categories, year-on-year change Q4 2012-to-Q4 2013 compared with Q4 2013-to-Q4 2014
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
16
© 2014 IHS
Global Players peer group Financial performance
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
17
Source: IHS Upstream Competition Service
© 2014 IHS
5. Can large companies succeed in unconventional resource plays?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
Large IOCs engage in shale plays in North
America & abroad to varying degrees.
• Organizational, technical, and
commercial skills required to succeed are
much different to large-scale, large
capex, distinct project development.
Can the unconventional resource plays
deliver the high returns upon which the
large IOCs have traditionally competed?
Can larger IOCs succeed in treadmill, cost
driven unconventional play developments?
• Or will they buy the expertise to do so?
Or will they move aggressively back into
deepwater, Arctic, and frontier basin areas,
with implications for next tier competitors?
18
© 2014 IHS
Big reserve plays bring more exposure and risk related to oil price fluctuations
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
19
Source: IHS Upstream Competition Service
© 2014 IHS
Global Players exploration spend
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
20
$0
$2,000
$4,000
$6,000
$8,000
$10,0002010
2011
2012
mill
ions
Source: IHS Upstream Competition Service
© 2014 IHS
6. Will returns recover in the coming year?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
2013 filings are not expected to show gains for
IOCs seeking to reverse a declining returns.
Majors, with value reliant upon a “high returns”
model, av. Upstream ROCE declines for 5 yrs
• From average 33% in 2008 to 20% in 2012
• Led by XOM with drop from 44% to 23%
Will companies well positioned in productive
plays with accelerated operational efficiency
see a recovery in Upstream ROCE in 2014?
The financial community demands improved
earnings, returns & dividends to shareholders.
• Will upstream players turn increasingly to
radical portfolio moves to reposition on the
basis of returns? Who does so successfully?
21
© 2014 IHS
Majors average upstream ROCE (3-year rolling average)
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
22
Source: IHS Upstream Competition Service
© 2014 IHS
Global Players peer group 2012 growth vs efficiency (3-year roll)
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
23
Source: IHS Upstream Competition Service
© 2014 IHS
7. Will we see a sharp recovery in asset sales and M&A in 2014?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
M&A in 2013 was one of the weakest in
recent years. A large number of IOCs
executed on material portfolio
restructuring over the last two years.
• Will we see aggressive movement on
what appears to be a buyer’s market for
this large inventory of assets, both
onshore US and internationally?
E&P companies attention on resource
development put them on the sidelines of
North America onshore positioning
• What kind of opportunities does this
open up?
• Which companies are best positioned to
benefit from these asset sales?
24
© 2014 IHS
8. Will opening Mexico Upstream swing greater investment in Latin America?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
Global E&P players watch closely the
much anticipated opening of the Mexican
upstream sector to private and foreign
investment.
• Potential production and profit sharing
contracts allow forbooking of reserves.
Will this transition encourage other
jurisdictions with current or future energy
supply constraints to relax restrictions on
foreign IOCs in upstream activity?
25
© 2014 IHS
Latin America: The failure of economic populism drives official efforts to attract upstream investment
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
26
Source: IHS National Oil Company Strategy Service
© 2014 IHS
Dec. 13, 2013: Constitution amended to
enable foreign companies in upstream,
ending PEMEX 75-year monopoly.
• Reform allows profit and
production sharing contracts,
and licenses.
• Foreign companies able to
book oil & gas reserves.
• PEMEX has maximum five
years to deliver state-
approved development plans
of current E&P acreage.
• Failure reverts acreage to the
state for potential licensing to
private and foreign energy
companies.
• Secondary legislation
detailing fiscal terms for each
contract to be negotiated.
• Finalized contracts likely not
available for private and
foreign companies until 2015.
POSITIONING NOCS WHEN $100 THE NEW $20 / APRIL 2014
Mexico: Energy reform to transform sector
27
Source: National Oil Company Strategy Service
Source: IHS National Oli Company Strategy Service
© 2014 IHS
Latin America bid round monitor summary
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
28
Uruguay
Unconfirmed Uruguay Round III
Argentina
Open Onshore Licensing Round 001/2014,
Unconfirmed Offshore Round, and
Unconfirmed 2014 Neuquen Basin Licensing Round
Brazil
Announced Small & Medium Producers
Rounds
and Unconfirmed 13th Bid Round
Peru
Unconfirmed 2014 Offshore Bidding Round
and Unconfirmed 2014 Onshore Bidding Round
Mexico
Announced Round Zero and
Closed Chicontepec Bid Round Part 2
Suriname
Closed 5th International Bid Round and
Unconfirmed 6th International Bid Round
Ecuador
Closed 11th Licensing Round
and Unconfirmed 12th
Licensing Round
Announced
Open
Suspended
Closed
Unconfirmed
Guatemala
Unconfirmed 2013 Bid Round
Trinidad and Tobago
Closed Deepwater Round
and Closed Onshore Round
Colombia
Open Bid Round 2014
Source: IHS Upstream Competition Service
© 2014 IHS
9. Will looming above-ground challenges stall deepwater resource development?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
Deepwater development remains a
leading driver of global production growth
• 36-37% of new source growth 2013-22
for Global Players & large Independents
• Volumes are projected from a handful of
play areas. Company positioning and
risk exposure varies a lot in these plays.
Consensus builds for a weakening
medium-term price scenario.
• IOCs to reconcile project economics of
technically challenging, high cost plays
in demanding fiscal terms jurisdictions.
How will this impact investment decisions
and capital allocation between onshore
plays & new offshore development?
29
© 2014 IHS
Deepwater production remains a leading driver of global production growth
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
30
© 2014 IHS
PEMEX vast acreage in Mexico deepwater (over 1000 feet water depth)
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
31 Source: IHS Upstream Competition Service
© 2014 IHS
Breakeven range of deepwater regions as consensus builds for weakening medium-term prices
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
32
Source: IHS Upstream Competition Service
© 2014 IHS
10. Will INOCs position in emerging frontier plays, or return to corporate acquisition?
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
INOC growth strategies have matured,
opportunism replaced by more focus on
returns, materiality, and tangible results.
INOCs seek to expand both resource
base and technical capability often
securing material positions in global
growth plays, particularly North America
onshore unconventionals.
To meet aggressive growth targets will
INOCs return to the emerging global
buyers market in 2014, or do they
represent new competition in accessing
frontier areas?
33
© 2014 IHS
Priority access advantage NOCs have at home largely disappears when competing internationally
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
34
© 2014 IHS
Asian NOCs acquisition spend by region 2009-2013
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
35
INOCs notably absent from North America transactions in 2013.
INOCs continue material moves in Africa & elsewhere, largely still pursuing de-risked basin entry.
© 2014 IHS
Chinese NOCs open more doors as upstream cost pressure mounts
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
Sinopec and CNPC announced opening
of new oil and gas segments to outside
investors
• Outside investors provided access to
minority stakes
Implications and outlook
• CNPC plan for PSCs with private, foreign participation
leads to more un- and conventional opportunities
• Without further regulatory, structural reform, minority
private capital will not increase competition
• Degree of openness is uncertain. Near-future JVs likely
limited to frontier and unconventional assets
36
© 2014 IHS
KEY QUESTIONS FOR UPSTREAM IN 2014 AND BEYOND / APRIL 2014
In closing Companies continue to balance growth
and value across complex regions and
asset types.
Lower returns from long-term production
North American onshore may drive
companies large enough to have multiple
core asset types to refocus on
conventional resources to gain value
Planning against a trend for higher costs
may lead to further FID delays, freeing
cash flow for consolidation or dividends
Or, “$100 has become the new $20”.
37
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