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EY Price Point: Global Oil and Gas Market Outlook - Q3

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The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field sub-sectors.

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EY Price Point: Global Oil and Gas Market Outlook - Q3

  1. 1. EY Price Point Global oil and gas market outlook Q3 | July 2018
  2. 2. Page 2 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 2 Gary Donald Andy Brogan EY Global Oil & Gas EY Global Oil & Gas Assurance Leader Transaction Advisory Services Leader gdonald@uk.ey.com abrogan@uk.ey.com Q3 overview In the second quarter, the three drivers of the recent oil market story (OPEC supply, North American shale production and demand growth) continued to dominate. OPEC reached an agreement that provided relative assurance over future production rates (at somewhat higher levels). There are few signs of structural or economic disruption; however, the risk of geopolitical disruption is, as always, ever-present. US President Donald Trump’s withdrawal from the Iran nuclear deal raises questions over the short- and long-term impact on supply.
  3. 3. Page 3 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 3 ? Q3 theme ► How will pressure from the US Government impact demand for Iranian oil, supply of Saudi crude and the global supply-demand balance? ► Will continued high oil prices deliver the cash North American operators require to deliver on expected production growth? ► Can demand growth be sustained despite economic headwinds (tariffs), and high prices caused by tighter supplies and a strengthening dollar? The theme for this quarter is clarity. The impact of uncertainties has been predictable and muted. Multiple upside forces (OPEC production restraint, demand growth and Venezuelan chaos) have led to higher oil prices, but they remain in a range where they aren’t disruptive to the world economy, yet support investment. Of course, questions remain.
  4. 4. Page 4 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 4 Only three LNG projects have been sanctioned since 2015. There are, however, signs of renewed interest with developers of 10 projects (total capacity of 92mtpa) indicating that they are targeting FID by the end of 2019. North American production growth accelerating Operators have mostly delivered on capital discipline promises and are able to spend more because of increasing oil prices. North American shale production continues to grow, but logistics bottlenecks are now a limiting factor. Trends OPEC and Russia agreed to increase output by 1mbpd. Continued decline in Venezuelan output, and renewed turmoil in Libya mean that Saudi Arabia and Russia will have to call on the significant portion of their idle capacity to meet the target. OPEC and Russia agree to increase production Customers of Iranian exports have been given until November to wind down imports. The impact on global supply will largely depend on the actions taken by India and China who did not cut imports during the previous sanction regime. US imposes sanctions on Iran A second wave of LNG? Source: Middle East Institute
  5. 5. Page 5 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 5 Market fundamentals ► Brent and WTI averaged $74.72 and $67.97 per bbl, respectively throughout the second quarter. Average prices in the second quarter represent growth of 12% and 8%, respectively, from Q1. ► Brent topped $80/bbl during the quarter amid supply concerns following President Trump’s withdrawal from the Iran nuclear deal. Prices were further supported by OPEC production cut compliance, continued decline in Venezuelan output and conflict in Libya. ► News of increased OPEC production brought price increases toward the end of the quarter. Production uncertainty may have weighed on markets prior to the agreement. Brent hits US$80/bbl Oil markets remain balanced (in the aggregate) ► Markets remain marginally undersupplied. The puts and the takes have been large, but have almost completely offset each other suggesting successful market management by the swing supplier. ► Demand growth has been impressive. Notwithstanding electrification of the energy system, and an increasing share of renewables, oil and gas continue to fuel the world economy. ► OPEC production declined while North American growth accelerated. The increased oil price has provided the cash North American operators required to sustain growth. ► Oil production in other regions continues to be starved of capital. The positive impact of the oil price increase is offset by long lead times and competition from other shorter-cycle projects. 55 60 65 70 75 80 85 4/1/2018 5/1/2018 6/1/2018 7/1/2018 US$/bbl Brent WTISource: EIA (3.00) (2.50) (2.00) (1.50) (1.00) (0.50) - Starting balance Demand growth OPEC North America Other End balance mbpd Movement to Oversupply Movement to UndersupplySource: IEA
  6. 6. Page 6 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 6 Market fundamentals ► XXX ► XXX XXXXXX ► OPEC and Russia have agreed to increase production by around 1mbpd from 1 July 2018. ► Production increases are likely to come from Saudi Arabia (spare capacity of 2mbpd), Russia and Iraq. ► In the last year, steep declines in Venezuelan output, as well as reductions from Mexico and Angola have resulted in OPEC surpassing its production cut targets (actual reduction of 2.8mbpd vs. a target of 1.8mbpd). It is not clear what to expect from those countries going forward. ► Despite OPEC’s announcement, oil markets were bullish. The risk of no deal at all (and less production discipline) is thought to have been priced into the markets before the meeting. ► In May, President Trump announced his decision to withdraw from the nuclear agreement with Iran, effectively re-imposing sanctions. Sanction relief and access to the US banking system had been key to the rise in Iranian exports. ► Customers of Iran have until 4 November to wind down contracts. Market participants expect a corresponding decline in supply of between 0.3 and 1mbpd. ► During 2014 (when sanctions were previously imposed), China and India continued to import Iranian crude, while settling transactions in local currency. Source: FT and The Hindu ► 70% of Iranian production is currently exported to the EU, China and India. How they react to US sanctions will determine the impact on global oil supply. US sanctions on Iran to impact global supplyOPEC and Russia agree to increase production 0 500 1,000 1,500 2,000 2,500 3,000 Cut in output per agreement Actual drop in production Output reductions by OPEC nations (kbpd) Venezuela Saudi Arabia Russia Mexico Angola Others Source: EY Analysis of OPEC data 3,000 3,500 4,000 4,500 5,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (‘000sbblperday) Iran oil production ? Source: OPEC
  7. 7. Page 7 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 7 0 2 4 6 8 10 12 14 16 18 20 US$/MMBTU International gas prices UK NBP Henry Hub Natural Gas Europe Japan LNG Market fundamentals North American shale production drives the global market Gas market expansion ̶ rising supply and demand ► US-associated gas output hits record levels as oil production from shale plays continues to rise. Demand from the power sector, and escalating LNG exports set a floor for US gas prices and support market stability. ► High temperatures led to strong demand for gas from the Asian power sector. LNG cargoes were sourced from the well-supplied European market to Asia, where prices were higher. ► The differential between Asian LNG and European prices is expected to narrow as demand for air conditioning wanes and storage capacity fills. ► Supply will be boosted by the start of commercial deliveries from new LNG plants that recently came on-stream. Sources: Thomson Reuters Datastream, Japan's Ministry of Economy, Trade and Industry, World Bank 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Yearonyearchange(kbpd) Source: EIA ► US shale oil production continues to surge at an accelerating rate. Year-over year (“YOY”), output has increased by over 1.5mbpd as at the end of the second quarter. As recently as six months ago, the YOY production increases were less than 1mbpd. A year before that, it was less than 500,000bpd. ► All of this has happened despite increasing calls for capital discipline. Thanks to increasing oil prices, those calls have largely been answered, while capital spending has increased. ► North American capital spending in Q1 2018 was over 60% higher than Q1 2017. As a percentage of operating cash, spending fell from 258% to 115%.
  8. 8. Page 8 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 8 Futures Oil markets remain in backwardation. When compared with the prior quarter, the futures curve has benefited from near-term supply concerns predominantly caused by Donald Trump’s decision to withdraw from the Iran nuclear deal, OPEC production cut compliance (supported by continued decline in Venezuelan output) and conflict in Libya. Oil market volatility remained steady throughout the quarter at approximately 30%. This data is effective as of 22 June 2018. 0 20 40 60 80 100 01/03/2012 01/09/2013 01/14/2014 01/20/2015 01/25/2016 01/27/2017 02/01/2018 CboecrudeoilETF volatilityindex Oil market volatility 20 40 60 80 100 120 Nov/12 Feb/14 May/15 Aug/16 Nov/17 Mar/19 Jun/20 Sep/21 Dec/22 Mar/24 $/bbl Brent futures Historical Brent Futures curve June 2018
  9. 9. Page 9 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 9 Oil price outlook Brent: Brokers’ and consultants’ price estimates ranges and averages WTI: Brokers’ and consultants’ price estimates ranges and averages For both crude benchmarks, the broader sample of banks and brokers predict, on average, marginally higher oil prices in 2018 and 2019. The trend is reversed in the midterm with the outlook of consultants exceeding that of banks/brokers. Consultants focus primarily on the analysis of a long-term sustainable oil price, while the banks/brokers balance their views on the basis of current market conditions. Banks and brokers forecast an almost flat outlook for Brent and WTI at around US$70/bbl and US$65/bbl, respectively. Consultants’ forecasts result in averages of US$76.4/bbl and US$73.1/bbl vs. banks’/brokers’ averages of US$66.7/bbl and US$62.2/bbl in 2022 for Brent and WTI, respectively. This data is effective as of 22 June 2018. US$66.7 US$76.4 US$62.2 US$73.1Brent: Average price forecast in 2022 WTI: Average price forecast in 2022 Banks/brokers Consultants Banks/brokers Consultants Source: Bloomberg, banks’/brokers’ reports, consensus economics, consultants’ website 30 40 50 60 70 80 90 100 2018 2019 2020 2021 2022 $perbarrel Bank/Broker range Consultants range Bank/Broker average Consultants average 30 40 50 60 70 80 90 100 2018 2019 2020 2021 2022 $perbarrel Bank/Broker range Consultants range Bank/Broker average Consultants average
  10. 10. Page 10 Q3 | July 2018 EY Price Point: global oil and gas market outlookPage 10 Gas price outlook Henry Hub: Brokers’ and consultants’ price estimates ranges and averages UK NBP: Brokers’ and consultants’ price estimates ranges and averages With regards to Henry Hub, consultants forecast (on average) higher prices than banks/brokers. The NBP forecasts of banks and brokers exceed that of consultants. Banks’ and brokers’ view of the outlook for Henry Hub is essentially flat with the increase throughout the forecast period, representing little more than inflation. In contrast, consultants’ estimates reflect a steady upward trend, reflecting a view on demand growth and production economics. NBP estimates for UK NBP are scarce with only 6 and 4 data points available from banks/brokers and consultants, respectively. Both parties NBP estimates are almost flat and largely aligned. This data is effective as of 22 June 2018. US$3.7 GBP51.9 GBP47.2UK NBP: Average price forecast in 2022 Banks/brokers Consultants Source: Bloomberg, banks’/brokers’ reports, consensus economics, consultants’ website Banks/brokers Consultants US$3.2Henry Hub: Average price forecast in 2022 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2018 2019 2020 2021 2022 $permmbtu Bank/Broker range Consultants range Bank/Broker average Consultants average 25 30 35 40 45 50 55 60 65 70 2018 2019 2020 2021 2022 GBppertherm Bank/Broker range Consultants range Bank/Broker average Consultants average
  11. 11. Page 11Page 11 Brent oil price estimates Appendix Bank/broker 2018 (US$/bbl) 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) High 84.0 86.0 90.0 85.0 85.0 Average 71.0 69.9 69.3 67.8 66.7 Median 70.3 70.0 70.0 66.1 67.0 Low 64.0 55.0 51.8 52.0 50.0 Source: Bloomberg, Banks’/Brokers’ reports, consensus economics. Source: Consultants’ websites, Oxford Economics, Wood Mackenzie. Consultant 2018 (US$/bbl) 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) High 77.7 82.0 75.8 85.1 90.7 Average 67.6 67.2 68.9 72.7 76.4 Median 68.0 66.3 70.0 71.7 74.7 Low 54.1 58.8 59.0 63.0 70.4 This data is effective as of 22 June 2018. Q3 | July 2018 EY Price Point: global oil and gas market outlook
  12. 12. Page 12Page 12 WTI oil price estimates Appendix Bank/broker 2018 (US$/bbl) 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) High 76.0 80.5 83.0 82.5 81.0 Average 66.1 64.9 65.0 62.5 62.2 Median 66.0 64.0 64.8 61.1 63.0 Low 58.0 53.0 50.0 50.0 48.0 Source: Bloomberg, Banks’/Brokers’ reports, consensus economics. Source: Consultants’ websites, Oxford Economics, Wood Mackenzie. Consultant 2018 (US$/bbl) 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) High 73.1 77.2 71.9 81.1 86.7 Average 63.3 63.4 65.8 69.4 73.1 Median 63.5 63.0 67.5 69.0 72.0 Low 50.6 55.3 54.0 58.0 64.7 This data is effective as of 22 June 2018. Q3 | July 2018 EY Price Point: global oil and gas market outlook
  13. 13. Page 13Page 13 Henry Hub gas price estimates Appendix Bank/broker 2018 (US$/MMBtu) 2019 (US$/MMBtu) 2020 (US$/MMBtu) 2021 (US$/MMBtu) 2022 (US$/MMBtu) High 3.1 3.5 3.6 3.7 3.8 Average 2.9 3.0 3.0 3.1 3.2 Median 2.9 2.9 3.0 3.0 3.2 Low 2.7 2.6 2.7 2.8 2.9 Source: Bloomberg, Banks’/Brokers’ reports, consensus economics. * Brokers have reported figures in $/mcf. We have used a conversion ratio of 1.037 for mcf conversion to MMBtu. Source: Consultants’ websites, Oxford Economics, Wood Mackenzie. * Wood Mackenzie has reported figures in US$/mcf. We have used a conversion ratio of 1.037 for mcf conversion to MMBtu. Consultant 2018 (US$/mmbtu) 2019 (US$/mmbtu) 2020 (US$/mmbtu) 2021 (US$/mmbtu) 2022 (US$/MMBtu) High 3.1 3.6 4.0 4.0 4.2 Average 2.9 3.1 3.4 3.5 3.7 Median 2.9 3.0 3.2 3.5 3.8 Low 2.8 2.8 2.9 3.2 3.2 This data is effective as of 22 June 2018. Q3 | July 2018 EY Price Point: global oil and gas market outlook
  14. 14. Page 14Page 14 NBP gas price estimates Appendix Bank/broker 2018 (GBP/therm) 2019 (GBP/therm) 2020 (GBP/therm) 2021 (GBP/therm) 2022 (GBP/therm) High 56.3 61.6 57.1 56.0 58.0 Average 49.5 49.8 49.4 48.7 51.9 Median 51.5 50.4 54.0 53.4 53.7 Low 34.3 35.4 37.3 38.3 42.0 Source: Bloomberg, Banks’/Brokers’ reports, consensus economics Source: Consultants’ websites, Oxford Economics, Wood Mackenzie. *Oxford Economics has reported figures in US$/MMBtu. We have used exchange rate forecast by Oxford Economics from USD to GBP. ** Wood Mackenzie has reported figures in US$/mcf. We have used exchange rate forecast by Wood Mackenzie from USD to GBP and mcf to MMBtu conversion ratio of 1.037. *** GLJ has reported figures in US$/MMBtu. We have used exchange rate forecast by GLJ from USD to GBP. Consultant 2018 (GBP/therm) 2019 (GBP/therm) 2020 (GBP/therm) 2021 (GBP/therm) 2022 (GBP/therm) High 55.0 50.0 51.9 53.8 55.0 Average 46.6 44.5 43.2 45.3 47.2 Median 45.1 45.2 44.7 45.7 46.9 Low 41.4 37.3 31.5 36.2 40.1 This data is effective as of 22 June 2018. Q3 | July 2018 EY Price Point: global oil and gas market outlook
  15. 15. Page 15Page 15 Key contacts EY | Assurance | Tax | Transactions | Advisory About EY The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. © 2018 Ernst & Young LLP. All Rights Reserved. EYG no. 010347-18Gbl 1803-2623867 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/oilandgas Important notice Price outlook data incorporated within this publication is effective as of 22 June 2018. Given the rapidly evolving nature of the market and views of market participants, analysis can become quickly outdated. It should be noted that EY analysis is not for the purpose of providing an independent view of the outlook for oil and gas prices. Instead, we are collating the views of market participants. Price outlook data should not be applied mechanistically. Instead, careful consideration should be given to the purpose of any value assessment with price forecasts assessed in the context of the other key assumptions, such as, resources/reserves classification, production rates, discount rates and cost escalation rates together with an appreciation of the key sensitivities in any such analysis. Adi Karev EY Global Oil & Gas Leader +852 2629 1738 Derek Leith EY Global Oil & Gas Tax Leader +44 12 2465 3246 Andy Brogan EY Global Oil & Gas Transactions Advisory Services Leader +44 20 7951 7009 Jeff Williams EY Global Oil & Gas Advisory Leader +1 713 750 5916 • Gary Donald EY Global Oil & Gas Assurance Leader +44 20 7951 7518 •

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