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EY Price Point: global oil and gas market outlook

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The theme for this quarter is resilience. A 6% supply outage in September was unable to push Brent prices above US$70/bbl. Demand concerns, driven by slowing world economic growth and the need to decarbonize, quickly retook the stage despite output from Venezuela and Iran being hindered by political turmoil and international sanctions.
Technology enhancements are a significant contributor to the market’s sanguine attitude towards supply disruption. Operators are able to produce greater volumes, quicker, and at a lower cost. That trend can only continue.
LNG markets continue to mature as traders play an increasing role in directing cargoes and setting prices. The pipeline for LNG projects remains healthy as market participants aim to establish a position in a market that is seen as the best opportunity for growth in oil and gas.

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EY Price Point: global oil and gas market outlook

  1. 1. EY Price Point: global oil and gas market outlook Q4 | October 2019
  2. 2. Q4 overview In September, an attack on the Abqaiq processing facility in Saudi Arabia resulted in a supply outage of 5.7 million barrels per day, approximately 6% of global oil production. Historically, similar events have led to significant price movements and impacted the market’s view on supply and demand fundamentals. Not this time. Although prices spiked by approximately 18% as markets opened on 16 September, prices returned to pre-attack levels within one week. The market’s attention has quickly returned to the demand-side risks caused by slowing world economic growth and the impact of energy transition. In part, the muted response was due to news flow from Saudi Arabia that downplayed the impact of the attack, as well as the availability of inventories to maintain supply. However, the response reaffirms the fact that oil markets have moved away from the scarcity paradigm. Gary Donald EY Global Oil & Gas Assurance Leader gdonald@uk.ey.com Andy Brogan EY Global Oil & Gas Leader abrogan@uk.ey.com Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 2
  3. 3. Q4 theme The theme for this quarter is resilience. A 6% supply outage in September was unable to push Brent prices above US$70/bbl. Demand concerns, driven by slowing world economic growth and the need to decarbonize, quickly retook the stage despite output from Venezuela and Iran being hindered by political turmoil and international sanctions. Technology enhancements are a significant contributor to the market’s sanguine attitude towards supply disruption. Operators are able to produce greater volumes, quicker, and at a lower cost. That trend can only continue. LNG markets continue to mature as traders play an increasing role in directing cargoes and setting prices. The pipeline for LNG projects remains healthy as market participants aim to establish a position in a market that is seen as the best opportunity for growth in oil and gas. • Is there any conceivable event that could move oil prices to pre-downturn levels? • When will the long-standing expectation of slowing oil demand be realized? • Could liquidity at LNG trading hubs rival those at its established oil and gas counterparts? ? Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 3
  4. 4. Q4 trends Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 4 Middle East tensions drive some (but not much) price volatility An attack on oil processing facilities in Saudi Arabia had a significant, but fleeting, effect on oil prices in September. The operational response has been swift and repeated shocks to the system have given the markets confidence in the supply chain’s capacity to pick up the slack. Decarbonization focus escalating The market’s focus on decarbonization is growing at an accelerating rate and the oil industry is responding. Pressure is mounting from capital markets, equity markets, activist investors, governments and the general public. Demand concerns weigh on prices In August, IEA lowered its 2019 demand growth forecast by 100 kbpd to 1.1 mbpd. Since 2010, IEA demand growth forecasts have averaged 20% below actuals. Oil producers will be hoping that trend continues in 2019. LNG volumes traded on a spot basis or under contracts of less than five years have grown by 11% and 41% since 2017 and 2010, respectively. Although traded volumes are well below more established oil and gas benchmarks, signs of structural change that should drive LNG liquidity are abundant. LNG spot market liquidity on the rise
  5. 5. Market fundamentals Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 5 Source: Thomson Reuters Datastream Source: IEA • Brent and WTI averaged US$61.96 and US$56.38 per bbl, respectively, during the third quarter. Average prices in 3Q19 represented a fall of 10% and 6% in Brent and WTI, respectively, from the previous quarter. • Escalating trade tensions between the US and China pushed prices downward throughout July and August amid demand concerns. • An attack on Abqaiq, a key processing facility in Saudi Arabia, resulted in a price spike of approximately US$12/bbl (18%) on 16 September as the market feared the impact of supply outages. • However, the effects were short-lived as Saudi Arabia played down the impact of the attack and the US announced that its Strategic Petroleum Reserve was available to ensure markets remained supplied. Price gains were eliminated by the end of the same week. • Year-on-year, the factors driving the global oil supply and demand dynamic remain the same as reported in prior quarters. Demand growth (although slowing) and OPEC supply restraint continue to offset growing output from North America. The numbers change from quarter to quarter, but the same themes persist. • Questions remain over demand, both in the short term (trade wars and economic growth) and the long term (vehicle electrification and carbon reduction). Aided by sanctions on Iran and turmoil in Venezuela, OPEC production restraint has supported prices in the face of growing North American production. • No one knows the extent to which North American oil production can continue to grow. Capital markets appear to be resolute in insisting that capital spending is self-funded. Oil majors will be the key to further growth in North America. The impact of extraordinary events are short-lived Supply and demand: the story remains the same 40 45 50 55 60 65 70 75 80 Apr-2019 May-2019 Jun-2019 Jul-2019 Aug-2019 Sep-2019 US$/bbl Brent WTI (2.50) (2.00) (1.50) (1.00) (0.50) - Starting balance Demand growth OPEC North America Other End Balance millionbarrelsperday Movement to oversupply Movement to undersupply
  6. 6. Market fundamentals Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 6 Source: EY analysis of quarterly earnings call transcripts • As a group, oil and gas majors received only one question that related to carbon emissions and investments in renewable energy when presenting their 2Q18 earnings to equity analysts. One year later, that number grew by 13 times, representing 4.5% of total questions raised during the 2Q19 earnings season. • Pressure is not just coming from equity analysts. Activist groups have been frequent attendees at oil and gas major shareholder meetings recently and a number of hedge funds are opting to shed fossil fuels from their portfolios. • Acceptance of the need for change is spreading and the majors are listening. The majors’ investment in assets capable of producing clean energy is climbing, albeit still a small percentage of total spend. • Cost, reliability and storage capabilities of renewables remain under question. Many believe gas will support renewables in the short to medium term. The rate at which renewables output will grow remains up for debate. The need for change is not. Middle East turmoil fails to sustain a climb in prices Decarbonization focus growing at an accelerating rate • In September, an attack on a key processing facility in Saudi Arabia shut in approximately 6% of the world’s oil production. We are told that capacity will be back to normal shortly, but questions remain over the vulnerability of oil supply infrastructure. • When compared with the impact on prices that similar events have had in the past, the response was muted. In a period in which output from Iran and Venezuela is restricted by sanctions and political turmoil, an outage of 6% of global oil production was unable to lift prices beyond US$70/bbl. • The market appears convinced of the ability of producers to satisfy demand despite outages. Bearish sentiment over the outlook for oil demand in the short and medium term could provide further reason for the muted response. Source: EY analysis of Oilprice.com data Arab embargo (1973) Outbreak of Iran/Iraq war (1980) Iraq invasion of Kuwait (1990) Venezuela oil strike (2002) Drone attacks on Abqaiq (2019) 0% 50% 100% 150% 200% 250% -7.0%-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0% Oilpriceimpact Supply disruption 0 2 4 6 8 10 12 14 2Q18 3Q18 4Q18 1Q19 2Q19 Numberofquestions European IOCs US IOCs
  7. 7. Market fundamentals Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 7 Source: International Gas Union and GlobalData • In August, IEA lowered its 2019 demand growth forecast by 100 kbpd to 1.1 mbpd due to “evidence of an economic slowdown” and worsening “prospects for a political agreement between China and the United States on trade.” • Forecasting oil demand is easy if you can accurately forecast economic growth, which is incredibly hard to do. • Actual demand growth has equaled or exceeded IEA’s estimate in each of the past four periods. Oil producers will hope the recent trend of actual demand growth exceeding IEA’s estimate continues. IEA demand forecasts revised downward LNG liquidity on the rise • In 2018, LNG volumes traded on a spot basis or under contracts of less than five years reached 99 million tonnes and 31% of total LNG trade, representing growth of 11%, 41% and 464% since 2017, 2010 and 2000, respectively. • Destination flexibility and contract standardization are promoting LNG commoditization. The relative bargaining power of buyers and sellers is also a factor. Following a period of weak demand, capacity additions have outpaced demand growth, resulting in a number of new LNG facilities turning to the spot market. • By 2025, liquefaction capacity is expected to rise by 136% to 1,075 million tonnes per annum with the race to sanction new capacity fueled by expectations of demand growth in Asia. FIDs indicate that the capital markets believe in the outlook for LNG demand growth. Source: IEA (1.5) (1.0) (0.5) - 0.5 1.0 1.5 2.0 2.5 3.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Y-o-Ychange(millionbblperday) Actual crude demand growth IEA forecast crude demand growth Variance (IEA forecast minus actual) 0 5 10 15 20 25 30 35 0 10 20 30 40 50 60 70 80 90 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 %oftotalLNGtrade Milliontonnesperannum Volume (Mtpa) % of total LNG trade (right hand axis)
  8. 8. Brent futures Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 8 Brent futures remain in backwardation. However, more importantly, the angle of backwardation continues to steepen. In fact, Brent's 6- month backwardation has risen to its highest level since September 2013 as concerns over near-term supplies increased due to the impact of outages in Saudi Arabia. Futures data is effective as of 20 September 2019. Source: Thomson Reuters Datastream 40 45 50 55 60 65 70 75 80 85 US$/bbl Historical Brent Brent futures - March 2019 Brent futures - June 2019 Brent futures - September 2019
  9. 9. Oil price outlook Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 9 For both benchmarks, consultants (on average) forecast higher oil prices throughout the period. Consultants focus primarily on the analysis of a long-term sustainable oil price, but the banks and brokers balance their views on the basis of current market conditions. The outlook for crude prices have shifted downward since the previous quarter. We have not included price forecasts published in US EIA’s Annual Energy Outlook 2019 within our analysis given that market conditions have evolved significantly since the publication’s release in January 2019. In the long term, we note high relative forecasting uncertainty given the proven ability of identified risk factors to move the price significantly in a short period of time. Consultants’ forecasts result in averages of US$73.4/bbl and US$68.8/bbl vs. banks’ and brokers’ averages of US$63.0/bbl and US$57.2/bbl for Brent and WTI, respectively, in 2023. This data is effective as of 20 September 2019. Brent: Brokers’ and consultants’ price estimates, ranges and averages WTI: Brokers’ and consultants’ price estimates, ranges and averages Source: Bloomberg, banks’/brokers’ reports, consensus economics, consultants’ website US$63.0 US$72.8 US$57.2 US$68.0Brent: Average price per bbl forecast in 2023 WTI: Average price per bbl forecast in 2023 Bank/broker Bank/brokerConsultants Consultants 45 50 55 60 65 70 75 80 85 2019 2020 2021 2022 2023 US$perbarrel Bank/Broker range Consultants range Bank/Broker average Consultants average 45 50 55 60 65 70 75 80 85 2019 2020 2021 2022 2023 US$perbarrel Bank/Broker range Consultants range Bank/Broker average Consultants average
  10. 10. Gas price outlook Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 10 Consultants predominantly forecast (on average) higher Henry Hub gas prices than banks and brokers. The trend is reversed for NBP. The outlook for NBP prices has been adversely impacted by the reduction in gas prices noted in 3Q19, predominantly driven by the diversion of LNG cargoes from Asia to Europe. The range of NBP consultant forecasts has increased significantly since the previous quarter. One consultant now forecasts that prices will remain broadly flat at 35p/therm throughout the forecast period. We have not included price forecasts published in US EIA’s Annual Energy Outlook 2019 within our analysis given that market conditions have evolved significantly since the publication’s release in January 2019. NBP price estimates are scarce with only four and three forecasts released by banks/brokers and consultants, respectively. This data is effective as of 20 September 2019. Henry Hub: Brokers’ and consultants’ price estimates, ranges and averages UK NBP: Brokers’ and consultants’ price estimates, ranges and averages US$2.8 US$3.2 £51.4 £47.9Henry Hub: Average price per mmbtu forecast in 2023 UK NBP: Average price per therm forecast in 2023 Bank/broker Consultants Bank/broker Consultants Source: Bloomberg, banks’/brokers’ reports, consensus economics, consultants’ website 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 2019 2020 2021 2022 2023 US$permmbtu Bank/Broker range Consultants range Bank/Broker average Consultants average 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 2019 2020 2021 2022 2023 GBppertherm Bank/Broker range Consultants range Bank/Broker average Consultants average
  11. 11. Appendix Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 11 Brent oil price estimates This data is effective as of 20 September 2019. Source: Bloomberg, banks’/brokers’ reports Source: Consultants’ websites, Oxford Economics Bank/broker 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) 2023 (US$/bbl) High 70.0 72.8 72.0 72.0 71.5 Average 64.7 62.5 62.7 64.9 63.0 Median 65.0 62.0 61.0 65.0 62.5 Low 57.0 53.0 55.0 55.0 58.0 Consultant 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) 2023 (US$/bbl) High 70.0 72.0 73.0 74.5 75.9 Average 65.9 66.3 68.8 70.5 72.8 Median 64.8 65.3 70.1 72.3 75.2 Low 63.4 62.0 62.2 63.0 64.8
  12. 12. Appendix Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 12 WTI oil price estimates This data is effective as of 20 September 2019. Bank/broker 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) 2023 (US$/bbl) High 65.0 63.0 66.0 66.0 68.0 Average 57.6 57.2 57.4 56.3 57.2 Median 57.2 57.0 55.1 55.0 55.0 Low 53.0 51.0 50.0 50.0 53.0 Source: Bloomberg, banks’/brokers’ reports Consultant 2019 (US$/bbl) 2020 (US$/bbl) 2021 (US$/bbl) 2022 (US$/bbl) 2023 (US$/bbl) High 63.0 67.0 70.0 71.4 73.1 Average 58.2 60.3 63.5 65.6 68.0 Median 57.7 61.2 65.0 68.3 71.4 Low 56.2 54.5 53.9 54.7 56.2 Source: Consultants’ websites, Oxford Economics
  13. 13. Appendix Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 13 Henry Hub gas price estimates This data is effective as of 20 September 2019. Source: Bloomberg, banks’/brokers’ reports * Where brokers have reported figures in $/mcf, we have used a conversion ratio of 1.037 for mcf conversion to MMBtu. Source: Consultants’ websites, Oxford Economics Bank/broker 2019 (US$/MMBtu) 2020 (US$/MMBtu) 2021 (US$/MMBtu) 2022 (US$/MMBtu) 2023 (US$/MMBtu) High 3.0 3.5 3.1 2.9 3.0 Average 2.7 2.7 2.7 2.7 2.8 Median 2.7 2.7 2.7 2.7 2.8 Low 2.5 2.4 2.5 2.5 2.7 Consultant 2019 (US$/MMBtu) 2020 (US$/MMBtu) 2021 (US$/MMBtu) 2022 (US$/MMBtu) 2023 (US$/MMBtu) High 2.8 3.0 3.3 3.3 3.4 Average 2.6 2.7 3.0 3.1 3.3 Median 2.6 2.8 3.0 3.2 3.3 Low 2.6 2.5 2.7 2.8 3.0
  14. 14. Appendix Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 14 NBP gas price estimates This data is effective as of 20 September 2019. Bank/broker 2019 (GBp/therm) 2020 (GBp/therm) 2021 (GBp/therm) 2022 (GBp/therm) 2023 (GBp/therm) High 52.0 50.0 53.2 55.8 55.8 Average 43.1 46.9 48.5 51.4 51.4 Median 41.0 46.8 47.5 51.4 51.4 Low 38.6 44.0 45.8 47.0 47.0 Consultant 2019 (GBp/therm) 2020 (GBp/therm) 2021 (GBp/therm) 2022 (GBp/therm) 2023 (GBp/therm) High 50.0 52.3 53.8 55.8 57.3 Average 41.7 45.3 45.9 46.9 47.9 Median 39.5 50.0 50.0 51.0 52.0 Low 35.6 33.6 33.8 33.9 34.3 Source: Bloomberg, banks’/brokers’ reports * Where brokers have reported figures in $/mcf, we have used a conversion ratio of 1.037 for mcf conversion to MMBtu and the broker’s forecasted FX rate. Source: Consultants’ websites, Oxford Economics * Where consultants have reported figures in US$/MMBtu, we have used the particular consultant’s forecast FX rate for the purpose of our conversion.
  15. 15. Key contacts Q4 | October 2019 EY Price Point: global oil and gas market outlookPage 15 Important notice Price outlook data included in this publication is effective as of 20 September 2019. Given the rapidly evolving nature of the market and views of market participants, analysis can become quickly outdated. It should be noted that our 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 and reserves classification, production rates, discount rates and cost escalation rates together with an appreciation of the key sensitivities in any such analysis. Jeff Williams EY Global Oil & Gas Advisory Leader +1 713 750 5916 Gary Donald EY Global Oil & Gas Assurance Leader +44 20 7951 751 Derek Leith EY Global Oil & Gas Tax Leader +44 12 2465 3246 Andy Brogan EY Global Oil & Gas Leader +44 20 7951 7009 John Hartung EY Global Oil & Gas TAS Leader +1 713 751 2114
  16. 16. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. 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. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com. How EY’s Global Oil & Gas Sector can help your business 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. © 2019 EYGM Limited. All Rights Reserved. EYG no.004499-19Gbl BMC Agency GA 1010725 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

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