Trends in the oil and gas markets

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1 Trends in the oil and gas markets Danske Markets oil and gas seminar Oslo, Ottar Skagen, Statoil CFO Macroeconomics and Market Analysis

2 Oil prices on a rollercoaster since the mid 2000s Source: Reuters EcoWin 2

3 Medium term oil market drivers Pace of economic growth in the key consuming regions Outcome of Eurozone crisis Shape and reach of policies on energy and oil demand The Non-OPEC cost curve OPEC s effectively Saudi Arabia s market perceptions and output decisions to sustain a comfortable price level Geopolitical events potentially disrupting supply 3

4 Global oil market seen to add ~1 mill bbl/d per year to 2020 Transport sector energy efficiency improvements will dampen growth Sources: IEA (history), Statoil (outlook) 4

5 Non-OPEC and OPEC production outlook Sources: IEA (history), Statoil (outlook) 5

6 The US shale gas revolution has paved the way for rapid growth in tight oil supply Estimated recoverable resources in the US Bakken formation (billion bbl) Continental Resources N Dakota State N Dakota IC Outlook for US tight oil production (1000 bbl/d) Other Eagle Ford Niobrara Bakken US Geological Survey Source: Energy Policy Research Foundation Sources: US DOE EIA (history), Statoil (projection) 6

7 A selection of crude oil price outlooks 2011-USD/bbl Sources: Recent bank & consultant evaluations compiled by Statoil Source: IMF Working Paper 12/109: The future of Oil: Geology versus Technology (May 2012) 7

8 Gas: Regional gas prices have disconnected Ratio of Brent oil price to Henry Hub gas price, energy equivalence basis, Historically regional benchmark prices have tracked each other Since the beginning of 2010 they have disconnected The US gas market has also de-linked from the global oil market Source: CERA 8

9 European demand down in 2011 A mild winter compared to the previous one The Eurozone crisis depressed growth The ETS (European emission trading system) price declined, eroding the competitiveness of gas relative to coal Demand will recover if and when these drivers return to normal Policy and regulatory uncertainty breeds market uncertainty Oil linked pricing under pressure Sources: Eurogas, Cedigaz 9

10 US prices have collapsed due to explosive gas production growth Coinciding with more moderate (though accelerating) consumption growth Source: US DOE EIA 10

11 that is, to the North American shale gale The number of shales under development or exploration is steadily increasing US gas supply to 2035 as seen by the US DOE EIA In EIA s Annual Energy Outlook 2012 the US becomes a net gas exporter by 2022 Sources: US DOE EIA, ARI 11

12 Are today s US gas prices sustainable? Not indefinitely, as the USD 2-2,50/MMBtu range is below long term marginal supply costs Producers have curtailed gas directed drilling and relocates to liquids plays There is talk about shut-ins but also large overhang of drilled but uncompleted wells Will prices stage a strong recovery? Not any time soon; the apparent shape of the long run marginal cost curve indicate low prices for a long time Will demand raise to the occasion? Source: Baker Hughes 12

13 Boosting demand for North American gas: No quick fixes Sabine Pass LNG terminal Industrial demand: Picking up Residential and commercial gas demand: Limited growth potential US and Canadian LNG exports: Enjoy strong tailwinds; a dozen US projects totalling ~200 bcm/y of capacity have filed applications GTL, gas as a road transportation fuel: Niche interests Pearl GTL plant In the short-medium term, the power sector s dispatching and investment decisions will be decisive Demand growth could be significant 13

14 Asia: Repercussions of Fukushima, plus robust new market growth All of Japan s more than 50 nuclear reactors off line for safety inspections Unclear when they will be restarted Japanese LNG imports up 12% in in volume terms, ~50% in value terms, in 2011 China s and India s LNG imports increased by 31% and 39% respectively in 2011 Outlook is for robust growth to continue Barring a major set-back for the Chinese economy Source: PIRA 14

15 LNG supply: Plateauing but set for further growth from around 2015 Capacity has plateaued, but Australia will ensure further growth from around 2015 to Then what? Many projects waiting in the wings with North America, East Africa and potentially the Eastern Mediterranean (Israel, Cyprus) likely to make splashes Sources: Wood Mackenzie, PIRA, company announcements, press clippings 15

16 Summary The global oil market will in the medium term likely be characterized by Slowing growth in demand Eurozone crisis Limited firepower left to compensate for a European set-back Rapid growth in non-opec supply though at increasing supply costs Stagnant OPEC production Efforts to curtain output if prices fall below pain threshold High probability of episodes of political unrest driving price volatility Prepare for turbulence! The main regional gas markets will in the medium term likely be characterized by Oversupply in North America reflecting the shale gale Though with prices recovering to a level consistent with long term marginal supply costs Tightness in Asia reflecting a period of stagnant LNG supply Though with prices coming down from today s near oil parity level in response to a normalization of Japan s energy situation, and as more LNG becomes available Volatility in the European gas market reflecting conflicting influences from the LNG market, renenwables and the carbon market, plus an uncertain economic outlook 16

17 Trends in the oil and gas markets Ottar Skagen Sr. Adviser Tel:

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